Joint Venture Failure Rate - Assignment Example

Joint Venture Your name:   Course name:         Professors’ name: Date: Introduction A joint venture is a business owned by two or more organizations or persons to share the profit and expenses of a particular business project (Johnson, 2000). A joint venture is not a business organization but a sense of partnership, proprietorship, corporation or other form of business parties involved in joint venture choose to select (Levine & John, 1986). Though, the joint venture represents a new enterprise, parties involved in the joint venture will continue to exist as separate entities. A joint venture may be formal or informal, such as a handshake and an agreement for two parties to share a stall at a trade show. Other agreement may be complex, such as major electronics companies joining hands to develop a new microchip. The key element in a joint venture is its single, definable objective (Levine & John, 1986). Few businesses have been able to use this form of business strategy to their advantage over the years, although the practice is primary associates with large companies. Most joint ventures have been formed for the purpose of saving money (Johnson, 2000). This is a true as international oil firms that agree to partner together for oil or gas extraction or exploration as it is of neighborhood businesses that agree to jointly run an advert in the weekly paper. This form of business strategy is attractive because they enable firms to share both costs and risks. Thus joint venture partnership is of limited duration and scope. It involves only a small fraction of each party’s total activities (Johnson, 2000). Each party in a joint venture partnership must have something important and unique to offer the joint venture’s business and at same time provide a source of gain to the other party. However parties in joint venture need not be affected by the arrangement (Johnson, 2000). Joint Venture Failure Rate Joint venture partnerships have become very popular in recent years, despite their high failure rate for one reason or another. In the recent uproar about joint venture partnerships, most people tend to focus on their benefits. Joint venture partnership are said to allow companies to share markets and risks, resources, information, to yield economies of scale, to build trust among companies, and so on (Choi & Paul, 2004). But expert in this field stress the costs of joint ventures partnership, such as the potential for disagreements between parties, for creation of future competitors and for diffusion of proprietary information (Moeller, 2000). Such issues have been blamed as factors that contribute to a high “divorce rate” between partners in the joint ventures. Sixty five percent of the joint venture partnership in a study conducted by eventually don’t end up well (Johnson 2000), as well as those in Franko’s sample, and a three third of those in Harrigan’s (Benjamin, 2006). Many studies have stated that high degree of “instability” of this kind of partnership is a sign that the organizational form will not succeed (Bertrand, Mehta & Mullainathan, 2002). In many cases, the dissolution of a joint venture indicates initial organizational choice is wrong for the project at hand. In other cases of instability, a joint venture may be the right thing to do when the partnership was formed (Ramaswamy, 1998). After that, however, changed in conditions as a result of joint ventures themselves, may have contributed to changes in the joint venture structure. Many researches have indicated that 50 per cent to 70 per cent of all joint ventures partnership failed. Not many managers of joint ventures characterized their partnership as “successful” (Neelankavil et el, 2000). According to Hofstede (1993) the most common cause of joint venture failure cited by managers is: cultural differences (49 per cent); unclear or poor leadership (49 per cent); and poor integration process (46 per cent). Other factors that contribute to failure of joint ventures include disagreement over operating policies, tactics and strategies; poor commitment; and differences in the approach towards management systems and style. Ideological and cultural differences top the list of factors that contribute to joint venture failure (Luo, 1997). During evaluation, joint venture parties don’t perform a proper integration and compatibility analysis. Neither do they make a thorough evaluation of management style and corporate culture. As a result, most companies fail to find a way to blend their differences, thus making their joint venture to be unstable (Neelankavil et el, 2000). Unclear or poor leadership is another reason of joint venture failure. In many cases, many parties insist on having a common project leadership role (Luo, 1997). In a situation where there is a disagreement, a standoff will occur (Neelankavil et el, 2000). If parties involved in a joint venture don’t agree on who will be in-charge in the day-to-day operational control and how decision will be made, then the joint venture will fail (Luo, 1997). Another issue of management is when managers of one organization may be involved themselves in decision making than their counterparts in the joint venture (Zhou & Tse, 2002). This may lead to a lack of cooperation and friction. In this case, the project is bound to fail if there is a well defined decision-making process has not been put in place, and which is predicated on mutual strategies and goals (Zhou & Tse, 2002). For example, if two vehicle manufacturing companies have agreed to enter into a joint venture. It is imperative that these companies should be similar in their approach and structures to doing business (Pangarkar & Klein, 2004). If party in the joint venture depends on non-unionized workforce who operates in an autonomous team building environment, and the other party relied on a unionized workforce who specialized in narrow tasks, then the chances of success in that joint venture are poor (Saxton, 1997). The staff in the first organization would be prone to solving problems and making decision on their own, which will reduce the levels of bureaucracy needed to manage the production (Neelankavil et el, 2000). On the other hand, staff in the second company will depend on their managers to make decisions for them. The difference between the two plants would be difficult to overcome and would lead to slower production and higher costs (Zhou & Tse, 2002). Therefore, most joint ventures fail because parties involved prefer not to deal with such problems after a project has been implemented (Zhou & Tse, 2002). Insufficient planning in joint venture is also another reason that may contribute to fail joint ventures. In many cases, a joint venture “plan” is made up nothing more than respective share of the profits of each parties and statement intended contributions to the joint venture project (Neelankavil et el, 2000). In addition to those cited above, other reasons include: lagging technology, disappearing markets, parties’ inability to honor the contract, or macroeconomic and governmental de-stabilizing factors. However, a lot of these factors can be eliminated if there is a proper planning (Luo, 1997). Interference from the government is a difficult problem that can lead a failure of a joint venture (Pothukuchi, Damonpour & Choi, et al, 2002). For example, the U.S government has put in place restrictions against exporting certain technologies to other countries, such as those utilized to produce computers and jet engines (Pothukuchi, Damonpour & Choi, et al, 2002). Such restrictions place companies in the U.S at a competitive disadvantage, since other governments do not place similar restrictions on their companies (Saxton, 1997). Thus, some American companies dealing in manufacturing of computers and jets engines are unable to engage in joint ventures (Pothukuchi, Damonpour & Choi, et al, 2002). Those companies that deal in military- oriented joint ventures with the government are often faced with unanticipated risks. The government may allocate money for sign contracts with manufacturers, production of certain weapons, and then cancel the project due to budget restrictions, changing needs, or election results (Johnson, 2000). Such actions by the government are common risks to these joint ventures (Johnson, 2000). They bring into a project an element of insecurity, which is something that parties try to avoid as much as possible. How to make Joint Venture Succeeded Although there is no official statistic on the rate of success of joint ventures, per se, few studies that have been conducted in this field conclude that most joint ventures fail about 60 per cent of the time within 5 years (Whitelock & Yang, 2007). Experts in this field are in agreement that the key to success in joint venture is the human factor such as knowledge sharing and human resources integration, rather than financial or geographical factors. A company that makes its employees to feel comfortable about the strategic alliance is important to the success of a joint venture. Information sharing will be critical, and it should be done as early as possible, both parties should always talk and exchange their ideas and knowledge. This involves steering committees, meetings, internal promotions, joint company events and employee “swaps” (Ramaswamy, 1998). The company should also be realistic when determining their goals of a joint venture because industrial conditions get modified, business environment change and new markets evolve (Werner, 2002). The success factor “trust” between parties is important the success of a joint venture. “Trust” reduces the need for complex contractual agreements, reduces behavioural uncertainties (Whitelock & Yang, 2007), stabilizes inter-organizational relationships and at same time it creates a conducive environment for parties involved in joint venture and enable a more open exchange of information among the parties involved in the joint venture (Pangarkar & Klein, 2004). Because joint ventures are built on convergent goals and trust, one of the main risks parties in joint ventures may face if parties come from different cultures. These parties may not trust have divergent goals or doing business in a certain “way”. This sharing principle should govern the entire process of joint venture (Whitelock & Yang, 2007). Many joint ventures have died because self-serving attitudes and divergent goals, which are not in tandem with the spirit of the joint venture. For example, the joint venture between British Aerospace and Taiwan Aerospace alliance. After negotiations, the agreement was put in pen. Soon after, Taiwan Aerospace alliance pulled out of the deal because their goals were not in agreement with British Aerospace. Taiwan Company wanted to acquire new technology, which their counterpart did not want to give them . The British Company wanted to extend it Asian market, but its Asian counterpart refused to grant their wishes (Whitelock & Yang, 2007). A joint venture concept will only work if all parties in it are willing to move forward together. Not even a contract that has been signed between the two parties can have any value if acceptance and mutual trust of the terms are not present in the two parties participating in it (Werner, 2002). Therefore, a person or an organization should not consider a joint venture project if the motive from either side is questioned. An agreement that is clearly defined will contribute to the success of a joint venture. In most cases this aspect of joint venture is overlooked (Yan & Child, 2004). But each party should be involved and not only understand the basic of that agreement, but also understand the fine details, including, financial contributions, goals, expected length of the partnership and human resources (Yan & Child, 2004). Understanding the scope of a joint venture helps to protect both parties from litigation issues or potential failure, and it also helps the partnership to reach its goals. Conclusion Instability in a joint venture has a lot in common with wholly owned businesses (Schaan, 1983). Therefore, both type of businesses will require corrective behavior when initial choices are wrong. But some of the factors that contribute to instability in joint ventures stem from elements that are unique to that firm form (Schaan, 1983). The advantages of joint ventures have been seen to override the disadvantages. Joint ventures allow organizations to tap into the resources of other organization, and, in the process, the organization is able to increase their own capabilities, which they cannot do when they go it alone (Schaan, 1983). Also, joint ventures allow organization to expand in other countries rapidly. In the process, the organization is able to create new economic scope. Reference List Benjamin G 2006, ‘Joint Venture Instability: Is it A Problem,’ Colombia Journal of World Business, Summer, 6(3), 71-94. Bertrand M, Mehta P, Mullainathan S. 2002. Ferreting out tunneling: An application to Indian business groups. Quarterly Journal of Economics 117 (1): 121–48. Choi, C, and Paul W. B 2004, "Split Management Control and International Joint Venture Performance," Journal of International Business Studies, 6(1), 71-94. Hofstede, G. (1993) Cultural constrains in management theories. 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