Here’s What You Need To Know About Joint Ventures

A joint venture, or JV, is when two or more businesses pool resources to accomplish a specific goal. Joint venture partners maintain their separate identities while creating a new entity focused on completing a particular project or exploring a new market.

Here, learn how joint ventures can help companies with a shared vision reduce costs and sharpen their competitive edge. 

Understanding joint ventures

A joint venture is a business arrangement where multiple parties agree to combine their resources for a specific purpose. Each participant shares in the profits, losses, and costs associated with the venture.

Joint ventures are flexible, powerful tools that enable companies to choose from various forms of collaboration. Depending on their goals and the terms of their agreement, joint venture parties may choose to incorporate a new, shared entity or to collaborate on research, product development, or market expansion. Joint ventures are particularly useful for businesses looking to enter new markets, share risks, combine complementary strengths, or undertake projects that would be too costly or complex to manage alone. 

Why companies form joint ventures

Common objectives for joint ventures include: 

• Entering new markets
• Developing new technologies
• Expanding product lines or service offerings
• Accessing complementary skills and resources

Joint venture advantages

As a business leader, there are several competitive advantages that might inspire you to pursue a joint venture:

Access to new markets: Joint ventures can ease you into unfamiliar markets, especially international ones. Partnering with local companies can make it easier to navigate new regulatory environments, understand local consumer preferences, and expand your customer base.

Shared risks and costs: Sharing responsibility mitigates your operational risks and brand risks and allows you to kickstart projects you couldn’t manage without a partner.

Combined expertise and resources: When you join forces with another company, you gain access to different skills, technologies, and assets. Sharing resources can spark innovation, leading to new business models, products, and services, and improving efficiency.

Enhanced flexibility and capacity: Sharing access to another company’s markets, resources, and talents can boost your capacity. JVs can also facilitate business expansion, allowing you and your partners to negotiate terms aligned with your mutual strategic objectives. 

Joint venture disadvantages

Despite their advantages, joint ventures can face significant challenges:

• High failure rate: An estimate from Entrepreneur suggests that anywhere from 40% to 70% of all joint ventures will fail. 
• Competing interests: When partners are competitors outside the joint venture, the venture’s chances of survival significantly decrease.
• Declining parent involvement: Parent companies often reduce their engagement in later stages of the JV, leading to governance issues.
• Insufficient risk planning: Many joint ventures lack adequate contingency plans to address changing market conditions or shifts in partners’ risk profiles.
• Cultural and operational differences: Partners may have different management styles, corporate cultures, or operational approaches that create friction.

Types of joint ventures

Joint ventures come in various forms, each suited to different business objectives:

Vertical joint ventures involve companies at different stages of the supply chain. For example, Honda and LG formed a vertical joint venture to produce lithium-ion batteries for Honda’s electric vehicles, combining Honda’s vehicle manufacturing expertise with LG’s battery technology.

Horizontal joint ventures allow companies at the same stage of the supply chain—who may even be competitors—to collaborate for mutual benefit. In 2018, streaming platforms Spotify (music) and Hulu (TV) formed a joint venture to offer bundled subscriptions, expanding both companies’ user base.

Functional-based joint ventures focus on specific business functions. LYNK & CO, a joint venture between Geely and Volvo, combines Geely’s understanding of the Chinese market with Volvo’s expertise in safety and design to create innovative automotive products. At a local level, functional-based joint ventures can be as simple as a coffee shop selling croissants from a nearby bakery or a graphic design and content marketing company sharing office space.

Project-based joint ventures are formed to complete specific projects and dissolve once the goal is achieved. Disney owns Hulu now, but the streaming service entered the market as a joint venture between Disney and News Corporation, NBC Universal, and Providence Equity Partners, who pooled media libraries to create a new platform.

Industry utility joint ventures provide specialized services to industry participants or establish industry standards. Partior, a blockchain platform and 2021 JV between JPMorgan Chase, DBS Bank, and Temasek, aims to establish new standards for global banking.

Creating a successful joint venture

To improve your odds of success with your new venture, consider these best practices:

• Choose partners carefully,looking for companies whose expertise, operations, and resources complement yours and whose values align with your company’s culture. 
• Establish clear strategic objectives to ensure a common purpose. 
• Develop a comprehensive contractual agreement covering all aspects of the partnership, including management structures and decision-making processes, financial contributions, profit sharing, intellectual property ownership, and dispute resolution processes. Ensure that it’s an equitable arrangement that reflects each partner’s contributions and illustrates appropriate governance. 
• Establish clear communication channels. Maintain an open dialogue to address issues before they become serious problems. Prepare for potential changes in market conditions, partner priorities, or risk profiles.