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Why Joint Ventures Die?. General Motivations For Joint Ventures. Risk Sharing Gaining Economies of Scale Exchanging Technology Exchanging abilities. Fundamental Conditions Pushing For Alliances. Motivation For Joint Ventures Fear Profit Organizational Learning. Fear. Future Prices - PowerPoint PPT Presentation
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WHY JOINT VENTURES DIE?
General Motivations For Joint Ventures
Risk Sharing
Gaining Economies of Scale
Exchanging Technology
Exchanging abilities
Fundamental Conditions Pushing For Alliances
Motivation For Joint Ventures
Fear
Profit
Organizational Learning
Fear
Future Prices Guaranteeing Quality Guaranteeing Delivery
Profit
When companies join a joint venture, profit can be gained in two ways.
1. Oligopoly the market
2. Reduction of costs or Creation of new products
1. Oligopoly the market
Between the firms in oligopoly, joint ventures can stabilize competition and improve industry
returns. Oligopolies are price setters rather than price takers.
For example,
2. Reduction of costs or Creation of new products
Increased profitability can be derived from the reduction of costs or the creation of new products
that can influence the competitive positioning of the partners.
For example, a creation of new product from General Motor and its Korean partner Daewoo
GM facilitated the export of low cost vehicles from Korea through the distribution network in the United States.
To slow down the penetration of Japanese competitors, who seeking to upgrade their auto-lines into higher priced levels.
Organization LearningJoint ventures are usually formed to combine the strength and allow firms
transfer the knowledge among partners.
Sharing knowledge is important when firms join from different industries.
For example, the joint venture between Honeywell and Ericsson
To create a telecommunication switch for the US market.
Honeywell is an expert in in-house software and has the ability to run a development facility in the US.
Ericsson had the technology in development and sales of the product in international market.
Products successfully adapted to the market.
Causes of Termination of Joint Ventures 13% of Joint Ventures die within the first
year. 3rd year of a Joint Venture is extremely
unsafe. Depends on external circumstances. Acquisitions occurs from: few competitors,
and unexpected growth.
Rates of Termination of Joint Ventures
Causes of Termination of Joint Ventures
Causes of Termination of Joint Ventures Dissolutions depends on whether or not the
parties have other business agreement. Joint Ventures often choose to divest or
expand. Their stability is strongly affected by the
familiarity and commitment of the partners.
Lessons for the design of Joint Ventures There is no failsafe design for a
business plan 1 simple reason that joint venture is
especially difficult for: - It is under the ownership of more than 1 firm
Joint Ventures
Contract does not make a good readingEliminate the need to reread the terms so
often○ Design the venture to guarantee your sleep○ Do not burden the joint venture○ Choose the right benchmark for evaluation○ Build for the future
Design the venture to guarantee your sleep Worry about loss of control over
technologies and brand label
Eliminate the problem by assuming the problem will occurWhat is it worth for you?Sell it as a part of the capital contribution of your
firm to the venturePriceless, don’t share
Design the venture to guarantee your sleep
GM & Toyota – agreed not to create or share a common brand label
Honeywell & Erickson too did not share a brand label
Market reputation – hard to getSharing brand label is often necessary, but
some loss of sleep can be expected
Do not burden the JV
Logical that partners will try to get something out of the venture
Suffer temptation to burden ventureExcessive channels of remuneration
○ Transfer prices on goods sold or bought from the venture
○ Employee salaries○ Licensing fees○ Royalty fees
Choose the right benchmark for evaluvation
JV is not a popular decision
Engineer & Managers gets upset
The benchmark should concern on how the return of the ventures(investment) compares to an outright divestment
Build for the future No one ensures the success of JV
Important that JV be supported by wider relationship among partners
Work out how relationship of each partner in the industry affect cooperation
Build for the future No organization is forever JV – stepping stones to something else Designed for success but also flexible to
change○ dissolution or acquisition
Managers – manage JV of how and why the alliances die