For several years, business leaders considered joint ventures as unpopular and not a successful tool for developing a business or optimizing expenses. But research by new Bain & Company has found something contrary. Overall, the value of joint ventures increased by 20% annually from 1995 to 2015- that is double the rate of M & A deals. Do you want to start a joint venture? If so, follow these tips to start a joint venture.
What do these companies do right? They create talents and routines to make joint ventures successful and understand the basic difference between M& A and joint ventures. For instance, if an acquisition goes off the course, the acquirer can take all the steps needed to move direction. But with a joint venture, you cannot start over. You must have the right foundation in place before the deal is signed, with solid agreement on strategy and methods of working- as well as on how to end the deal when the time is correct.
How to Start a Joint Venture
Create a repeatable model- Working with companies on over 450 joint ventures, it has been found that the best partners create a repeatable model for success. They create a sound strategic base, with clear deal goals. They operate with an aligned joined venture architecture and with deal structures that prepare the allies for the changing scenarios, setting up deals for strong integration or solid constant management. Also, they carefully handle leadership transitions. As a result, the partners prevent a host of potential questions, like unclear roles, slow decision making, and an incapability to solve problems.
Winners conduct cautious evaluations before starting. They operate under the belief that joint ventures work only when everyone wins. In successful joint ventures, top management is involved from start and remains involved. The best companies also overinvest in governance and partner-fit assessment truthful, clearly identifying possible future challenges and expecting ways to change the joint venture model to accommodate a new environment or market. They customize the specifics depending kind of deal-scale or scope. For instance, in scope joint ventures, they embrace a “start-up” approach and pay emphasis on growing the pie. In scale deals, they adopt a “merger integration” approach and focus on cost-sharing.
Setting up a joint venture for achieving success- Companies must tie their joint venture objectives to include growth strategies, first assessing whether a joint venture is a better option than acquisitions or organic growth. Winners conduct detailed market and competitor analysis and business planning to make sure there is a clear value-creation potential for every partner. Next, they assess partner fit based on the comprehensive set of predefined criteria, like strategic intent, decision-making style, culture, and risk approach. They develop “what if” situations to foresee potential misalignment and associated response strategies. And they define a joint venture business plan and structure, and as the vital principles for a future operating model, from both a parent and from a joint venture perspective.
After calculating the partner fit, the next important step is to design the joint venture and discuss the deal. That includes e answering a host of questions like, what should the joint venture look like, and which operating model will be effective? What is the best method to align interests and form the deal?
In our experience, the best companies create a sustainable joint venture organization and governance structure designed for more flexibility and effectiveness. Also, they detect extra mechanisms that will ease the regular operations and preserve the strategic intent and balance the power.
Once a deal is designed and negotiated, it is time to develop the joint venture itself and take the steps required to deliver the required results.
Success can depend on the partners’ capability to focus the company on the most important decisions that will enhance the joint venture’s value while mercilessly highlighting the initiatives that will deliver the most value. It is significant to resolve people’s problems early, getting the leadership in place to start creating a new culture as fast as possible.
Important Tips to Start a Joint Venture
Agree on the same goals before anything gets signed
This might seem obvious, but joint ventures can fail easily because of competing strategic goals. Successful joint ventures provide an element of strategic alignment, where the objectives of partners and their parent organization are coordinated.
Ask these questions to yourself as you determine each party’s goals for a joint venture:
- What resources is each partner planning to contribute?
- What objectives do partners want to attain, and how will the joint venture reach them?
- What are the appropriate risks for both partners, and what process they will follow to address them?
- How often should executive leadership be consulted and at which stage?
These questions help build your cohesive business plan and avoid headaches afterward during execution.
Keep executive leadership involved throughout the procedure
In a typical joint venture, the parent executive leadership joins in during planning as well as terms discussions. Once both the companies sign the contract, business managers take over to handle the execution. While this gives the managers and their respective teams some breathing space to execute the venture, it may result in discontinuity from the objectives set at an executive level.
In research on joint venture development, McKinsey & Company contended for the appointment of an end-to-end senior management team to check progress. McKinsey concluded in their study “This creates a proper balance of executive sponsorship and specialized authority throughout the procedure.”
Do not get bogged down in terms of discussions
The McKinsey study points out an important factor in joint venture negotiations: most discussions are spent on the deal terms, which have less value to the project than structure or model discussions. Financial discussions are familiar to any M & A transaction, but your time might be better spent on recognizing potential risk factors from strategy and execution.
McKinsey concluded in their study that “Several companies lack the foresight and discipline to address those operational realities at every stage in a joint venture’s development and spend time on steps where less value is at danger and less time where more value is at risk.
Disperse your capital slowly, do not spend everything at once
Carefully planned joint ventures avoid the need to spend too much at the venture’s launch. Instead, they spend slowly and expect future requirements, which helps avoid taking out the unplanned loans along the way.
Foresee human instinct and accommodate various cultures
Bringing two distinct cultures together for common objectives sounds great in the abstract but can be perilous if cultures clash with each other during the execution. Assume that “tribal instincts” may be present in any venture and account for various cultures as you manage. Experts believe that venture partners must embrace the differences between cultures instead of constraining them.
The key to success is to invest your as much time and money in shaping the right behaviors as you can. Embracing and celebrating your dissimilarities will significantly enhance the chances that you will choose to work with your joint venture partner on various projects in the future.
If you too are planning to start a new joint venture, the above-mentioned tips will surely help you out to launch one and make it a great success.