Download Building Successful Joint Ventures

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 holder’s 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
JV’s 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 JV’s 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”