Alternatively, a business merger or acquisition, creation of joint ventures is a common business strategy among companies seeking to achieve a common goal or reach a specific consumer market. Entering into a joint venture involves two or more entities under a contractual agreement to work together on a specific project for a specific period of time. Companies work as partners and pool resources to make the projects profitable for all parties involved.
When the joint venture is successful, the participating companies share in profits stipulated in the original contract. In addition, the failure of the joint venture results of all participating companies implementing their share of the losses. The creation of joint ventures has unique benefits that make it an attractive option for some businesses.
Shared resources and responsibilities
Most often, the company is a joint venture, because he lacks the necessary knowledge, human capital, technology or access to a particular market, which is necessary for the successful conduct of the project independently. Together with other business gives everyone access to the resources of other participating companies, without having to spend an excessive amount of capital to get it.
For example, a company can have a wide range of production technologies that the company B has to create and, ultimately, distribute a new product. A joint venture between the two companies gives the company access to the equipment without purchasing or leasing, while the company can participate in the production of goods he does not bear the development costs. Each company is advantageous when the joint venture will be successful and not have to complete one project.
Flexibility for participating companies
Unlike a merger or acquisition, a joint venture is a temporary agreement between the companies-participants, which is soluble in a certain future or after the completion of the project. Companies included in the joint venture are not required to create a new business entity, in which after completion of the project, will provide some flexibility not found in more sustainable business strategies. In addition, participating companies should not relinquish control of their business to another company, they should continue regular business operations until SP is in full swing. Each company is able to maintain its own identity and can easily return to normal activities of the company after SP is completed.
General Business Risk
Joint ventures also provide a General allocation of risks between the participating companies. The creation of a new product or a new service, carries a greater risk for the business, and many companies are not able to manage this risk alone. In a joint venture, each company contributes its share of the necessary resources to bring a product or service to market and making a heavy financial burden on research and development less challenging. The risk of the project not in the state and has a negative impact on the profitability is lower because the costs associated with the project are distributed among each of the participating companies.
(For associated reading, see: what are the main disadvantages of forming a joint venture?)