In 1993, while speaking to graduate students at Columbia University’s School of Business, Warren Buffett was asked how he evaluates investment risks. “Risk,” he told the students, “comes from not knowing what you’re doing.”
When it comes to entering new markets, some companies sadly fall squarely into this category. This is especially true when it comes to International Joint Ventures, which are complex, challenging, and have a success rate of only about 50%. Jumping the hurdles of a long-distance relationship and navigating cultural differences can be a daunting task for even the smartest business executives.
That said, entering a joint venture with a company that has an established presence in the market you choose can be an appealing strategy. A joint venture can be a quicker, less costly, option over scaling on your own or entering through acquisition. Also, partnering with an in-market player can provide credible knowledge of the market landscape, allowing you to leverage existing relationships already established with key suppliers and customers.
From our experience with international joint ventures and in our discussions with clients who have entered partnerships abroad, Metre22 has gathered several insights. Here are three important lessons to consider when entering and operating an international venture.
Make sure you’re singing the same song. Strategic alignment between your company and the parent company is essential.
Are the interests of the prospective parent company, as they relate to the joint venture, aligned with yours? The process of picking a partner is usually centered around common goals, synergies and cultural alignment. A parent company’s interests and strategies are considered during the due diligence and operating agreement development process, but what happens when the parent company’s interests change? What implications will that have on the joint venture? Understanding a partner’s priorities and interests should not be isolated to the venture-forming process.
As markets and relationships with customers evolve, it’s important to have ongoing strategic discussions with the parent about how it views its current position and its future in the market. Periodically meet to spot changes such as those that might occur in operating philosophy, recruiting, marketing and service. Consider wrapping these meetings around the cadence of board meetings. Continued engagement at the executive level ensures alignment down to the objectives of the joint venture, which likely will evolve over time.
Be a responsible playing partner. Create rules for shared services at the beginning.
When it comes to defining operating roles with your joint venture partner, it generally makes good sense to contract with the in-market partner to provide the majority of the shared services and back office responsibilities. After all, the company has a deeper understanding of local market regulations, employment laws and financial reporting requirements. The partner’s expertise usually underpins the service schedule that supports the joint venture’s operating or definitive agreement. The downside is the shared service provider often leans to their company's existing policies for key strategic decisions.
Here’s the caution: these policies may not align with the new joint venture strategy or business model. And even if there is clear alignment at the outset, market events may require a shift in the initial business plan, thus requiring a more flexible approach and perhaps new skill-sets altogether. Such issues can create a perfect setup for conflict within the joint venture.
Metre22 recommends that during the planning process you develop clear guiding principles for how key decisions related to shared services are made, as market needs and priorities evolve. In the event new talent is required to be successful, organizations should consider bringing the HR function into the joint venture rather than contract it out to the parent company. This will provide you greater control and flexibility of the human capital decisions that are essential to the success of any venture.
For more information on how to manage the expectations between business strategy and the shared service functions that support them click here.
Guard your hopes and dreams. Protect your assets for growth outside the joint venture.
Many organizations view their entrée into a new market as merely a beachhead to expand other products and services in the market as they gain better understanding of how to serve the needs of new customers. The joint venture agreement should clearly dictate which products and services are delivered through the new entity and which products and services each party can sell to the broader market. This is very important to protecting your intellectual property, a precious driver of your growth outside the confines of the agreed-upon venture. Protect your assets to protect your growth in the future, after the joint venture ends.
The average lifespan of a joint venture is three years. The companies that do well are those that enter the venture with their eyes wide open, fully informed of what to do and how to do it. Following these three basic disciplines will go a long way to helping you tame the four-letter business beast -- risk.
To read more from Metre22, check out our blog page here.