Challenges Inherent in Management of Joint Venture Companies - Literature review Example

Challenges Inherent in Management of Joint Venture Companies Student’s Name Instructor’s Name Course Name & Number Date of Submission Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Joint Venture Motives 3 3.0 Challenges Inherent in JV Management 4 3.1 Culture Clash 4 3.2 Balancing Different Interests/Objectives 7 3.3 Maintaining Relations with the Parent Companies 8 4.0 Actions to Minimize the Problems 8 4.1 Perform Due Diligence to Understand Partner’s Culture 8 4.2 Understanding and Balancing the Parties’ Interests 9 4.3 Building Good Working Relationships 11 5.0 Conclusion 11 References 13 1.0 Introduction Globally, companies in different industries are entering into joint ventures. Bamford et al. (2004) indicates that in the last five years, there have been more than 5,000 joint ventures while there were several other contractual alliances being entered into by companies. Companies enter into joint venture partnerships for different reasons that include expanding, achieving cost efficiencies, and gaining economies of scale or as a strategy to enter into a new market (Makino & Beamish 1998, p. 797). Despite the growth of joint venture arrangements across industries, studies show that just a few of the joint venture partnerships become successful. According to a study conducted by Bamford and colleagues in 1991 that evaluated the performance of 49 joint ventures and alliances discovered that only 51% of these joint venture arrangements were successful. In this respect, the researchers found that only 51% of these joint ventures were able to break even. In another study conducted by the same researchers in 2001 as a follow up to the first study and involved 2,000 joint ventures, the Bamford et al. (2004) found that only 53% of these JVCs were successful. Some of the reasons for the failure of the joint ventures, according to the findings of these studies were adoption of wrong strategies, inequitable, incompatible partners, unrealistic deals and weak management. This paper discusses the challenges inherent in joint venture management. In so doing, the paper begins by defining joint venture and the motives of joint ventures. It is then that the paper will proceed to discuss the challenges inherent in joint venture company management. The third part of the paper discusses the actions that can be taken by managers of JVCs to minimize the challenges and then conclude with a brief summary of the lessons learned. 2.0 Joint Venture Motives Joint ventures have become common in the modern day globalized business environment. A joint venture refers to a business arrangement in which two or more firms agree to come together to contribute capital to finance a new entity (Trost 2011, p. 3). Joint venture arrangements cover finite time periods which can last several years. In a joint venture arrangement, the different firms that come together share resources, expertise and management. As pointed out by Bamford et al. (2004), there were more than 5,000 joint ventures created over the last five years. This indicates that joint ventures have become a popular business growth strategy pursued across industries. Companies enter into joint venture arrangements with different motives that vary from one firm to another. First, corporations enter into joint ventures for strategic purposes, in particular to enter into new territories or markets. Trost (2011, p. 2) notes that, in recent years, many companies have been looking up for the China as an investment destination because of the massive growth China has recorded in recent years. However, the government of China has introduced tough laws on foreign companies as a way of safeguarding domestic Chinese companies from foreign firms. In this respect, the Chinese government does not just allow foreign firms to enter the country and do business. Instead, to enter into China and do business, the Chinese laws requires that foreign companies enter into a formal joint venture arrangement with China-based firms (O'Connor & Chalos 1999, p. 3). For example, when the American retailing giant Wal-Mart Stores entered China in 1996, it had to enter through joint venture with Chinese companies. The same applies to the UK firms, such as Tesco that entered into China through joint ventures. The joint ventures enables multinational companies have access to markets available in foreign countries, which ensures growth. Second, companies set up joint ventures as a way of creating new synergies. Studies show that there are many companies that comes together to form a joint venture partnership in order to achieve synergies, such as cost efficiencies (Makino & Beamish 1998, p. 798). At the same time, there are number companies that enter into a joint venture arrangement so as to be able to share resources and competencies so as to be able to realize economies of scale. This is especially common in situations where companies in different industries enter into joint venture arrangements. 3.0 Challenges Inherent in JV Management 3.1 Culture Clash Although JVs have become common across industries, managing a joint venture is one of the hardest things managers face. As highlighted previously in the introduction, close to half of all joint venture deals fail due to various reasons key among them being management issues. One of the challenges management of joint ventures fact that often contributes to joint venture failure is difficulty integrating staff due to culture differences. Dianne (1995, p. 3) shows that many joint ventures fail because the partners are not able work together due to culture class. A large body of literature indicates that bridging cross-border cultural differences to create a cohesive and effective JV where employees from different cultural backgrounds can work together in harmony is a challenging endeavor for most JV managers. In fact, most research conducted on joint venture arrangements have found that only 50% of JV employees have positive stories to tell about the culture inside their joint venture company (Madhok 1995, p. 114). Whenever there is a culture clash among employees in a joint venture deal, this can degenerate into a conflict between employees from different cultures, thus contributing to joint venture failure. The challenge inherent in joint venture management has been demonstrated by Geert Hofstede in his cultural dimension study discovered that there are many traits that are associated with individual work values. They include uncertainty avoidance, individualism and long-terms orientation (Kirkman et al. 2006, p. 286). Uncertainty avoidance denotes the degree to which an individual is comfortable with an ambiguity. Individualism, on the other hand, denotes the degree to which people prefer to do things in person, have personal achievement and get rewarded. Long-term orientation, however, refers to the extent to which an individual take into account consequences for the future when making decisions. Therefore, whenever a company from a high uncertainty avoidance nation enters into a joint venture deal with another from a low uncertainty avoidance country, this result in staff integration challenges, which make management of a joint venture difficult. The challenge results from the culture clash between the employees of the two companies. This is because, whereas employees from a low uncertainty avoidance culture may be willing to take initiative and greater risk when doing their work, those from a high uncertainty avoidance may be less willing to take greater risk because of their cultural influence (Kirkman et al. 2006, p. 286). In such situations, it becomes a huge challenge for a manager of such a joint venture to integrate the staff to work together effectively and in harmony. The same applies to managing a joint venture with staff from highly collectivism society and individualism societies. The difficulty results from the fact that employees from highly collectivism societies may prefer to work in groups and as team and attribute achievement to teams, those from individualism societies might find it difficult working in groups and instead prefer to work as an individual and realize individual achievements (Kirkman et al. 2006, p. 289). Whenever such a culture class manifests in a joint venture company, it becomes difficult for the managers to effectively manage the cultural differences and this can result in a joint venture failure (Dianne 1995, p. 13). Staff integration challenges have become common for Western companies entering into joint venture deals with Chinese firms. This is because, whereas staff from Western companies has low uncertainty avoidance, and lean more towards individualism, Chinese people have high uncertainty avoidance and lean more towards individualism. Therefore, when a Western company enters into a joint venture arrangement with a Chinese firm, it usually become a huge challenge integrating the cultural differences demonstrated by employees and this impacts negatively on the performance of a JVC. There are a number of classical cases of joint venture failures in China that have occurred due to a clash of cultures (O'Connor & Chalos 1999, p. 4). One such is the joint venture between French multinational food company Danone and Wahaha Beverage of China. The two companies entered into a joint venture deal in 1996. Although the deal looked good and attractive, managing the joint venture became a huge challenge because of the culture clash. The French employees could not integrate well with those of China because of cultural differences (Dyer 2007). At the same time, there was serious culture clash between the management of the two companies and this resulted in the failure of this joint venture. Another case is the joint venture that HSBC entered into with the China’s Bank of Communications that failed because of culture clash. Evidence gathered from the JV found that there was serious and irreconcilable culture clash between the two companies in partnership that made the management of the JV difficult, thus resulting in its failure (Hughes 2015). Other than the national culture, differences in organizational culture are another challenge associated with managing joint ventures. A study conducted by Wolf (2000) found that joint ventures set up between Indian and foreign firms were affected more by differences in organizational culture compared to national culture differences. On the same note, another study found that JVs entered into by companies with similar organizational culture had a higher chance of success. Differences in organizational culture creates management challenges for joint ventures because organizational culture of a company dictates how people are expected to behave and determines the values that an organization stands for (Pearson 1992, p. 101). For this reason, when companies with different organizational cultures come together, organizational culture conflict might occur, such as differences in management styles, thus resulting in JV failure. 3.2 Balancing Different Interests/Objectives Other than cultural integration challenges, managing today’s joint ventures is a challenge to managers especially because of the existence of divergent interests and requirements of the partner companies. Studies conducted in most of the joint ventures that have failed show that building and maintaining strategic alignment across the business entities in partnership is one of the greatest challenges managers face in JV management. The studies attribute this to the fact that each of the companies that have partnered has different interests, goals, shareholders and market pressures (Yan & Luo 2016, p. 22). For instance, when two companies have formed a joint venture, the management of one company might want, for example, that part of the business divested while the other might not see this as a good move. The differences in interests being pursued by partners in a JV often results in disagreements and conflicts that make the management of a JVC difficult. Another example of areas of differences that sometime are witnessed in JVs because of different interests is where there could be a disagreement between the partners as to whether or not the JV product should target mass-market or high-end market or whether the JV should focus on revenue growth or cash flow (Li et al. 1999, p. 53). Whenever such differences manifest in a JV management, this can delay the venture development and trigger a costly compromise. It is reported that, as much as many JV deals try to predict areas of possible misalignment during the JV negotiation phase, the majority of the conflicts of interest manifest when the JVC deal has been finalized and the new entity starts to operate. Kwicinski (2016) of the Water Street Partners estimates that about 69% of joint venture deals are at odds on long-terms strategy while up to 58% of joint ventures cannot agree on upcoming budgets due to competing interests. Kwicinski proceeds to argue that joint ventures that disagree on strategic direction that the JV needs to take often creates conflicting guidance to joint venture management, which consequently create confusion and even delay decision making as the partners compete to have their interests implemented. Kwicinski (2016) notes that this presents a big problem to the management of a joint venture especially in fast-paced markets, such as telecom, media and high-tech industry, where faster decision making is required and initiative lost when the Board has to sit multiple times in trying to balance the interest of the partners and the shareholders of the JV created. 3.3 Maintaining Relations with the Parent Companies Maintaining relationship with the parent companies is the other challenge encountered by managers of joint ventures. Wolf (2000, p. 32) observed that maintaining a good working relationship with the parent company is key to the success of a joint venture. Nonetheless, maintaining the desired relationships because of competing interests. However, like for joint ventures set up in highly collectivism countries like China, building relations with the employees and the executives involved in the management of JVs is important in ensuing success. 4.0 Actions to Minimize the Problems 4.1 Perform Due Diligence to Understand Partner’s Culture From the analysis, it emerged that staff integration due to cultural differences is one of the greatest challenges that are inherent in the management of joint venture companies. From the analysis, it emerged that cultural integration is one of the major challenges inherent in joint venture management as it makes it difficult for the staff of the companies forming a JV to integrate and work coherently. Unfortunately, when employees cannot work together effectively because of cultural differences, this affects the performance of a JV and can result in joint venture failure (Lane & Beamish 1990, p. 87). Therefore, to minimize cultural integration challenges and to ensure that employees from different companies in a joint venture work together as a team, companies need to conduct due diligence to understand the national cultural differences between the companies in cases involving cross-border joint ventures (Yan & Luo 2016, p. 31). This is important because it would enable the companies entering into a joint venture to understand the national cultural differences that might present integration challenges. This is important as it would enable the managers to be able to train their employees adequately on the cultures of the employees of the other company with whom they are forming a joint venture (Wolf 2000, p. 21). Thus way, the employees will be in a position to understand and embrace each other, thus resulting in proper culture integration when the joint venture deal is finally sealed. For instance, when a British company intends to enter into the Chinese market through joint venture partnership, the British company can mitigate the cultural integration challenges by training its employees and managers to be sent to China on the Chinese business cultures that they might need to know to ensure that they are able to adapt effectively to the Chinese culture once the JV deal is finalized. Madhok (1995, p. 117).states that most companies mitigate cultural integration challenges associated with joint ventures using expatriate managers who are sent in advance to the foreign nation to study and familiarize with the foreign nation’s culture before they can embark on the actual assignment. Secondly, as indicated earlier, organizational cultural differences is another major challenge experienced in managing joint ventures. To mitigate joint venture management challenges associated with differences in organizational cultures between companies in a joint venture deal, firms should ensure that due diligence is performed with a focus on the corporate culture, decision-making and values of the partners in the venture. This includes taking into consideration even the counterparties in other partnerships. Performing due diligence on the organizational culture of the partner is important as it would enable the companies to identify the cross cultural differences and expectations of each partner before entering in the partnership agreement (Woodside & Pitts 1996, p. 42). This is important as it would help minimize organizational culture clash that might cause joint venture failure. 4.2 Understanding and Balancing the Parties’ Interests It was observed from the discussion that managing competing interests is one of the challenges inherent in joint venture company management. When partners in a JV deal cannot agree on how to run the JV because of competing interests, this normally creates a conflict, slows down the decision making process and at worst results in joint venture failure. Therefore, it is very important for companies entering into a JV deals to ensure that they understand the interests of their partners in a JV before entering into such deals (Ouyang 1988, p. 179). This is important as it would enable the partners to see if the interests of their company match that of the partner or whether there are possibilities of disagreements on how the company would be run due to competing interest. Understanding the interest of the partner requires organizing a meeting and discussing the interest of both partners because there are some companies from some parts of the world that are not always willing to lay bear their interests. For instance, it has been observed that, understanding the interests of Chinese companies in a JV deal is not an easy undertaking. This is in contrast to the European companies that tend to be more straightforward in discussing the interests in a relationship. Tsang (1994, p. 11) noted that Chinese people are never willing to discuss their actual interest before building some level of trust in a relationship. Therefore, it is important for a company entering in a joint venture to ensure that the interest of the partner is understood by performing due diligence and ensuring that the interests of both parties is balanced as this helps minimize differences and conflicts that might affect the running of a joint venture. It is recommended that, once the interest of both parties in a joint venture deal is understood, it is important that the interests be translated into clear objectives (Ouyang 1988, p. 177). For instance, the partners need to agree on the investment objectives and regularly re-evaluated jointly by the partners as the JV progresses to ensure that there are no differences. Additionally, to minimize differences and competing interests, it is important that partners set out clear corporate values, communicate them to the members of the staff continually and ensure that they are properly implemented (Woodside & Pitts 1996, p. 62). Additionally, because circumstances keep changing in any business environment, so should be the partners in a JV deal who should also ensure that they make adjustments whenever necessary to keep their interests aligned as the circumstances change. Jaguar Land Rover (JLR) is an example of a British automaker whose joint venture with the Chinese automaker Chery Automobile has been a success. Monaghan (2012) reveals that since the two companies entered into the partnership agreement, the JV has been a huge success at the performance of the JV has been on an upward trajectory year after year. In 2011, sales of the joint venture increased by 60% while in the first ten months of 2012, the joint venture sales in China increased by 80%. The continued growth of sales of the joint venture between JLR and Chery is attributed to the fact that the two companies were able to align their values and interests when entering into the JV deal. This has ensured that there is no competing interest between the partners as both are pursuing a common objective. By contrast, the joint venture between Tiffany & Co and Swatch Group that was sealed in 2007 acts as an example of joint venture partnerships that have failed because of ideological differences and competing interests (BBC, 2013). When the two companies entered the deal in 2007, Swatch, which is the largest watchmaker, agreed with Tiffany that they were to make a watch together under the brand Tiffany with the watches to be sold in Tiffany shops and profits shared. Unfortunately, the JV turned sour few months later when Tiffany started to pursue other things other than what was agreed in the JV deal, which included deliberately delaying the JV (BBC, 2013). However, pundits believe that the problems that created the failure of the joint venture between the two firms could have been mitigated if the two companies conducted due diligence to understand the interests of each other and align them to a common objective as did Jaguar Land Rover and Chery. 4.3 Building Good Working Relationships Lack of trust and suspicion is a major problem experienced in managing a JVC. Whenever the partner’s lack trust for each other in which case there is constant suspicion of each other, it becomes difficult to manage such a joint venture and this can result in constant conflicts which might eventually result in the failure of the JVC. However, trust issues are usually triggered when the partners have no better understanding of each other. For this reason, to mitigate the challenges, it is important for companies to build a good working relationship with the partners and the parent company (Tsang 1994, p. 18). In case of a cross-border JV partnership, the company seeking to form a joint venture can send a team of people or executives on the ground in that foreign nation where its partner business is based to learn about their partner business in terms of working style and values among other issues that the partner might need to know about each other. The partners also need to hold regular discussion with each other and with the parent company as this helps create understanding, which eventually help build trust and a good working relationship, which is critical in managing a joint venture (Madhok 1995, p. 121). Normally, when partners trust each other and there is a good working relationship between the partners, this minimizes conflicts, thus JVC success. 5.0 Conclusion Joint ventures have become a common growth strategy pursuing by companies across industries. The analysis indicates that companies form joint ventures with different motives which include to enter new markets or geographies, create new synergies and to gain economies of scale among others. Despite the fact that companies are finding joint ventures a good strategy to pursue, it has emerged that a lot of these joint ventures fail. According to statistics, only about half of all joint venture agreements succeed and results in sales and profit growth. This therefore implies that half of the joint ventures fail. There are many reasons why there is such a high joint venture failure rate as discovered in the analysis, including culture clash, setting unrealistic objectives, pursuing different objectives, differences in organizational cultures, poor working relationships and weak management. The analysis has also learned that there are a number of challenges associated with management of joint ventures that managers need to understand and address to ensure the success of a joint venture company. These include the challenge emanating from culture clash that results in staff integration problems, difficulty balancing the different interests and objectives of the partners as well as issues to do with maintaining relationship with the parent company. The discussion indicates that, if these issues are not adequately addressed, they can result in a joint venture failure. Therefore, it is important that partners in a joint venture arrangement take appropriate measures to ensure that these issues are mitigated or resolved to ensure joint venture success. Some of the appropriate solutions that need to be considered by companies including training expatriate managers in case of cross-border joint ventures to enable them have a good understanding of the partner national culture issues that might affect employee integration as well as performing due diligence to understand the partner’s organizational culture in terms of the values, working style and decision making issues to ensure that they are aligned with those of the company before sealing a joint venture deal. Additionally, partners in a joint venture arrangements need to ensure that due diligence are performed to understand the partner’s interests so that they can be balanced with that of the company. 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