Entering into a joint ventures is a major decision. When two businesses agree to join together for a common purpose and mutual benefit, it gives rise to a joint venture. Join ventures can be created by two or more parties; generally characterized by shared ownership, shared returns and risks, and shared governance in a business.
What is a Joint Venture?
A joint venture is a business arrangement in which two or more companies combine resources on a project or service. Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects. The length of the agreement and what resources it will include will vary.
For example, a small business with an exciting new product might want to sell it through a larger company’s distribution network. The two partners could agree to a contract setting out the terms and conditions of how this would work. When and why a business can enter into joint ventures are as follows,
Increased Resources and Capacity
When two firms come together, it enables the joint venture company to grow and expand more quickly and efficiently as the new business pools in financial and human resources. It is able to face market challenges and capitalize new opportunities more effectively.
Innovation
Products become outdated after sometime and demand for them starts falling. Consumers have become more demanding in terms of new and innovative products. Joint ventures enable companies to come up with innovative products because of new ideas and technology acquired from the partner in the joint venture.
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Access to New Markets and Distribution Networks
When foreign companies form joint venture with companies in a host country, they gain access to the market of host country. They can also take advantage of the established distribution channels. That is the wholesale and retail outlets in different local markets which may be very expensive for them otherwise.
Low Cost of Production
When international corporations invest in developing countries through joint ventures, they are able to benefit from low cost of raw materials and labor. The international partner is thus able to produce the products of required quality and specifications at a much lower cost than what is prevailing in the home country.
Access to Technology
Most businesses enter into joint ventures to get access to an advanced technology. Which is not possible or economically feasible to be developed on their own. Technology adds to efficiency and effectiveness, thus leading to reduction in costs and superior quality products.
Established Brand Name
When two businesses enter into a joint venture one of the partners benefits from the other’s goodwill already established in the market. In such cases, there is a ready market waiting for the product to be launched. Which in turn saves expenditure on marketing activities otherwise required to launch a new product.
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Finally!
Partnering with another business can be complex. It takes time and effort to build the right relationship. Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.
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