How to Craft a Winning Market Entry Strategy – Joint Ventures

by

Inside this video we will intro­duce the core direct invest­ment options and focus on joint ven­tures. If the ini­ti­at­ing man­age­ment team can stand to have more of a Board role in the new ini­tia­tive you can posi­tion your orga­ni­za­tion to have lim­ited down­side expo­sure while still being able to par­tic­i­pate on the upside. Sound like you’re tak­ing the role of a Ven­ture Cap­i­tal­ist (VC)? In some respects you are, which can be a good thing when mov­ing into a new market.

How to Craft a Win­ning Mar­ket Entry Strat­egy — Part 3: Transcript
 
Wel­come back.
 
In the last video we talked about Spe­cial Licens­ing Agree­ments and how it’s lim­ited risk pro­file is very appeal­ing to many busi­nesses that don’t have the excess cap­i­tal or will to directly enter a new market.
 
In this video we take a look at the other side of the coin and tran­si­tion into direct invest­ments, in par­tic­u­lar Joint Ventures.
 
What is the deter­min­ing fac­tor in all of this? It varies by indus­try, mar­ket, and most of all risk­i­ness. So how is one going to deter­mine the appro­pri­ate method? By answer­ing the fol­low­ing two questions:
 
1) How risk tol­er­ant is the organization?
Prompt­ing ques­tions include:
·      Have we done this before?
·      If so, how eas­ily did the pow­ers that be digest the asso­ci­ated fits and starts?
·      If we haven’t gone down this path before, why?
 
From this rough cut busi­ness analy­sis you then want to assess the fol­low­ing two items:
·      Would par­tial or full own­er­ship be preferable?
·      And, is the orga­ni­za­tion able to under­take a direct for­eign investment?
 
2) What invest­ment form should be pursued?
·      Joint ven­ture
·      Minor­ity or major­ity equity stake
·      Or, an acquisition
 
Joint Ven­tures
But what exactly is a joint ven­ture (JV)?
 
Wikipedia defines it as, a legal entity formed between two or more par­ties to under­take an eco­nomic activ­ity together. The JV par­ties agree to cre­ate, for a finite time, a new entity and new assets by con­tribut­ing equity. They then share in the rev­enues, expenses and assets and “con­trol” of the enterprise.
 
I favor prac­ti­tioner def­i­n­i­tions, which tend to pro­vide a use­ful frame­work. Joint Ven­ture – an entry strat­egy in which the part­ners share own­er­ship of a newly cre­ated busi­ness entity.
 
Joint ven­tures are very com­mon in the media and enter­tain­ment indus­try. Com­mon house­hold names such as
·      MSNBC,
·      the Sun­dance Channel,
·      and Hulu were all launched as strate­gic collaborations. 
The ques­tion is why?
 
The answer lies in the gen­eral busi­ness struc­ture, which is attrac­tive for sev­eral reasons.
·      First and fore­most is the shar­ing of risk; a com­pany can limit its finan­cial risk as well as expo­sure to uncertainty.
·      Sec­ond, one can use the plat­form to learn about new envi­ron­ments and paradigms
·      Third, by join­ing forces part­ners can achieve syn­ergy by com­bin­ing dif­fer­ent value chain strengths.
·      Lastly, it may be the only way to enter a mar­ket due to bar­ri­ers or restrictions
 
Joint ven­ture invest­ment in the big emerg­ing mar­kets (BEMs) is grow­ing rapidly. China is a case in point; for many com­pa­nies, the price of mar­ket entry is the will­ing­ness to pur­sue a joint ven­ture with a local part­ner. Brazil has also seem a rapid increase in strate­gic alliances, from big and small con­cerns alike, over the last decade.
 
Sounds great doesn’t it. Then why isn’t every­one doing it?
 
The dis­ad­van­tages of a JV can be significant.
·      Requires more invest­ment, pri­mar­ily the cost asso­ci­ated with con­trol and coor­di­na­tion issues that arise when work­ing with a part­ner. These costs go beyond quan­tifi­able expenses to include poten­tial oppor­tu­nity cost asso­ci­ated a slower Board level decision-making process. Which rolls us into the next.
·      Requires strong coordination
·      Must share rewards and risks
·      The poten­tial for part­ner conflicts
·      Part­ner may become a competitor
 
The Real­ity
Joint ven­tures (JV) are a pop­u­lar mar­ket entry method, many JVs fail within the first few years. While there are a vari­ety of tech­ni­cal, busi­ness, and cul­tural rea­sons for fail­ure, most can be attrib­uted to:
·      Lack of a shared strategy
·      Poor com­mu­ni­ca­tion
·      Lack of trust and mutual understanding
·      Or, ten­sion around goals
 
Inside the next video we’ll explore mar­ket entry via own­er­ship stakes.
 
Thank you for watching.
 
If you would like to see more videos go to http://donaldmcmichael.com

Previous post:

Next post: