Do Joint Venture Profit Sharing Alliances Work?

Entrepreneurs in the business world know that there is power in forming the right alliances. They are keen on the idea of being strengthened by having the right connections. Many wonder whether joint venture profit sharing alliances really work, and whether they make money. Those are valid questions, and the answer is pretty complex. The short answer is that it depends. The long answer is where the plot thickens. Read on to find out why.

 “How Do I Make A Joint Venture Work?,”

Some joint ventures work. The main thing that can help the outcome to be positive is to keep the main thing the main thing. In order to do this, it’s important that the parties to the joint venture hash out the details in writing, up front. In his article, “How Do I Make A Joint Venture Work?,” Keith Lamb, a Leadership and Strategy Mentor, stated “We look for joint venture partners that have complementary products and services and share our business goals and motivations.” He stated that the agreement must include a specific start-up strategy; along with details about investments, goals, plans, joint marketing and sales efforts.

One other factor that Lamb mentioned was the importance of creating a venture that will better serve customers.

Use Joint Ventures to strengthen Earnings Portfolio

The next key to success is to team with another company that brings a similar benefit to the table. Since parties to joint ventures (JV) are to share strengths and be stronger and better as a result of the joint venture, it’s important to consider who to partner with. By definition, the assets, revenues and expenses of each participant should be shared in a JV. According to The Dow Company, they use joint ventures to strengthen their earnings portfolio. In fact, they indicate that 90% of their total equity earnings come from joint ventures. On their website it reads, “Joint ventures can provide Dow with access to capital, geographic markets, synergy opportunities, risk sharing, technology and advantaged raw materials.”

Dow lists ten joint venture agreements that they’ve entered into with other entities.

Joint Ventures Resulting in Higher Prices

The European Union, an oversight organization for EU member states, has elected to take a look at a proposed joint venture between United Kingdom based PRS For Music and a Sweden and Germany company. According to an RMBiz.com online article, the EU is looking at whether the potential merger of PRS For Music, STIM and GEMA lines up with EU Merger Regulation.

In their preliminary review, they showed that they were concerned that the venture could result in higher prices, reduced competition and reduced choices for digital consumers; which would give unbalanced bargaining power to the joint venture.

The January 15, 2015 article reported that PRS For Music chief executive had comments about the news about the European Commission’s review. “Given the complexity of the multi-territory digital market place and the scale and scope of the ground breaking solution that we are bringing to the table, it is understandable that our joint venture is subject to an in-depth assessment. We will continue to co-operate fully with the European Commission and look forward to a successful resolution of the process,” he said. On it’s note, the United Kingdom company is expecting that the joint venture will get a nod, allowing the triad to go forth with their plans.

At first blush, this proposed venture would meet Lamb’s benchmark specifying that the venture better serve customers if it is to have a successful outcome.

“In Control of my Destiny and Build my own Empire.”

In 2012, another music industry joint venture was announced by EMI Music Publishing. A London-based press release indicated that Ivor Novello songwriter Plan B (Ben Drew) and EMI entered into a joint venture by launching a company called Temperamental Music. In this venture, they outlined plans that Drew will give creative input regarding signing and developing and marketing songwriting talent. Both EMI’s president and vice president were quoted in the press releasing offering praise and respect for Drew, while Drew shared these words,“I’ve always wanted to be in control of my destiny and build my own empire and this is one step closer to that. I feel I can help young musicians progress and plant some positive seeds in their heads. Before I made it I was trying to help other people, the only difference is now I’ve got a budget.”

The release also report that Drew entered the UK music scene with his 2006 hip/hop grime record,‘Who Needs Action When You Got Words?’

What is a Study Venture

A Gov.UK article dated June 28, 2013 reported that UK based Orion Energy formed a joint venture with Pakistani company Pakistan Petroleum, Ltd. (PPL). The venture is specified as a study venture, with a memorandum of understanding hashing out the details of the venture. Included in that memo was the specification that Orion would fast track as gas based power project with the Pakistani company.

The British High Commissioner was quoted as saying, “The UK Government looks forward to greater co-operation in the energy sector and increased trade and investment for mutual benefit. Today’s signing is another step towards the UK and Pakistan’s ambitious, joint trade and investment targets.”

Ready-to-drink Joint Venture

Whether one is a fan of Coca-Coca or prefer a Pepsi, it’s not hard to see that the Pepsi Company (PepsiCo) has thrown their faith in the joint venture direction. The soda giant is in a joint venture with Unilever (think Lipton). According to their website, this ready-to-drink joint venture enables them to expand their drink options to consumers. The same is true of their joint venture with Starbucks. In a September 27, 2007 press release, Gerry Lopez, Starbucks Global Consumer Products Group president, shared why this joint venture was a win-win. “With our coffee expertise and PepsiCo’s extensive sales and distribution network, this joint venture will allow us to provide an authentic Starbucks coffee experience to millions more consumers around the world anytime and anywhere they want it. This could include countries that may not currently have a Starbucks store.” Not to put too fine a point on this, the greatest strength PepsiCo brings to this venture is their sales and distribution; including in areas where Starbucks is not available. As for Starbucks, they bring to the arrangement their substantial coffee expertise and even branding in the coffee beverage industry that PepsiCo does not have.

“Launching a World Class Joint Venture,”

Three writers collaborated on an article in Harvard Business Review in January 2004. Titled, “Launching a World Class Joint Venture,” the article started out by indicating that in the prior five years over 5,000 joint ventures had launched across the globe. They indicated that in 1991 they did research and found that about 50% of joint ventures were successful. They reported that when they assessed this data again in 2001, the rate was slightly higher at 53%. The article details some ideas for successful launching of a joint venture; including aligning the partners’ interests around the joint venture’s objectives upfront and specifying first year goals. Amongst other things, this article outlines how joint ventures should behave; including taking action steps to preempt failure. The writers also hold the idea that joint ventures should be entered into judiciously. The triad of writers include these words, “Some managers avoid or overlook the JV option because they aren’t sure at what point the advantages outweigh the complexities. Yet some companies have developed a core competency in alliances and pursue JVs over and over again with good results.”

Big Four firm with a dedicated Joint Venture Practice

KPMG is a United Kingdom company that advises its clients on joint ventures. On their website they advertise themselves as the sole Big Four firm with a dedicated Joint Venture Practice. They had their 2nd annual joint ventures forum in London, where their first speaker stressed the importance of joint venture collaboration. Another speaker stressed the importance of unlearning old behaviors and developing new values. One key summary from speakers at the forum nailed one important consideration for those considering becoming a partner in a joint venture. “There are many kinds of alliance and it’s important to distinguish between more ad hoc “means to an end” partnerships and those, for example involving co-creation, which have the potential to be transformational.”

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