Joint Ventures: Synergies and Benefits

by Siri Terjesen

Executive Summary

A joint venture (JV) is a formal arrangement between two or more firms to create a new business
for the purpose of carrying out some kind of mutually beneficial activity, often related to business
expansion, especially new product and/or market development.
An important first step is for each firms managers to review the firms business and corporate
strategies to determine synergy with the objectives of a joint venture.
A second key step is to assess the suitability of the potential joint venture partner(s) for fit with the
firms strategy, and compatibility during the life of the JV.
There are four basic JV types: consolidation (deep combination of existing businesses); skills-transfer
(transfer of some key skill from one partner); coordination (leveraging complementary capabilities of all
partners); and new business (combining existing capabilities, not businesses, to create new growth).
JVs can offer an array of benefits to partner firms through access to new and/or greater resources
including markets, distribution networks, capacity, staff, purchasing, technology/intellectual property,
and finance.
JV risks can arise from disparate communication, culture, strategy, and resources, and result in loss of
control, lower profits, conflict, and transferability of key assets.
NUMMI is an example of a successful JV offering mutual benefits to its partners, General Motors (GM)
and Toyota.
To succeed, JV partners must mitigate potential risk factors, including poor communication, different
objectives, imbalanced resources, and cultural clashes.

Introduction
A joint venture (JV) is a formal arrangement between two or more firms to create a new business for the
purpose of carrying out some kind of mutually beneficial activity, often related to business expansion,
especially new product and/or market development. A JV is the most popular type of contractual alliance
among firms; other types include formal long-term contracts, informal alliances, and acquisitions. JVs may
take the form of a corporation, limited liability company (LLC), partnership, or other structure. The 100
largest JVs worldwide account for more than US$350 billion in revenues (Bamford, Ernst & Fubini, 2008). An
increasing number of JVs involve foreign partners, in part due to laws in some countries that require foreign
firms to partner with local firms in order to conduct business in that country.

Synergy to Strategy
An important first step is for management to review the firms business and corporate strategies to determine
synergy with the objectives of a joint venture. In this process, managers can apply a range of strategy
methodologies such as SWOT (strengths, weaknesses, opportunities, and threats), Porters Five Forces,
stakeholder analysis, and the value chain to assess the firms strategy and future vision. Managers may then
determine that the joint venture is not the most optimal organizational form for achieving the firms objectives,
and that another form, such as a long-term contract, may offer a better strategic fit.
A second key step is to assess the suitability of the potential joint venture partner(s) for fit with the firms
strategy, and compatibility during the life of the JV. Key questions here include:

Does the potential JV partner share the same business objectives and vision for the joint venture?
Is the potential partner firm trustworthy and financially secure?
Does the potential partner firm already have JV partnerships with other firms? If so, how are these
performing?
How would you rate the potential partner firms performance in terms of production, marketing,
customers, personnel, innovation, and reputation?

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What are the general strengths and weaknesses of the potential partner? How do they complement our
firm?
What benefits might the potential partner firm realize from the JV?
What risks might we be exposing our firm to in the JV?

A joint venture should only be formed when the parties mutually agree that this form offers the best
possibility of optimizing opportunities.
Thirdly, the parties set out JV terms in a written agreement which addresses structure (for example, if
it should be a separate business or not), objectives, financial and other resource contributions (of each
partner), including the transferability of any assets or employees to the JV, ownership of intellectual property
created in the JV, management and control responsibilities and processes, sharing/re-allocation of liabilities/
profits/losses, resolution of disputes, and exit strategy. Joint ventures can be flexible, covering only a limited
life span or a limited scope of firm activities.
Four basic types of JVs and their respective benefits are (Bamford, Ernst & Fubini, 2004):

Consolidation JV: value derived from deep combination of existing businesses.

Skills-transfer JV: value derived from the transfer of some key skill from one partner to the JV (or to the
other JV partner).
Coordination JV: value derived from leveraging the complementary capabilities of all partners.
New business JV: value derived from combining existing capabilities, not businesses, to create new
growth.

Joint Venture Benefits

Joint ventures can offer an array of benefits to partner firms through access to new and/or greater resources
including markets, distribution networks, capacity, staff, purchasing, technology/intellectual property, and
finance. Often, one firm supplies a key resource such as technology, while the other firm(s) might provide
distribution or other assets. The following are key resources that can be shared:
Access to markets: JVs can facilitate increased access to customers. One JV partner might, for example,
enable the partner to sell other goods/services to their existing customers. International JVs involve partners
from different countries, and are frequently pursued to provide access to foreign markets.
Distribution networks: Similarly, JV partners may be willing to share access to distribution networks. If
one partner was previously a supplier to the other, then there may be opportunities to strengthen supplier
relationships.
Capacity: JV partners may take advantage of increased capacity in terms of production, as well as other
economies of scale and scope.
Staff: JVs may share staff, enabling both firms to benefit from complementary, specialized staff. Staff may
also transfer innovative management practices across firms.
Purchasing: As a result of their increased resource requirements, JV partners may be able to collectively
benefit from better conditions (for example, price, quality, or timing) when purchasing.
Technology/intellectual property: As with other resources, JV partners may share technology. A JV may also
enable increased research, and the development of new innovative technologies.
Finance: In a joint venture, firms also pool their financial resources, potentially eliminating the need to borrow
funds or seek outside investors.
Taken together, the benefits suggest an improved competitive position for the JV, and each of the partners.

Joint Venture Risks

There are, however, a number of risks related to joint ventures that can result in loss of control, lower profits,
conflict with partners, and transferability of key assets. In fact, studies in the 1980s and 1990s revealed
failure rates of 49% and 47% (Bamford, Ernst, Fubini, 2004). More recent work reports failure rates varying
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from 2% to 90%, depending on the partners involved (see, for example, Perkins, Morck & Yeung, 2008). JV
risks stem from many sources, including the following:
Communication: The firms may not communicate their objectives clearly, resulting in misunderstanding.
These communication issues can be exacerbated by geographic and cultural distance among partner firms,
and by the use of language such as us versus them.
Strategy: The firms may have divergent strategies for the joint venture, and fail to reach a set of mutually
agreeable objectives regarding business and exit strategies. Risks can also emerge from a lack of agreed
processes regarding governance, accountability, decision-making, HR, and conflict resolution.
Imbalanced resources: The firms may bring imbalanced resources to the table, a source of great conflict.
Another source of conflict may be that the JV disproportionately allocates resources among the firms. For
example, one firm may find that its technology is being appropriated by another firm.
Culture: The JV partner firms may have distinct corporate (and in the case of cross-border JVs, national)
cultures and management styles, resulting in poor integration and cooperation.

Case Study
NUMMI Joint Venture
Established in Fremont, California, in 1984, the New United Motor Manufacturing Inc. (NUMMI) is a joint
venture between General Motors (GM) and Toyota. The NUMMI JV began as an experiment. The allure
for GM was a chance to learn how to build cars, especially of a small size and high quality, using Toyotas
lean production system. Toyota was interested in testing its production methods in an American setting.
According to Eiji Toyoda, then the Chairman of Toyota Motor Company: Competition and cooperation is the
underlying principle of the growth of the world economy. Our joint venture is founded on this approach. We
hope to make this project a success as a model of economic cooperation between Japan and the United
Statesone that contributes to the American economy. (Source: www.nummi.com/us_roots.php).
To start the joint venture, US$450 million in funding was required. GM contributed its plant in Fremont,
which it had closed in 1982. Toyota provided US$100 million of start-up capital. The remaining capital was
raised by NUMMI as an independent Californian corporation. The US Federal Trade Commission (FTC)
approved the formation of the company for an initial 12-year period, stating that the venture would offer
a wider range of automobile choices to customers. The 12-year limit was eventually lifted, and NUMMI
continues to operate. Ford and Chrysler opposed the joint venture and filed an unsuccessful lawsuit to block
NUMMI.
NUMMI invited former GM workers to apply for jobs, and expressed a special need for employees willing
to contribute to an atmosphere of trust and cooperation. Following a rigorous hiring assessment, the
new employees attended orientation sessions about NUMMIs concept, system, principles, policy, and
philosophy. Team members were introduced to NUMMIs core values, which are based on teamwork,
equity, involvement, mutual trust and respect, and safety. Approximately 450 group and team leaders
traveled to Toyotas Takaeoka plant in Japan to spend three weeks learning in the classroom and on
the job about Toyotas production system, team building, unionmanagement relations, and safety.
NUMMIs first effort was the Chevrolet Nova, built by 700 team members in 1984. NUMMI has established
a collaborative partnership with United Auto Workers (UAW) in which UAW agrees to be a cooperative and
active participant in labor-management relationships, to accept Toyotas production methods, and to work to
improve productivity and quality. NUMMI has been presented as a case-study model of labor-management
cooperation to the International Labor Organization Conference.
NUMMIs unique corporate learning and cultural environment optimizes the best of GM, Toyota, and nearby
Silicon Valley. The JV is considered to have been instrumental in introducing the Toyota production system
and a team-based working environment to the US automobile industry. NUMMI remains a key source of
innovative knowledge about quality, continuous improvement, and human resource management. GM and
Toyota regularly send managers to visit NUMMI in order to learn lessons to be applied in their home units
strategies.

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Today, NUMMI has more than 5,440 team members, and annually produces approximately 250,000 cars
and 170,000 trucks under the brands of Toyota Corolla, Toyota Tacoma, and Pontiac Vibe. More details
about NUMMI can be found at www.nummi.com.

Conclusion
As the NUMMI case study illustrates, JVs offer benefits to both partners as well as other stakeholders
providing customers with more and a higher quality variety of car choices and manufacturers, with a model of
labor-management relations. There are, however, many risks to be considered.
Interrelationships among small and large firms are increasingly common, and offer unique benefits to each
partner. For a small firm, a joint venture may offer a unique opportunity to grow quickly with other small
firms, or to partner with a larger firm. Often the large partner benefits from the smaller firms flexibility and
intellectual property, while the small partner benefits from increased access to markets, reputation, and other
key resources. Increasingly, JV partners of all sizes join together as a defensive response to blurring industry
boundaries.

Making It Happen
To succeed, JV partners must mitigate several potential sources of risk: poor communication, different
objectives, imbalanced resources, and cultural clashes. Firstly, JV partners must establish clear
communication channels at the top of the firms involved, and also with employees whose daily work is
related to the joint venture. This communication is often facilitated through regular, face-to-face meetings to
establish not only the benefits from the JV, but also the risks if the JV does not work. Secondly, it is essential
that partners agree on objectives and milestones. Key performance indicators (KPIs) can be established to
measure performance and provide early warning guidance. Imbalanced resources, such as different levels of
financing or expertise, can also lead to conflict. Finally, each firm has a unique culture, and cultural clashes
in management style may become apparent. These issues may be exacerbated across foreign JV partners
as a result of language and cultural differences. Flexibility and an open approach to trying to make things
work are essential.

More Info
Books:

Child, J., D. Faulkner, and S. Tallman. Strategies of Cooperation: Managing Alliances, Networks, and
Joint Ventures. Oxford: Oxford University Press, 2005.
Wallace, Robert L. Strategic Partnerships: An Entrepreneur's Guide to Joint Ventures and Alliances.
New York: Kaplan Publishing, 2004.

Articles:

Bamford, James, David Ernst, and David G. Fubini. Launching a world-class joint venture. Harvard
Business Review (February 2004): 90100. Online at: hbr.harvardbusiness.org/2004/02/launching-aworld-class-joint-venture/ar/1
Perkins, Susan, Randall Morck, and Bernard Yeung. Innocents abroad: The hazards of international
joint ventures with pyramidal group firms. NBER Working Paper 13914 (April 2008). Online at:
www.nber.org/papers/w13914
Steensma, H. K., J. Q. Barden, C. Dhanaraj, M. Lyles, and L. Tihanyi. The evolution and
internalization of international joint ventures in a transitioning economy. Journal of International
Business Studies 39:3 (April 2008): 491507. Online at: dx.doi.org/10.1057/palgrave.jibs.8400341

Website:

Googles latest joint venture news: news.google.com/news?pz=1&ned=us&hl=en&q=%22joint+venture

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See Also
Best Practice

Maximizing a New Strategic Alliance

Checklists

Assessing Economies of Scale in Business

The Objectives of Corporate Planning and Budgeting
Options for Raising Finance
Structuring and Negotiating Joint Ventures

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