Advantages and Disadvantages of Joint Venture
A joint venture is an advantageous method to expand your creativity while completing a project within the deadline and that too, on a limited budget. Forming a joint venture benefits you in multiple ways. Better solutions to problems shared resources, and timely project delivery are the common ones. Even if it’s a plausible solution to the given problems, this type of business has its limitations as well. These Advantages and Disadvantages of Joint Venture shine some light on the common and rare situations that may arise.
What is a joint Venture?
In simplest words, the joint venture is when two or more companies join together to complete a specified business goal. This type of venture is usually based on a deadline. The business goals can either be a development project, creating another child company or related to any field such as selling products and services to the market.
The best example of a joint venture is of Ford and Toyota joining together to manufacture Hybrid Trucks in 20211. The commercial agreement is what keeps the participants bound legally. Hence, they share equal responsibilities to achieve the outcome within the stipulated timeframe.
What are the Advantages of joint venture?
There can be many advantages of forming a joint venture, out of which, profit generation is most often talked about. The following are the key advantages of joint ventures after combining resources and knowledge of two different business entities.
1. On-board Expertise
Combining expertise by forming a joint venture benefits all the participants as they can work together to overcome the project's shortcomings. Starting a joint venture provides the opportunity to generate innovative ideas and figure effective solutions to the given situation.
2. Better Use of Resources
Project completion and execution are a lot difficult when you have limited resources in terms of staff and capital. However, with a joint venture, your company can get better access to capital and staff requirements. All the required equipment and budget can be used for the timely delivery of a project.
3. Shared responsibility- one of the key advantages of Joint Venture
From risks to costs involved, companies can sort out solutions once they team up. The higher the profits, the better for both parties. Even if the joint venture fails, you are not alone to bear the costs of its failure.
As per the commercial agreement, all the participants bound in a joint venture can share the expenses, including the benefits. In other words, shared costs, expenses, benefits, and risks facilitate the company to flourish in business which is one of the best joint venture advantages.
4. Joint Venture is likely to succeed
Two minds are better than one; When more than one company are involved in a joint project, the chances of success increase automatically. Profitability, sustainability, operational satisfaction, and financial satisfaction are the key attributes to measure the success rate of a JVs. When all these factors are taken care of by the parties involved, the success rate is positive.
5. Better Business Relationships
Joining hands with another company for a future or undertaken project can be a way to build better business relationships. Such relationships can be beneficial for future deals.
Even though your partnership is only for a specific goal and short time, this move will enable you to create long-lasting business relationships with another compan.
What are the Disadvantages of a Joint Venture?
A joint venture is a common way of combining efforts and resources of two unrelated companies or even competitors. The merits may outnumber the disadvantages of Joint Venture. But you need to consider that sometimes, certain risks and limitations play a key role in the route of success.
1. Complicated Goals
Even though rare, the objectives of forming joint venture can be difficult to understand or execute. Provided both the companies are unfamiliar with their respective working methodology, the objectives of a joint venture may not be 100% clear and rarely communicated properly to all the people involved.
2. Restricted Flexibility
Flexibility is one of the key factors of the joint venture. However, some projects depend intensively on full concentration. This can be a problem if companies have different time zones workdays. Also, there can be delays from one end, which can hamper the project delivery.
For example, if company A needs technological assets in a JV, company B avails the facility to it. On the other hand, if company B requires those technical assets, it has to delay the individual project in the meantime. When that happens, participants have to focus on the joint venture, and their parties suffer in the process.
3. No Equal Involvement
Unfortunately, there is no equal involvement in a Joint venture, so the 50/50 profit or contribution is impossible to maintain. Let us make it easier with a simple example. The role of participants is defined by their expertise, such as R&D, Design & Manufacturing, and marketing. In such cases several roles and responsibilities differ even if the paid share is equal.
4. Cultural Clashes and Communication Problems
A difference in work culture and management can be one of the biggest disadvantages of joint ventures and result in poor cooperation. Different beliefs, tastes, cultural values, and preferences may become bottlenecks in the entire business process.
Also, a joint venture involves different participants from different countries; there can be a severe lack of communication between partners due to language barriers.
5. Lacking Trust- One of the rare disadvantages of joint venture
Trust is the primary requirement of every relationship. Trust between the partners can affect their current and future business relationships. Lack of Trust can make decision-making more difficult for business. A bad decision from the other party can lead to project failure and loss of valuable time and resources.
Final Verdict on Advantages and Disadvantages of Joint Venture
There are many reasons for a company to sign for a joint partnership for a fixed period. Stepping into an agreement of JV means a company can expand its operations and build business relationships. But there are also certain demerits of joint ventures one must consider. Most of the points are relatable to these Advantages and Disadvantages of the Joint Venture to give you an overview of this business type.