A joint venture is an organisation in which two or more individuals or companies join together in a limited, temporary partnership. These groups will then combine their resources in the hopes of accomplishing a specific, profitable goal. For example, two oil companies might form a joint venture to drill a new well. Because of their many benefits, joint ventures are very common. However, there are also a number of drawbacks.
Pro: Different Skill Sets
Joint ventures allow different parties to bring different skills to the table. Many companies enter into joint partnerships to gain access to new technology, capital and skills, as well as critical business knowledge. For example, a clothing company may want to sell shoes to a new market. While the company may be well-capitalised, they may be inexperienced in the needs of the new market's consumers. By launching a joint-venture with a knowledgeable local show company, the clothing company gains the experience necessary to penetrate the market.
Pro: Access to New Markets
Often national governments will forbid foreign companies from selling products to its citizens so as not to take away sales from local industry. However, some countries, such as China, will allow foreign companies to enter local markets by making joint ventures with local businesses. This allows the country to provide new products and services to its citizens and for the foreign companies to reach new markets.
Pro: Diversification of Risk
As companies are combining their resources in a joint venture, they also share risk. This makes joint ventures a wise move for particularly risky transactions, allowing companies to essentially hedge their bet.
Con: Slower Decision-Making
Joint ventures are often structured so that all members of the venture have a hand in making decisions. This ensures that no action is taken contrary to the wishes of any of the partners. However, this requirement for consensus can mean that decision making takes far longer than in other instances, as each issue must be negotiated until all parties are in agreement.
Con: Shared Rewards
The flip side to sharing risks is that rewards must also be divided. In a joint venture in which two parties have equal stakes, each party can take home only half of the venture's profits. This presents a severe downside to forming joint ventures for companies that believe they can conduct a successful transaction on their own.
Con: Potential For Disagreement
Each company has its own culture, philosophy and management style. Unless all parties in a joint venture agree about the venture's objectives and its leadership structure, the partnership can become mired in poor cooperation and integration, defeating its chances for success.