Why Joint Ventures Die

1. Why Joint Ventures Die • Why do they die? Understanding why and how joint ventures die gives insight into how firms can make better use of them. Even though we focus on termination, it is worth reviewing the fundamental conditions that give rise to alliances in the first place because these fundamentals will help explain terminations.

2. Motivation for Joint Ventures Reasons given by CEOs for choosing joint ventures range from the benefits of • Sharing risk • Exploiting economies of scale • Exchange of technologies • Differential abilities

3. In many cases, these are promoted by governments who stipulate shared ownership as the only channel by which to invest in a country, and the most common reasons are

4. Fear • When two firm transact on a long-term basis, problems usually arise due to the difficulty of • Settling future prices • Guaranteeing quality and delivery • Safeguarding technological • Strategic decisions

5. Example • As there is no guarantee that it would not fail, the necessity of stipulating contractual conditions increases with the complexity of the transaction and the difficulty of monitoring behavior. Also, contractual clauses regulating the development process are difficult to write and to enforce. Example: A supplier that initially gives a low price may claim unexpected costs in developing a new process. The fears in relying on an outside supplier increase when the buyer has to design specific components and is dependent upon the goodwill in the relationship that is not certain.

6. The reasons why a joint venture tends to be the best alternative: • It requires mutual commitment of investment. • It provides incentives for both parties to perform according to their obligations. • It holds each side’s investment vulnerable to loss in the case of breach of contract or poor performance.

7. Profit • Increasing profitability can be gain by one of two ways • Between the firms in oligopoly, joint ventures can stabilize competition and improve industry returns • Boosted profitability can come from the reduction of costs or the creation new products and technologies. It can affect the competitive positioning of the partners in their industries

8. Example General Motor and its Korean Partners • They facilitated the export of low-cost vehicles from Korea through a well-established distribution network in the U.S. • The cooperation between two companies served to slow the penetration of uncontrollable Japanese competitors, who were seeking to upgrade their auto lines into higher-priced level on the basis of profits earned on their commodity vehicles sales.

9. Organizational Learning Learning • It is important to balance this perspective by considering the role of joint ventures in creating and transferring knowledge among firms. • Sharing knowledge is important in ventures between firms from different industries who seek to pool their distinct competencies.

10. Example Honeywell and Ericsson • The purpose was to develop a telecommunications switch for the U.S. market. • Honeywell had considerable in-house expertise in software features desired by the end users, as well as, the ability to run a development facility in the U.S. • Ericsson had the switch technology and several years of experience in the international to development and sales of the product. • The development efforts resulted in a product that is fully adapted to the target market.

11. Causes of Termination of Joint Ventures • A sample of ninety-two joint ventures in the US • Whether terminated and what form of termination it has • Share of the joint ventures that died in each year • 13% tend to die within 1 year • Acquisitions of joint ventures occur under 2 kinds of industry conditions – few competitors and unexpected growth

12. Lessons, design and not burdening the Joint Venture • Difficult to design because it is under the ownership of more than one firm • Worries about the loss of control over technologies and brand labels – technology could be sold or not shared; quality of products can cause damage to brand reputations • Cooperative arrangements lead to each member trying to do the least amount of work which leads to jeopardizing the joint venture • Design the alliance in a way that both parties are equally interested in the profitability of the concern

13. Causes of Termination of Joint Ventures • Asea Brown Boveri (ABB) and Westinghouse • Concentrated and mature industry • Acquiring the operation rather than leaving both parties to invest separately • Analysis of dissolutions – whether or not the parties have other business arrangements • Findings – JV are options to divest or to expand ; their stability is strongly affected by the familiarity and commitment of the partners.

14. Choose the right Benchmark for evaluation The benchmark should concern on the amount of divestment comparing to the profit you get from keeping the investment.

15. Build for the Future • As in the business, the working out of conflict and challenges required the participation of effective manager, as well as the supported by a wider relationship among the partners. The hardest task of forming an alliance is to work out on how the relationship of each partner with other players in industry that affect cooperation.