Individualism or Collectivism: Which Ideology Works Well for Business Diversification?
Posted in Finance Articles, Total Reads: 4377
, Published on 04 July 2014
Many large business endeavours are carried out in some form of sharing or collaboration. One such collaboration is ‘Joint Venture (JV)’. A joint venture is a strategic alliance between two or more companies in which they agree, for a finite period of time, to share equity, revenues and losses, assets, authority and responsibility to form a new entity. It is a fiduciary relationship between firms to serve a specific business purpose or to enter new markets or geographies.
A JV can be thought as a consortium or a cooperative agreement that is formed between parties that seek to share not just a common business goal, but also pool their technological expertise, share their brand images, finances, management contracts, rental agreements. Joint ventures do not follow the accounting principle of “Going Concern” because they are formed to serve a specific business activity.
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Every business entity works on the principal of ‘Profit Maximization’. To achieve this, expansion, diversification, mergers and acquisitions, joint ventures are some of the routes through which companies can enter new markets or offer new products and services. But entering into joint ventures is not a “Cakewalk” for any entity because every organization has their own set of goals, mission and vision and above all cultural values disseminated in the workforce. Joint venture enables a company’s diversification, but challenges abound for the both the companies in the form of different work cultures, different trade practices, different views of the top management and employees and many more.
The business environment has seen many successful joint ventures, but there also have been many failures and breakups too. An instance of a failed JV is presented by Mahindra and Mahindra and Renault which was formed to produce and commercialize the car “Logan”. The car was supposed to be positioned as a ‘low price car’ with middle-class customers as its target market. But it failed to do so due to tremendous competition from its competitors who were already catering to the same segment. The production cost of Logan was also high due to which it could no longer fulfil the ‘low price’ tag and started incurring losses because of high price margin. This, along with many other reasons led to the termination of the JV in 2010. It was a setback for both the companies initially, but both the car makers managed to survive this storm through their inherent capabilities. Mahindra proved itself through the success of Mahindra XUV 500 and Mahindra Xylo and in 2012; it replaced Tata Motors to become the third largest automaker in the country after Maruti Suzuki and Hyundai. Even Renault did not lag behind and offered India its first real production ‘Duster’. Soon Duster started ‘Dusting off the competition’ and India became the fourth largest market for Duster globally.
JVs could also fail if management of both the companies does not get the freedom of making their own decisions and their decisions create a conflict of interest. This was the reason that the year 2010 saw another break-up of a 26 year long association between Hero Group and Honda Motor Company. Hero Honda came into existence in 1984 as a motorcycle and scooter manufacturer in India. In August 1999, Honda Motor Company announced the setting up of Honda Motorcycle and Scooter India (HMSI) for making scooters and later motorcycles as well. Hero Honda was establishing itself in the market at a fast pace and in 2001, it became the largest two wheeler manufacturing company in India and 'World's number one' company in terms of sales. In 2004, HMSI launched its own bike which made it clear that Honda would focus more of its efforts on developing the ‘Honda-only’ brand. Moreover the bike was competing directly with the Hero Honda bikes. After this, the stock of Hero Honda fell by 30%. Hero felt that its ambition to go international was being hampered by the joint venture. Hence this clash of interest led to the signing of the parting agreement between both the companies and today they are direct competitors in the two wheeler market. Similar breakups have been seen by Suzuki-TVS, Bharti-Walmart, Vodafone-Essar, but each of the companies is ‘pioneer’ in the business it deals with and providing stiff competition in the market globally.
Though the joint ventures in the industrial environment have seen many divorces, there have been successful alliances as well which boost the market confidence. The joint venture between Volvo and Eicher presents one such finest example of how the two companies should leverage their respective strengths to achieve their disparate goals. In 2008 VE Commercial Vehicles (VECV) was formed as a JV between Eicher Motors and Swedish truck maker Volvo. Eicher wanted to boost its commercial vehicles business in India and also build an overseas presence. It could have done that on its own, but it would have required a vast amount of time, efforts, funds, systems and technology. Volvo brought in all of them along with advanced manufacturing technology. Volvo wanted to cater to the small and medium-truck segment in India. The JV enabled it to leverage on the low-cost manufacturing base of Eicher and gain exposure to the Indian market. The investments made by both the companies showed remarkable results as Eicher's revenue from the trucks and bus business more than doubled since forming the joint venture. VECV had a cash surplus of Rs 700 crore and posted a net profit of Rs 336.66 crore within four years of its inception. Similar success story is of the JV between Tata Teleservices and NTT Docomo, known as Tata-Docomo, which was formed in 2009 and currently it is the sixth largest telecom operator in the country.
Hence there is no fixed ‘mantra’ whether companies will survive individually or collectively i.e. as a single entity or through a joint venture. Ralph Waldo Emerson has rightly said “What lies behind us and what lies before us are tiny matters compared to what lies within us”. This has been proved by Mahindra, Renault, Hero Group, Honda and many companies like them who, despite failed joint ventures, have managed to maintain their status quo successfully. Today’s competitive scenario demands ‘Survival of the fittest’. It is important to transmit the energy in the right direction, learn from the past mistakes and formulate the right strategy. The ‘Power of Two’ is not a magic wand; companies considering embarking on a joint venture should be aware of its limitations and risks, and they should take advantage of some of the painful lessons learned over the years. JVs present tremendous opportunities; however it requires careful planning, a thoughtful structure and willingness to remain flexible during the life of the venture which would increase the chances of success.