Managing Partner Relations in Joint Ventures

Between 1991 and 2001, the average number of joint-venture deals announced each year increased dramatically from 1,000 to 7,000. As that trend seems to be continuing, executives are clearly setting great store in these temporary partnerships as a way of achieving both short-term and longer-term goals.

Are they getting all they hope for? The answer is murky. While it has been argued that 50% to 60% of joint ventures fail, the definition of success and failure is blurred.1 Joint ventures last an average of six years and are then terminated for any number of reasons. Sometimes success is clear, as the partners have achieved the strategic and financial goals they sought when they began the venture. In other cases, the competitive environment has evolved so that the partnership no longer makes sense for one of the companies, and it sells its stake to the other partner (85% of joint ventures end with the acquisition of the venture by one of the original partners). In China, for instance, joint ventures were once the only way for foreign companies to gain access to that market; when the law changed to permit wholly owned subsidiaries, companies began to terminate joint ventures in order to fully consolidate operations and gain efficiencies. Although not all terminations have such neat explanations, joint ventures are increasingly viewed as strategic options to be exercised in due course. And achieving financial success in the limited window of existence is an ever challenging task.

Often at the root of difficulties within a venture are poor partner relations. Although partner-relationship management has been widely discussed by academics and practitioners, it does not seem to be well practiced.2 In order to maximize a joint venture’s potential over the course of its life, companies must pay more attention to the impact of partner relations on the performance of their offspring. Too often, a negative cycle develops in which poor partner relations lead to poor performance, which in turn puts the partner relations under greater pressure. In ventures where, for example, communication between the partners is primarily limited to formal board meetings, the joint-venture general manager will struggle to respond quickly to differences of interests when hit by an unexpected event like the loss of a major customer, the loss of market share or a general business recession.<

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References

1. The definition of joint-venture success has been widely debated. Writers on the subject have measured success in terms of stock market returns, the achievement of financial and strategic objectives and divestment. See J. Reuer, “Parent Firms Across International Joint Venture Life-Cycle Stages,” Journal of International Business Studies 31 (March 2000): 1–20; A. Yan and B. Gray, “Bargaining Power, Management Control and Performance in United States-China Joint Ventures: A Comparative Case Study,” Academy of Management Journal 37, no. 6 (1994): 1478–1517; J.M. Geringer and L. Hebert, “Control and Performance of International Joint Ventures,” Journal of International Business Studies 20 (summer 1989): 235–254; and M. Yoshino and U. Rangan, “Strategic Alliances: An Entrepreneurial Approach to Globalization” (Boston: Harvard Business School Press, 1995).

2. Scholars have pointed toward issues related to partner relationship management but have not directly linked it to joint-venture success (measured in terms of fulfillment of strategic objectives by the parent companies). See P. Killing, “Strategies for Joint Venture Success” (New York: Praeger, 1984); K. Harrigan, “Managing for Joint Venture Success” (Lexington, Massachusetts: Lexington Books, 1986); P. Beamish, “Multinational Joint Ventures in Developing Countries” (New York: Routledge, 1988); P. Lorange and J. Roos, “Strategic Alliances: Formation, Implementation and Evolution” (Cambridge, Massachusetts: Blackwell Business, 1992); Y. Doz and G. Hamel, “Alliance Advantage: The Act of Creating Value Through Partnering” (Boston: Harvard Business School Press, 1998); and R. Spekman and L. Isabella, “Alliance Competence: Maximizing the Value of Your Partnerships” (New York: John Wiley & Sons, 2000).