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
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
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
· 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
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.
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