Joint Venture: Meaning, Advantages, Disadvantages
In 2012, Microsoft and American conglomerate General Electric (GE) took healthcare by storm with Caradigm, a strategic joint venture to…
August 31, 2021 | 7 mins read
In 2012, Microsoft and American conglomerate General Electric (GE) took healthcare by storm with Caradigm, a strategic joint venture to simplify public health management. Caradigm was a 50-50 joint venture, leveraging Microsoft’s expertise with large-scale data platforms and GE’s prowess in developing healthcare applications.
Starting its journey with a little more than 700 employees, Caradigm offered innovative healthcare solutions, an open platform and tools to help health professionals and software developers improve healthcare, deliver a robust patient experience and combat the challenges of population health.
The joint venture grew steadily over the next four years, so much so that its products began to be used extensively in more than 1,500 hospitals around the world, before it changed hands. Till date, this remains one of the best-known examples of a successful joint venture.
But what, exactly, is a joint venture? What are its pros and cons? Let’s find out!
A joint venture is defined as a strategic business agreement whereby two or more organizations come together for a specified period to accomplish a common objective such as a new business undertaking or a project. The organizations participating in a strategic joint venture pool in resources, capital and assets to create synergy and gain a competitive advantage in the market. Ownership of the new project or undertaking, project costs, profits and/or losses are shared among the parties involved in the joint venture.
Organizations turn to joint ventures to break into a new market segment, enter foreign markets or launch a new product or service. A joint venture agreement usually involves the following key elements:
A joint venture is entirely based on the terms agreed upon by all the participating entities and can either be short term or long term.
Each organization involved in a joint venture is unique with a different level of skill and expertise, thus, the benefits of joint venture are many. Here we look at a few advantages of a joint venture:
The top advantage of joint venture is the combined expertise it brings to the table. When two or more organizations join hands, they bring together complementary skill sets and abilities. This greatly increases their chance of success when exploring a new product or field.
A strategic joint venture allows organizations to access one another’s diverse pool of resources. Such resources can take the form of manpower, technological tools, regulators, suppliers or contractors. An expanded pool of resources not only strengthens an organization in terms of workflow but also creates operational synergy.
Cost savings is another significant advantage of joint venture. In a joint venture, operating costs, the cost of labor, advertising, marketing or promotion and all other related costs are shared among participating entities. Each organization involved is able to cut down its expenses and optimize costs by using economies of scale.
A joint venture can be a new organization’s best bet to establish brand credibility and build a loyal customer base. When a startup or a small-scale business comes together with a well-known organization, it gets the exposure it needs to establish its own identity and compete with bigger players in the market. This is one of the primary benefits of joint venture.
Market penetration is a major advantage of joint venture. An India-based organization might want to expand its business footprint and tap into the US market. A joint venture allows it to do just that. It opens up vast new possibilities in terms of unexplored customer and market segments.
Breaking into a new market or region brings its own set of challenges and risks. These include budget and time overruns or unsatisfactory performance of the completed project. In a strategic joint venture, capital investment and the required resources are shared among all participating entities. This reduces the risk of the project incurring heavy losses and adversely affecting any one particular entity.
Diversity is an added advantage of joint venture. A joint venture brings together people from diverse cultural backgrounds and nationalities to collaborate and share skills and ideas. This fosters an inclusive work environment where everyone works toward a shared goal.
The benefits of joint venture extend beyond simply helping organizations scale up with limited capacity. It allows organizations to diversify and take on projects that otherwise would’ve been extremely cost-intensive and risky. A joint venture also comes with a high degree of flexibility, being a temporary contract that usually dissolves with the completion of a project.
Everything has its pros and cons, and a joint venture is no exception. Let’s consider a few disadvantages of joint venture:
Imbalance in degree of involvement is among the major disadvantages of joint venture. A joint venture often falls victim to an imbalance in investment, workload, resources, assets or levels of expertise of the organizations involved. A particular organization might find itself contributing more time to the venture compared to the other(s). But this increased amount of effort doesn’t translate to a greater share of profit for that organization. Such gaps can eventually lead to conflict among the participating entities and result in lower returns overall.
Often, unrealistic profit expectations are set by participating entities while initiating a joint venture. This can be detrimental in the long run because when reality doesn’t live up to expectations, parties lose interest. They don’t know how to stand out from the competition and the joint venture struggles to stay afloat. Thorough market analysis and research is required to counter this and set achievable goals and objectives.
A strategic joint venture is progressing successfully, objectives are being met and everyone’s happy. Except, not really. The increasing workload and pressure of consistently managing and expanding a new business can take a toll on participating organizations. Disagreements arise on operational or financial decisions, there’s lack of proper communication and collaboration and organizations can’t reach common ground on the future course of action. All of this has the potential to strain business relationships and drive a wedge between participating organizations, preventing the joint venture from functioning to its full potential.
A joint venture brings in people from two or more different organizational cultures to work together. While this can introduce new, innovative solutions and workflow methods, it also has a downside. Because the people involved are accustomed to their own techniques and processes, arguments can arise about choosing one organization’s methods over the other’s. This is especially acute when some staff members are resistant to change and unwilling to compromise. To make the joint venture work, all participating organizations must be willing to set aside cultural differences.
Experts recommend thoroughly planning exit strategies before entering into a strategic joint venture agreement. A joint venture doesn’t always go as expected and deadlocks might arise at any point. There may be a breach of contract, organizations may want to move out of the venture or abandon it. It’s best to plan for and clearly define the terms for all possible end scenarios to avoid conflict and, in worst cases, legal intervention.
Competing partners, conflict of interest and trust issues may also cause joint ventures to fail. However, despite these disadvantages of joint venture, it has the potential to bring in significant benefits to participating organizations—returns that offset the hazards. It’s up to an organization to carefully examine the risks involved and go through the terms of the agreement with due diligence before deciding to go ahead with the joint venture.
The successful execution of a joint venture requires effective joint venture management. It’s essential for managing distribution of costs, resources and assets among the organizations involved in the joint venture. Impactful joint venture management, in turn, rests on the shoulders of the top leaders of an organization. They’re required to operate in a complex and demanding environment— mitigating risks, navigating ambiguity and addressing the myriad challenges a joint venture brings.
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