Joint Venture and Strategic Alliance
External growth can be achieved by entering into a joint venture or strategic alliance. Although the methods are different, they do represent a similar method of external growth.
An agreement between two, or more organisations, to undertake a particular business activity. There will be a contractual agreement between the organisations and the joint venture becomes a separate legal entity. All organisations share in the profits or losses of the enterprise and will share the investment.
A strategic alliance is a collaborative agreement between two or more firms to pursue a set of agreed goals, but the firms remain completely independent organisations. The alliance ends when the goals are achieved.
A joint venture means setting up a separate organisation in which all the 'partners' have a stake. This arrangement allows the participating companies to grow, while maintaining their own identity and brands.
A joint venture and strategic alliance offer the following advantages and disadvantages:
- Competition may be reduced - by working in cooperation with another firm.
- A synergy is created where the joint skills, resources and experience of the businesses collaborating far exceed those of the two businesses acting independently.
- By partnering with a local firm, there may be fewer logistical problems entering a new and/or overseas market and it may be possible to take advantage of the local knowledge and distribution channels of the partner firm. This may lower distribution costs and may also reduce any problems due to language or cultural issues.
- Allows firms to work together without being burdened by these costs or the permanency of the arrangement. Mergers or takeovers are expensive and difficult to reverse.
- Enable a firm to move into a new product or market much faster.
- Avoidance of taxation, or at least rates on tax in the country of production.
- Profits are shared - this may be regretted by the firm if subsequently they feel they could have carried out the activity quite easily themselves.
- Communication and control issues - there may be some issues with control in a joint venture - who has the final say? There may also be communication problems caused by cultural and language differences if the firms are very different in their organisational structure and management style.
- Conflict - there may be disagreements between the partner organisations especially if there are inadequate conflict resolution procedures. The joint arrangement requires goodwill to be maintained throughout the term of the agreement.
For more information on joint ventures and strategic alliances, why not have a look at the following Wikipedia pages?
For an example of how joint ventures can result in disputes, why not have a look at the BBC news article - Chinese war of words hits Danone. You can view this in the window below or follow the previous link to view it in a new window.