Joint Venture (JV)

A commercial enterprise between two or more businesses for tactical and strategic purposes

What is a Joint Venture (JV)?

A joint venture (JV) is a commercial enterprise in which two or more organizations combine their resources to gain a tactical and strategic edge in the market. Companies often enter into a joint venture to pursue specific tasks. The JV may be a new project with similar sets of products and services or an entirely new firm with different sets of activities.

Companies initiate a JV through a contractual agreement between all concerned parties. The profit and loss in this set-up are shared by the participants. However, entering into a joint venture does not affect the individual business of the participants.

 

Joint Venture (JV) in business

 

Top 10 Advantages of Joint Ventures

A joint venture offers several advantages to its participants. It can help the business grow faster, increase its productivity and generate more profits.

 

1. Shared investment

Each party in the venture contributes a certain amount of initial capital to the project, depending upon the contract terms and thus alleviating some of the financial burden placed on each company.

 

2. Shared expenses

Each party shares the common pool of resources and thus brings down the cost on an overall basis.

 

3. Technical expertise and know-how

Each party to the business often brings specialized expertise and knowledge, which helps the joint venture become more competent and strong enough to move aggressively in a specified direction.

 

4. New market penetration

A joint venture allows companies to enter a new market very quickly as all relevant regulations and logistics are taken care of the local player. Hence, with the formation of the venture, the companies are able to expand their product portfolio and market size.

 

5. New revenue streams

Small businesses face limited resources and capital for growth projects. By entering into a joint venture with a stronger and more established partner, the small business can expand its sales force and distribution channels, resulting in larger and more diversified revenue streams.

 

6. Intellectual property gains

Critical intellectual property, technology or other resources are often difficult to build in-house. Businesses then enter into joint ventures with businesses that possess these resources in order to gain access to such assets.

 

7. Synergy benefits

With the expansion in product portfolio, venturing into new market and sharing of common expenses and expertise, it allows synergy to come quickly in the JV.

 

8. Enhanced credibility

It takes lots of time for a young business to build market credibility and a strong customer base. For these companies, forming a joint venture with a larger, well-known brand can help them grow faster and achieve more credibility and visibility.

 

9. Barriers to competition

One of the reasons for forming a joint venture is also to avoid competition and pricing pressure. With collaboration with other companies, market penetration builds barriers for competitors that are effectively difficult to penetrate.

 

10. Improved economies of scale

A bigger company always enjoy the economies of scale, which again is enjoyed by all the parties in the JV.

 

Risks of Joint Ventures

There are several benefits of forming a joint venture, but it also creates lots of challenges. Forming a venture with another business can be complex in terms of time and effort required to build the right business relationship. The new JV can cause the following problems or differences:

  • The new set of partners may have different objectives for the joint venture, as the objectives of the venture are not clearly defined and communicated to everyone involved.
  • Cultural mismatch and different management styles can lead to poor integration and cooperation in business growth.
  • Imbalance in the levels of expertise, investment or assets brought into the venture by the different parties may bring in differences regarding the priorities of the business
  • Flexibility is important. However, some projects require full concentration and thus simultaneous work may become impossible.

 

When Should a Joint Venture Dissolve

As discussed earlier, joint ventures are formed with certain objectives and not necessarily as a permanent long-term solution. Below are some of the common reasons when a JV should dissolve:

  • Completion of the time frame as agreed upon initially with no objective of renewing the same
  • The objectives of the party are no longer aligned with the common objectives
  • Legal or financial issues with either of the parties
  • Disputes concerning the management of the business with no significant growth of the JV
  • Change in the market conditions, such as economic policies and political reasons, can also drive companies not to continue the joint venture

 

Other Resources

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