Building Successful Joint

Ventures

Joint Ventures and Alliances can deliver

more shareholder value than M&A can, but
getting them off the ground can trip you up
in unpredictable ways
-- Harvard Business Review

History of Joint Ventures

A study published in Harvard Business
Review in 2002 reveled that a whopping 47%
of joint ventures fail!!
Reason cited are:

Wrong Strategies
Incompatible Partners
Weak Management
Unrealistic or inequitable Deals

The Real Reason

Mistakes done at the Launch Phase!!
Companies fail to commit sufficient resources
during the launch phase
Lack of attention during the Launch Phase
Strategic Conflicts between partners
Governance gridlocks
Missed operational Synergies

Launch Phase : between signing memorandum

of understanding to first 100 days of
operation

Joint Venture Challenges

Building and maintaining a strategic
alignment between partners
Creating a joint governance system
Managing the economic interdependencies
between the parent firm and the joint venture
Building the organization of the JV
Putting together a good management team
Deciding on all potential issues prior to
operational launch

Strategic Alignment
Each firm will have its own goals, market pressures,
share holders expectations etc.
These issues must be analyzed and discussed in
detail before the launch of JV
Which Market Segment?
Cash Flow Management Reinvest or Pay Dividends?

The Goals for the JV must then be set such that it is

in line with the goals, expectations of the parent
Companies
E.g : Apple-Motorola-IBM PowerPC venture
Verizon-Vodafone venture to Create Verizon Wireless

Joint Governance System

Challenge is to establish a governance system
that promotes shared decision making and
joint oversight, without stifling
entrepreneurship
Weak Controls can expose the parent
companies to lots of Risks and cost money
Pepsi & BAE S.A in Brazil. Mistakes in JV
management led to huge losses for Pepsi

Protect important intellectual assets of the

parent in the venture

Economic Interdependencies
Parent Companies often agree for a broad outline on
the extent of economic interdependence during
Negotiations
But fail to quantify actual resources that needs to
flow from each of the partner to the JV
Managing & building an economic interdependence
between Partners is very important
Avoid duplicating costs. Parent firms usually provide
capital, Human Resources, Intellectual resources etc
Pepsi & Starbucks : Ready to drink Coffee
Starbucks provides the concentrate, Pepsi provides
distribution network, Both jointly handle marketing

Building the Organization

Building the JV into a successful high
performing alliance needs capable managers
Often best managers at the parent company
are reluctant to work at the JV or want to
return to parent firm after sometime
JV often gets part time managers
Under-investing in a JV is a sure fire formula
for failure
Eg: Corning and Mesa in Mexico

Get the Best team in Place for the JV!!

Clearing the Hurdles

Challenges

Strategy

Governance

Economics

Different Strategic
Interests & goals

Sharing of JV
control complicates
governance

Parent firms to
provide resources,
size, timing issues
have to be decided

Parent firms have

different reporting
systems & metrics

Keys to
Success

Align goals of JV with

that of the parent
Agree on short term
goals for the JV first

Have a clear cut

rules for joint
governance
Apply loose-tight
management style

JV performance is
hidden/isolated
from parent firm
Specify the nature,
timing, quantity of
resources to be
provided
Establish a common
risk and
performance
management
policies for JV

Organization
Managing cultural
differences
Career path
conflicts for
members of JV

Create a compelling
value proposition
for JV employees
Get key staff from
parent firm to work
for the JV

VC style Business Plan

Every JV needs a business plan
The business plan must meet the same standards of
rigor, detail, and logic that a venture capitalist would
demand
Top management of the parent firms should meet to
develop and approve the business plan
Define exactly how & where the JV will compete, set
financial targets, plan expenditures and develop
organizational structure
Remember The Devil is in the Details

Types of Joint Ventures

Consolidation Joint Venture
Value comes from combining existing businesses

Skills Transfer JV
Value comes from transfer of some critical skills to
other partner

Coordination JV
Value comes from Leveraging the complementary
Capabilities

New Business JV
Value comes from creating new growth by
combining existing business Capabilities

Why a Joint Venture?

When advantages are not clear, new opportunities
have an unknown potential
When a firm has internal capability to manage a JV
but does not have all the resources to exploit the new
opportunities
When new opportunities need different core
competencies than that of the parent
When M&A is not a good option
M&A carries a 20%-50% premium
Partners are not willing for M&A
Firm is not capable of M&A

Running the Venture

Successful JV pay a lot of attention to
communication Before launch & throughout
the life of the venture
Management teams of JV act quickly to
manage inevitable setbacks
Hire the right kind of management team
CEO for a JV interviews with all the members of
the JV board to understand the objectives and set
short term targets

Avoid Influencing JV management to make

decisions in favor of one parent

Running the Venture

Establish an effective governance system for the JV
during the launch phase
Allows JV Management team to make timely decisions
Provide parent organizations with sufficient oversight

Establish rigorous risk management and performance

tracking methodology
Parent firms must be aware of any debts at the JV
JVs ROI must be tracked and measured
Sarbanes-Oxley Act makes JV management of risks &
performance transparency mandatory
Audit process on par with that of the parent firms

Managing Interdependence
JVs need interdependencies between parent
firms to survive
Healthy level of interdependencies
Mutual trust and respect
Agreement on transfer pricing, protection of IP,
access rights to technology etc are required
Agreement on sharing of parent services with JV

JV must be linked with the corporate review

& planning cycle of the parent

Staffing the JV
Entice the best talent from the parent firms to
join. JV launch teams must identify key
human resources needed for it to succeed
Motivate people who work for the parent and
contribute for the JV
A formal job commitment to JV
Bonus for JVs success

Remember, it the people who make a firm

succeed

Closing remarks
Launching and running a world class JV is complex
and demanding task. If done right, JV promises a
better ROI than a merger or acquisition.
It is necessary for all executives involved to
understand the unique demands of JV and invest in
early planning
Right Investments during launch phase will reap big
rewards
If you get the launch right, the rest will take care of
itself