Article Review: “Launching a World-Class Joint Venture”
Article written by: James Bamford, David Ernst, and David G. Fubini
Review by Chris Byus
The authors of ‘Launching a World Class Joint Venture’ identify the launch phase as a critical period of time for determining the success of a Joint Venture. They define the launch phase as the period beginning with a signing of a memorandum of understanding and continuing through the first 100 days of operation.
The authors identify four specific challenges that must be overcome in the launch phase. First, strategies across the parent companies and the JV must be aligned. Second, the governance of the JV must be clearly established to provide adequate control over the JV without stifling entrepreneurship. Third, the economic interdependencies between the JV and the parent companies must be determined. An example of this would be determining appropriate cross-charges for shared services. Fourth, the organizational structure of the JV must be set up to encourage performance.
Most of the advice offered in the article will come as no surprise to the seasoned executive. Tips such as ‘select a CEO who inspires loyalty’ should go without saying. However, in the midst of the obvious, the authors did offer several insights which I found useful.
First, the authors encouraged moving quickly to detailed practical planning. Many companies will assume that the details of governance, strategy, and organization will have been worked out during negotiations. This is not typically the case though, and the newly formed JV should immediately dive into more clearly defining the outline put forth during negotiations.
A second useful insight came in regards to the governance of a JV. The authors advocate a ‘loose-tight’ approach. This framework attempts to balance control over the JV with freedom for the JV to independently operate. As a general guideline the authors proposed that the parents should play an active role in the three governance areas that are key to driving financial performance and protecting shareholder interest: capital allocation, risk management, and performance management. The parents should limit their intervention in more operational processes such as staffing, pricing, and product development.
A third useful insight was to challenge the interdependencies between a parent company and the JV. While it may be tempting for a JV to share a large number of services with a parent company, this is not always desirable. A large list of shared services may lead to unmanageable complexities. It can be very difficult to determine appropriate cross-charges for these services, and a JV could be burdened with a large amount of the parent company’s overhead.
Overall I found this article useful to read. Although much of it seemed obvious, it is often the obvious which is overlooked. This article would be a useful introduction for a company preparing to launch a new JV. However, it should be supplemented with in-depth studies of other JVs in the industry.