JOINT VENTURES ARE OFTEN SCOPED as fairly narrow-purpose entities – initially conceived to operate within the confines of a specific product or geographic market. But the world is a dynamic place. After three to five years, many joint ventures start to see opportunities to bring new value to their shareholders – by pursuing natural step-outs in adjacent geographic markets or product categories. Similarly, at different points in their life, most joint ventures confront at least a few strategic inflection points – radical shifts in the industry landscape, major acquisition or investment opportunities, or fundamental changes in the corporate strategies of one or more parent company.
The purpose of this insight is to outline the necessity of JV strategic evolution in order to remain successful. In two subsequent parts, we will address i). tools and tactics that the most successful joint ventures adopt to enhance the strategy development process and ii). the structures and processes that they need to put in place to allow for that shift in strategy.
The ability to respond to radical shifts is critical to most joint ventures. JVs that have the ability to develop – and gain agreement on – new strategies and growth opportunities are far more likely to deliver strong near-term performance and to generate compelling returns to their shareholders over the long-term. In contrast, those JVs that struggle with strategy tend to stagnate and, in many cases, die early deaths. The ability to evolve a venture’s strategy – and dynamically adapt to changes on the landscape – is clearly correlated with financial and strategic outcome performance: Roughly 80% of JVs that have materially evolved their strategy and scope meet or exceed the performance expectations of their parent companies, whereas those JVs that have remained essentially unchanged have only a 33% success rate (Exhibit 1).
THE NEED TO EVOLVE
Exhibit 1: JV Evolution Success
Evolved JVs have a much higher success rate
But strategy development is inherently challenging in JVs. While JVs offer great advantages, joint ventures also introduce added demands in both the substance and the process of strategy – demands that wholly-owned business units or independent companies do not confront. JV shareholders often fail to reach decisions about new products, fundamental changes in the scope of the JV, major investments, or game-changing transactions. The more partners in the JV, the more difficult it can be to evolve. For example, the substance of a joint venture strategy must solve differences in shareholder objectives and risk-reward appetites, and inherent tensions and conflicts related to venture scope. Meanwhile, the process of joint venture strategy development is more “physical” than that of a wholly-owned business, with far more players and approval layers involved.
Termination is not the only outcome of strategy challenges. Many JVs simply struggle or get stuck, defaulting to the status quo, which creates its own set of costs. JVs that do not adapt suffer from lost market opportunities, missed product-introduction windows, delayed investment decisions and lost profits. Our benchmarking work indicates that at least 25% of JVs are currently experiencing delays of nine months or more in making decisions on their most important board-level strategy issues. And there are indirect costs: Non-dynamic JVs have a much harder time attracting the attention of board members and other senior parent company executives, and find it much harder to attract top-notch talent.
There are three points along a venture’s life-cycle where shaping strategy is crucial – and where JVs stall.
COMMON STALL POINTS
- Fundamental change in the industry, the parents, or the JV situation. JVs are usually reasonably stable for the few years after the deal is struck. But sooner or later – after two, five, or eight years – fundamental changes in technology, regulation, or the advent of new competitors make business-as-usual untenable. An example is a joint venture producing components for old-style TVs, whose parent companies had to decide whether to double-down and reinvest to compete in the LCD and plasma-TV segments as the old business quickly wound down.
Parent companies’ situations can also change dramatically, requiring adjustment in the JV. When oil prices plunged in 2014, several JVs in the renewable energy sector were forced to quickly cut their budgets and change their strategies. New strategies may also be required following success of the JV against its initial objectives and scope.
- Major investment decisions. Strategy conversations are often forced by major investment or acquisition decisions. A major oil company wanted to double the size of a multi-billion dollar JV in the Canadian oil-sands – the partner did not. The JV team was caught between the opposing forces for over two years before a final decision was taken not to proceed.
Another situation was less forgiving of delay: A transport JV was faced with a decision whether to bid for an attractive acquisition – or to refrain and allow competitors to acquire the company and its market share. In that case, the JV team was able to get its Board aligned to make the acquisition – unlike the health-care JV that missed out on a high-potential acquisition that was snatched up by a competitor.
- Annual “pushing and pulling.” Sometimes the strategic evolution path that’s needed is a gradual one – not a big investment, and not a fundamental re-scoping of the JV’s business. You would think that these evolutionary strategy decisions would be easier, right?
- Think again. The big events will at least capture the attention of board members, and are hard to ignore or defer, since there is usually some real and immediate risk to the JV’s business, or an up-or-down decision is needed on a big project. Smaller – but important – strategy decisions should be easier, but they aren’t in practice. Many joint venture business development teams have burned out after detailing the umpteenth plan for a moderate business step-out or a new product, only to see their hard work gather dust after a polite but inconclusive debate.
- As an example, one business development team went 0-for-25 in its proposals to the Board over a span of three years. The owners of the JV had very different philosophies about whether and where the JV should grow, and a few of the board members liked to delve into a lot of detail in challenging the proposals. So nothing happened. This isn’t an isolated case. Fully 60% of JV management and board members are not satisfied with their JV’s ability to grow and respond quickly to market opportunities. Consequently, many JVs are disadvantaged relative to competitors in pursuing edge-outs into adjacent products and markets, and in closing on small acquisitions or partnerships that require board approval.
Not all JVs manage to evolve. To help JV CEOs and boards address these unique challenges, we have developed a set of tools and structures to enhance the strategy development process, which we will discuss in later installments. In Part 2, we provide tactics addressing issues of substance, principally parent-company differences in aspirations, specific product and market priorities, and investment appetites. In Part 3, we address issues of process – i.e., the strategy-making process is inherently harder in joint ventures given the two or more parent companies and numerous people involved.
*These issues do not apply to all joint ventures. There are some JVs that are essentially large capital projects; others are captive to the parent companies; and some are never intended to evolve. For these JVs, strategy development may not be an issue. This article is not directed at those JVs – although some aspects may be very relevant, e.g., when major investments are being considered. Similarly, not all joint venture strategy dilemmas can be solved. Sometimes, the parents have positions that are irreconcilable – when termination is the only reasonable solution.