The Concept of Joint Venture - Case Study Example

The Concept of Joint Venture This paper aims to explore the academic concept of joint venture. By defining joint venture as an academic concept, the paper starts the discussion about its relevance as a mode of entry in terms of foreign expansion. The paper iterates the reasons behind the utilization of joint venture, as well as the relative benefits and disadvantages of using it over other modes of entry. The concept of joint venture is explored further by proposing a design and management of a joint venture between the US and Japan with the use of various frameworks as proposed by academic experts. Further, a context of experience is provided by narration of a personal experience with a company that has used joint venture in foreign expansion. The paper finally concludes that, as apparent in the concept and the context, strategic planning, congruity between the national and organizational cultures between the two entities as well as communications play an important part in order for a joint venture to be successful. I. Body A. Joint venture defined When an opportunity is beyond one company's ability in terms of knowledge and resources, most companies resort to forming joint ventures in order to take advantage of the opportunity. While these joint ventures can take place between any entities that wish to combine their expertise and resources for the hope of sharing the gains from the venture, joint ventures are more common on the international business arena (Rod 2009). With the onset of glottalization, joint venture is a usual entry strategy to another geographic market. There are many reasons why companies or entities would resort to forming a joint venture. For one, in many other geographic markets, the entry of an foreign entity is hindered by laws of the land (Makino et al 2007). It is very common that for foreign entities to enter the local market, they must do it by partnering with a local entity, and forming a venture, or an alliance (Chen, Park & Newburry 2009). In the case of the joint venture, the two entities share the stakes in the equity of the newly-formed JV entity. Depending on the terms of the agreement, in most international joint ventures, the local entity's major role is to serve as the gateway to the local market, sometimes in terms of marketing and distribution knowledge, or more depending on the agreement. This is another reason for a company that has global expansion plans to adopt joint ventures—local knowledge of marketing and distribution in order to offer targeted products to certain segments of the market (Makino et al 2007). By taking advantage of the local knowledge of the market of the partner, the foreign entrant can have a better grasp of the market than getting in directly, thus minimizing the risks of entry. In return, the local partner will be able to take advantage of the technology that the foreign partner will bring. Thus, international joint ventures have become a popular mode of entry to new markets. B. The design and management of an international joint venture between the US and Japan Although joint venture has become prevalent during the past few decades as a mode of foreign entry for global expansion, a lot of international joint ventures has failed as well (Gong et al 2007). A conceptual framework for joint venture development and management that is proposed by Rod (2009, 12) is used. This framework includes the main motivation for the two entities to rationally enter the joint venture, the role of internal environment of the two entities, then an agreed system of processes for the joint venture itself between the two entities. The main motivation, or considerations for the two entities are classified into two: the costs of collaborating and the benefits of collaborating. The costs of collaborating includes “assets specificity, reciprocal investments, uncertainty, opportunism, information asymmetry, and opportunity costs (Rod 2009, 12).” For an international venture between US and Japan, depending on the nature of the venture or the project, these costs need to be weighed and distinguished first between the two parties in order to ensure the degree that the other party is collaborating. For example, if the international venture presents a huge opportunity costs for Japan to cooperate with the US, this must be given consideration. These costs, however are not enough as considerations. The benefits of collaborating also need to be weighed. According to the framework, the benefits of collaborating include “economies of scale, lower costs, political benefits, and reduced risks (Rod 2009, 12).” In the case of an international venture between US and Japan, depending on the nature of the venture, these benefits can offset the costs. If the benefits to collaborate exceed the costs between both entities, the entities are more likely to collaborate and the joint venture would have a larger chance to succeed. Apart from these motivations and considerations, the internal environment of the entities play a huge role in the success of the joint venture. The internal environment which embodies the “organizational culture, the entity's objectives, expectations, management style, motives, reputation, organizational systems, organizational policies, resources, skills, and knowledge (Rod 2009, 12).” In the case of US and Japan, these factors for each of the entities should be assessed. These internal environment factors determine the “prior interaction, trust, communication, and conflict resolution (Rod 2009, 12),” depending on the congruity between the two internal environments. These internal environments dictate the norms and ways of doing business with the joint venture. For the two countries, the major difference between the American way of doing things and the Japanese way of doing things, and how they can be reconciled would determine the level of interaction between the two entities. Therefore, in order to be successful, the two countries should have higher benefits than costs to collaborate in order to be more flexible in adapting to the ways of doing things of the other parties. The major considerations could be the language barriers for the US and the Japanese, as well as the management style between the two countries. In order to be more specific in the design and management of the joint venture, the phases that are identified in the joint venturing process that Beamish and Lupton provide in their framework should be used (2009, 79). This framework includes “assessing strategic rationale, selecting a partner, negotiating terms, and implementation and management (2009, 79).” In the case of a joint venture between the US and Japan, “managing the cultural differences (2009, 79)” is an important factor along the JV process. The difference between the national cultures between the two countries are important to note, and then reconcile in crafting the joint venture. In “assessing the strategic rationale” phase initially, the company must have conducted strategic planning. By strategic planning, the external factors must have been weighed: the opportunities to be taken advantage of, the threats that need to be addressed, as well as the level of the industry. After the US has assessed its strategic rationale (or the rational considerations as previously stated) in pursuing the joint venture, the considerations should also be noted in selecting a partner, which is Japan. By choosing Japan, the country aims to accomplish a goal with Japan as a partner, depending on what Japan can offer to the US in the joint venture. The issues that need to be addressed during the “negotiating terms” of the joint venture include terms on “performance assessment, relative importance on each of the requirements, awareness of each other's assumptions, sharing of benefits, and management responsibilities of the joint venture (Beamish and Lupton 2009, 79).” The questions that need to be addressed during the “implementation and management phase” of the joint venture include the “handling of disputes when they arise, renegotiating terms if one or more partners think it necessary, capturing and codifying the management capabilities, plans for turnaround and issues for termination (Beamish and Lupton 2009, 79).” C. Context of experience: Personal experience related to transnational/international business The Canadian company that I was involved with was assessing its options to find its third market. After being successful in the Canada, then the US, the company was looking to expand somewhere in Asia. It was ready for some expansion. For the “assessing the strategic rationale” phase, the major reason why the company wanted to expand was to increase utilization of its current manufacturing capacity. Although the Canadian and US market were huge, the company has opened another manufacturing plant in order to address the anticipated growth in demand. As the growth has proved to be a little slower that anticipated, the fixed overhead was higher. Since it has been part of the company's strategy to create a presence in Asia, the top management has finally decided to look for another market. In this way, economies of scale is hoped to be achieved. Part of “assessing the strategic rationale” phase includes environmental planning and overall assessment of the market and the industry. The company is in the food supplement and nutritional products industry. Knowing that there is a global trend toward health consciousness, the company has decided to seize the opportunity. However, the company's mode of entry revolves around the following choices: expansion, licensing, strategic alliances, joint venture, or foreign direct investments. While each of the modes of entry have their own respective advantages and disadvantages, the company has opted for an international joint venture. The reasons include: local expertise in terms of the market, as well as the labor market; minimizing risk than going into FDI immediately; and maintaining lower operational costs while not giving away the technology and technical know-hows of the business. The company has initially narrowed down its choices to Korea, Japan and the Philippines. While the purchasing power of consumers in Japan was huge, the company's major concern was its flagship product was for skin-lightening. For a country like Japan which is used to more traditional herbal medicine, the success of food supplement in a Western fashion would require more capital for the company in order to create demand. As for Korea, although consumers also spend more in skin whitening, the country has heavy restrictions and protection for the industry. With all these, the company has chosen the Philippines, for these reasons: former US colony where people speak English; the country is more used and exposed to Western culture therefore products can gain wider acceptance; the very huge demand of skin-lightening products in the country and more investor friendly economic policies; the corporate ways in the Philippines that resembles that of the US companies. The country then proceeded by choosing a local partner that specializes in distribution. The joint venture would be created between the distribution company and the Canadian company. The Canadian company would own 70%, and 30% would be owned by the local company, with a more complex profit sharing agreement in favor to the local company. This is because, the local company bargained that it will take care of the marketing and brand presence for the Canadian company's products. Because the Canadian company cannot agree to increase the ownership of the local company, it has agreed to pay in the form of a different compensation, as provided in the profit-sharing agreement aside from the equity positions. For the implementation and management, the joint venture's top management is comprised by executives from the home company in Canada as well as some from the US. The other employees are hired locally by the joint venture. The company has faced little problems as the products were widely accepted by the locals, with high quality of employees at lower rates than in the US and Canada. II. Conclusion The success of the joint venture is dependent on many factors as both illustrated in the concept and the context. For one, a lot of things between the host company and the local company should be considered. As joint venture is just one of the expansion strategies that a company could employ, the costs and benefits should be weighed in choosing joint venture as the mode of entry into a specific geographic market. The success of the company as told in the context of experience, can be safely assumed to be the congruity of the national cultures between the two countries, or at least the familiarity of ways of doing things that helped the companies to reconcile their differences more easily. The company, albeit not very huge in terms of resources, has been able to capitalize on opportunities in a different geographic area because of joint venture. Although it does not have the knowledge of the market, by choosing a strong local distribution partner, it has been able to succeed more. If the company has chosen Japan or Korea immediately, it would realize it has “taken a bigger bite than it could chew.” as it would take bigger marketing costs to convince the Japanese to buy the food supplements. As for Korea, it would have to face tighter political restrictions. In order to grow its operations and increase utilization of its capacity, the company has taken the right choice to pick the most economical one: to go to the Philippines. The communications factor also play a huge role in the ease of the negotiation process. Thus, the success of the company is also dependent on the company's ability to assess its situation as well as the external environment before it can decide to go into joint ventures. Reference List Beamish, P. W. & Lupton, N. C. (2009 May). “Managing Joint Ventures.” Academy of Management Perspectives. Retrieved July 19, 2009, from http://web.ebscohost.com/ehost/pdf?vid=1&hid=9&sid=7f005550-f8f7-4366-9038-777b47288766%40sessionmgr11 Chen, D., Park, S. H., & Newburry, W. (2009 April 23). “Parent Contribution and Organizational Control in International Joint Ventures.” Strategic Management Journal. Early View. Retrieved July 19, 2009, from http://www3.interscience.wiley.com/cgi-bin/fulltext/122439513/PDFSTART Gong, Y., Shenkar, O., Luo, Y. & Nyaw M. (2007 March 19). “Do Multiple Parents Help or Hinder International Joint Venture Performance? The Mediating Roles of Contract Completeness and Partner Cooperation.” Strategic Management Journal. Volume 28. Issue 10. Retrieved July 19, 2009, from http://www3.interscience.wiley.com/cgi-bin/fulltext/114261568/PDFSTART Li, J., Zhou, C., & Zajac, E. J. (2009 February 25). “Control, Collaboration, and Productivity in International Joint Ventures: Theory and Evidence.” Strategic Management Journal. Volume 30. Issue 8. Retrieved July 19, 2009, from http://www3.interscience.wiley.com/cgi-bin/fulltext/122301313/PDFSTART Makino, S., Chan, C., Isobe, T. & Beamish, P. W. (2007 April). “Intended and Unintended Termination of International Joint Ventures.” Strategic Management Journal. Volume 28. Issue 11. Retrieved July 19, 2009, from http://www3.interscience.wiley.com/cgi-bin/fulltext/114277786/PDFSTART Rod, M. (2009 April). “A Model for the Effective Management of Joint Ventures.” International Journal of Management. Volume 26. Number 1. Retrieved July 19, 2009, from http://web.ebscohost.com/ehost/pdf?vid=1&hid=104&sid=041ae82e-46a1-4c29-8769-b401879a6d7a%40sessionmgr110 Read More