Joint Venture as the Famous Entry Method - Research Paper Example

Introduction Today’s fierce competition compels businesses to seek other markets and discover unknown frontiers to expand the business just to be able to maintain their foothold on the market or even gain competitive advantage and to realize better profits. As the world is figuratively shrinking with the advent of technological breakthroughs especially the rapid advancement in information and communications technology, geographical barriers are swiftly being wiped away. New frontiers are opened and excellent opportunities present themselves to the businesses which are willing to take on the challenges and manage the risks. However, organizations which have set their objectives into going global and entering the international market realizes that getting into new territories is more complex than it seems. There are plenty of issues to be addressed to successfully venture into the international arena. Aside from the usual initial considerations such as marketing, which involve the choice of countries, market segment, entry method, marketing efforts etc and sourcing requirements, which are about the procurement or manufacturing details, a major concern lies in the area of investment, management and control. This involves the details on the type of capacity that the firm is gaining entrance into the global scene (Market Entry Strategies, n.d.). One of the more famous entry methods is the joint venture. It has been favoured by many organizations because of the varied benefits that it could accord depending on the status and the capabilities of the firm. One is in terms of financial resources. Having insufficient capitalization to venture into a broader market could hold back the company from pursuing its goals for the global market but partnering with another and combining the resources allow the companies to achieve the necessary financial readiness or access the ease of acquiring financing (International Joint Ventures, n.d.). The international market is also very complex owing to the distinct differences of each country with regard to the political, economic, socio-cultural, technological, environmental and legal (PESTLE) aspects. The analysis of such intricacies and the need to map out adaptation policies could burden the new entrant in terms of time and resources which are integral in gaining its competitive edge. Partnering with a local company which has extensive and comprehensive knowledge and experience about the local market immediately takes out the trouble and allow the company to proceed with the project faster and more easily. The local partner could be the best vehicle in ascertaining its presence in the chosen country and market (International Joint Ventures, n.d.). Another reason for considering going into a joint venture is the competitive advantage that could be derived from the marriage of both firm’s expertise which could necessarily expand the competence and capabilities of both partners. The sharing of resources could be the stalwart feature as they go against existing competitors in the chosen industry (International Joint Ventures, n.d.). Joint venture is "an enterprise in which two or more investors share ownership and control over property rights and operation (Market Entry Strategies, n.d.)”. There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions (Foreign Market Entry Modes, n.d.). Looking at the concept of joint venture, the partners enter in conflicting situations in which they would like to harness the benefits of the joint venture to optimize their competitive edge. They also shared their resources for the venture’s operations and yet they try to maintain the confidentiality of their proprietary resources. Another point of conflict is that joint venture is controlled through negotiations and coordination processes, while each firm would like to maintain hierarchical control (Foreign Market Entry Modes, n.d.). And yet the advantages of entering into a joint venture cannot be discounted and thus makes it a very attractive method of entry. Joint venture is especially advantageous when “the partners' strategic goals converge while their competitive goals diverge; the partners' size, market power, and resources are small compared to the industry leaders; and partners' are able to learn from one another while limiting access to their own proprietary skills (Foreign Market Entry Modes, n.d.)”. However, as a SWOT analysis of the company and a PESTLE analysis of the industry and the environment is a major tool and technique for a business enterprise, assessment of the advantages of going into joint venture to be able to harness its full capacities towards the firm’s competitive edge is essential towards the decision of embracing joint venture as a mode of entry. On the flip side, recognising the risk and drawing up a risk management procedure before committing into a joint venture will spell the firm’s success or failure in the decision as well as its entry into the international market. Circumstances to Harness Corporate Advantage 1. Financial Strength Combining finances essentially strengthens the financial capabilities of the joint venture partners. As mentioned previously, especially for those firms which lack sufficient financial resources, joint venture is a viable way of overcoming the impediment. The pooling together of both partners finances would necessarily afford them the opportunity to pursue the venture with greater capacity and better financial standing among the competitors and within their industry (Market entry strategies, n.d.). 2. Cost and Risk Sharing Because of the firm’s “marriage” for business and economic conveniences, they are allowed to share the cost of doing the business which keeps the burden of cost on each partner relatively lighter that doing the business alone. The capital assets of both companies, even if the partners retain the respective ownership, are likewise shared in the conduct of the business. This allows the fixed cost to be spread to a much wider base and consequently drives down the operational and production costs or it could provide a much greater production capacity, thereby in most instances achieving economies of scale (Gamble, 2002). Similarly, the sharing also extends in the risk that the venture faces and anticipates. The risks is not solely borne by one company but is spread out to both partners. This necessarily halved the risk that the venture takes on. Because of this, the partners could have the ability in exploring higher risks endeavours with consequently better returns without compromising their assets to the possible extensive liabilities (International Joint Ventures, n.d.). 3. Low Cost to Establish Compared with acquisitions and other types of business alliances, joint venture costs less to put up as it only requires the agreement of both parties and the capacities they are willing to bring into the venture. The only determinant is the share percentage of each partner in the venture. The respective capacities of the partners determine their share and percentage of profits and expenses based on the percentage of contributions (Gamble, 2002). 4. Elimination of Possible Competition By forming an alliance with another company within the market and the industry that the firm decides to enter, it categorically eliminates one of its possible competitors. The business sense of a joint venture especially in a new market is just that–by the strategic alliance entered by both firms, they become partners instead of competitors. Within this context, a combined organization necessarily acquire a bigger stance and could take on the other competitors in the market better compared if they were both smaller and also competing with one another (Jeannet & Hennesy, 2004). As previously discussed also, the coming together of both organization allowed them the benefit of driving down the cost and achieving economies of scale. 5. Maximizing Individual Competencies One of the main reasons of going into a joint venture is the ability to extend the firms capabilities through finding a complementary business organization in terms of skills and competencies. It entails the knowledge of the company’s strengths and weaknesses and finding other firms that will complement the organization’s weaknesses with the other’s strengths. In this way, the strengths will be further enhanced while the weaknesses could be neutralized and better managed (Pearce, 2008; Business Briefing, 2009). 6. Customer Base A new entrant might have zero customer base and might have to start from nothing in the new market and geographical location which is a costly disadvantage. Finding a local partner with an already established customer base will immediately provide the company a hold on the market without expending time and resources into marketing and advertising activities to seek out the customers and grab a hold on a sizable customer base. This reduces market risks and increases the firm’s market viability (Pearce, 2008). Gaining access to the customer base is also very advantageous especially if the partner company is larger thus enjoying a larger customer base. 7. Local Acceptability Add to the advantage of having a customer base courtesy of the local partner is the higher percentage of acceptance of the local market for the firm. Some social and cultural perception and practices promotes distrust and enmity against foreigners in their local land. Some communities are regionalistic and endorse loyalty to locals. This poses a threat to the new business as the perception of the potential customers will dictate their success or failure in conducting business in the new customer’s locale. A local partner, which enjoys the trust and loyalty of the natives, will be the solution to this social and cultural barrier. The market looks at the local partner more than their perceived distrust to the new entrant (Business Briefing, 2009). 8. Dealer Networks and Distribution Channels Together with the established customer base of the local partner is also an established network of dealers and distribution channels. Capitalizing on this laid out platform in the conduct of business facilitates the entire operational chain of the business. Such networks and channels are usually very reliable and tested over time. This ease will not necessitate allocating time and resources into trying to build the distribution structure from the start. It necessarily aids the business right away in its conduct of its own operations (Pearce, 2008; Business Briefing, 2009). 9. Local Access Another very important advantage is the ability to gain local access right away. This could include local contacts, contact points for distribution and the multitude of local suppliers of raw materials. Sometimes, the local access could also connect to winning local government contracts as well as to production facilities within the community. All these provide the competitive advantage that a new entrant firm needs at the onset of its operations (Business Briefing, 2009). 10. Research and Development Capability The combined financial resources of the partners could also fund research activities that could be otherwise unaffordable to separate firms. The bigger financial base that they enjoy as a result of the joint venture is their window to research and development activities that they need to undertake to come up with innovative products and services. This could not have been possible because RND initiatives usually require sizable financial allotments that might be too much for a smaller firm and could be the risk of financial instability if sustained (International Joint Ventures, n.d.; Pearce, 2008). 11. Technical Capabilities Not all organizations are equal in expertise especially in technological know-how. It depends upon the objective of the firm and the ensuing practices and experiences that it acquires in the general conduct of their business. A joint venture provides the chance for one of both organizations to learn from the other especially in their technical capacities (Pearce, 2008). 12. Managerial Practices The same with technical capabilities, both firms coming in from different geographical location, cultural background and social environment might have best managerial practices that they could share with each other as well as utilize better for the success of the joint venture. The pooling together of knowledge, expertise and practices could provide the venture exemplary edge over the competition (Pearce, 2008). 13. Operational Responsibilities One of the main attributes of joint venture is the staffing for the operations of the business. Through their combined manpower resources and management board, they will have more people to choose from with regard to the staff’s individual skills and competencies. The responsibilities in the operations of the business is now shared by the two organizations rather than borne by just one of the partners. More importantly, strengths of each better skilled individual is better harnessed and utilized in strategic positions which could promote better, more efficient and streamlined operations (International Joint Ventures, n.d.). 14. Political and Legal Impediments Some countries impede entry of foreign businesses with their strict regulations about companies wholly owned by foreigners. Often, the issue is the possible imbalance rivalry and competition posed by a more stable foreign competitor to a local business. In such cases, the only entry method is the joint venture, with the local company as the contact point of the venture in the locality. The local connection provides the link to the local market without going against any local political or legal impediments and still provides legality to doing business in the foreign soil (Business Briefing, 2009; Foreign Market Entry Modes, n.d.) 15. Product Line Diversification Corollary to the other advantages mentioned especially the access to the customer base of the partner company as well as the ability to conduct research and development activities is the ability of the organizations to come up with innovations in their products and services and offer such to the captive customer base. This move could expand the business capacity of the venture and could open up for them new markets to get into and the opportunity to realize better profits (Pearce, 2008). 16. Flexibility The flexibility of a joint venture allows the partners to properly limit the extent of the sharing. This could be through the life span of the venture or committing specific areas only of the firm and not the entire company to the joint venture or other specific arrangements. In this way, the organization retains control on the degree of the exposure it is willing to share with the venture partner. It is also possible to “gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other (Advantages and Disadvantages, 2007)”. 17. Exit Route Joint venture’s also offer an easy exit depending on the agreements of the venture. As usually a joint venture is time bound, the elapse of time necessarily separates the partners with an easy, no frill exit route (Advantages and Disadvantages, 2007). Risks and Risks Management 1. Management Control The structure of a joint venture does not provide full control to any of the partners because management is shared by both. This does not provide freedom to one to take advantage of the other partner through exercising control over the other. This is for the best intentions of both but also poses a risk if the other partner does not behave and conform to the underlying agreements of the venture. One way to minimize the occurrence of such situation is through proper communication and negotiations in all aspects of management. It also helps if the partners always take into consideration the benefits of the venture primarily as long as they are within the agreements of the business alliance (Gamble, 2002). 2. Misaligned Goals and Objectives As such as the partners come from different organizations, it is not unlikely that they will have different goals, objectives and priorities. These strongly impact an organization as it is the driving force that sets them to accomplish tasks and achieve success. However, when they enter into a new venture with another company, they must initially draft a new set of goals and objectives that are amenable to both parties. In this way, they all knew in which direction they are heading. Otherwise, going in different directions and pursuing different goals will stall the joint venture which could lead to the failure of not just the venture but both companies (Pearce, 2008; Business Briefing, 2009). 3. Capital Recovery Being in the agreement, the partners committed their financial resources towards the operations of the business, thereby making recovery of capital difficult. In this case, the partners must be aware before proceeding with the agreement that it is unlike an investment procedure wherein they could just withdraw the capital when they see fit. A joint venture is committing the financial resource towards the venture which could be a long terms investment (Business Briefing, 2009). 4. Management Styles and Company Culture Clashes As there is an advantage in the sharing of management best practices, the difference in styles and the conflicts in the partner’s cultural background could be a risk in the smooth management and operations of a joint venture. This could be heightened because both partners do not have full management control. The conflicts could arise from issues of cooperation and integration within the system. However, this conflict could have been better manage through proper communication plus the ability of the partners to have presented a procedural resolution of cases like this as early as the inception of the joint venture. Knowing that their differences could be both good and bad, they must commit to harnessing the best in the differences rather than be destroyed internally because of it (Advantages and Disadvantages, 2007). 5. Financial Management Conflicts Conflicts on the allocation of resources are also a threat to the venture. The same with management style conflicts, culture clashes and misaligned goals, risk management of such starts with the inclusion of this probability in the agreement and ends with better communication and cooperation (Advantages and Disadvantages, 2007). 6. Confidentiality and Proprietary Issues Going into the venture, both firms bring with them their own formula and confidential information. As mentioned above with regard to the conflicting pressure that the partner face, they have to address the issue of sharing them with their partner. This is one of the most difficult risks to manage as the knowledge could be essential to the venture but sharing them with the other could produce a future competitor. In this concern, the organization must determine from the start the extent and limit of the sharing – to be both viable in the business without undermining the competitive edge of the firm (Foreign Market Entry Modes, n.d.). Conclusion Utilizing the joint venture as the strategic entry mode into the international market has its share of advantages and disadvantages. The secret to success is to properly harness the benefits to the optimum competitive advantage of the firm while maintaining the better management of risks and disadvantages. Joint venture has been a popular mode because the advantages outweigh the risks. Thus, the better understanding of these risks and the careful planning and laying down at the onset of the venture the processes and methods in anticipation of the potential problems and challenges will be the better gauge of the success of entering into a joint venture. Bibliography Business Briefing. 2009. What are the advantages and disadvantages of participating in a joint venture with another company? [pdf](23 Feb 2009). Available at: www.cera.org.ar/new-site/descargarArchivo.php?idioma. [Accessed 23 Dec 2009]. Cateora, P. R., and Graham, J. L. (2002) International marketing. 11th Edition, New York, McGraw-Hill. Doole, I., and Lowe, R. (2001) International marketing strategy. 3rd Edition, Bedford Row, London, Thomson. Elliot, R.J., 2006. Advantages and disadvantages of joint venture. [Online] (20 Oct 2006). 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