One of the first things to consider when establishing a joint venture is the compatibility of the partners. All parties involved should have aligned motives and be well suited to working together. While the ultimate goal of the ESL founders was likely to make money, the clubs involved were approaching the situation from very different standpoints. Clubs such as Barcelona and Real Madrid are currently in financial difficulty brought on by mismanagement of player wages and transfer fees, and further exacerbated by the drop in ticket revenue caused by the pandemic. For these clubs, the ESL represented an opportunity to help plug a cash hole. On the other hand, American-owned clubs such as Manchester United and Liverpool likely wanted to protect their investments with a closed league, removing the threat of relegation or missing out on a top-four finish in the Premier League (and the drop in revenue this would entail). Finally, it appears there were other parties, such as Manchester City and Chelsea, who were never keen on the project but simply didn’t want to be left behind. When all the parties involved have such wildly different motivations, friction is likely to arise. Show
Despite the great potential for conflict, many companies routinely—and successfully—use joint ventures. With the increasing use of this form of management, business leaders must think about the more effective way of managing: shared management or dominant parent. This author, drawing from his research with 37 joint ventures involving mostly North American and Western European companies, explores the different ways executives can tailor their management approach to the specific needs of the enterprise. How fast should the joint venture grow? What constitutes good or bad management of it? The answers to these questions and others are critical to venture success, as is management flexibility. In the 1960s and early 1970s, a number of U.S. and foreign companies, spurred by tales of great wealth lying on the seabed, were independently looking for mine sites and evaluating techniques for raising manganese nodules to the ocean surface. By 1980 all of these independent efforts had coalesced into five major ventures. Four of these were international, headed by U.S. Steel, INCO, Lockheed, and Kennecott; the fifth was an all-French venture. At least one U.S. company voiced strong opposition to the notion of bringing in partners, but in view of the technical, economic, and political risks involved, a joint venture partnership was the only means of continuing. The managers of these undersea enterprises and others are discovering that they have a lot to learn about the design and management of joint ventures. Managers often disparage joint ventures as losing propositions—too complex, too ambiguous, too inflexible. But as projects get larger, technology more expensive, and the costs of failure too large to be borne alone, managers in many businesses must learn to accept and work with joint ventures. In addition, nationalistic governments such as those of India and Mexico are demanding that joint ventures replace autonomous corporate subsidiaries. Joint ventures, however, do have a high overall failure rate, and many of the failures are very costly for the partner companies. According to a study done by the Boston Consulting Group, more than 90 ventures in Japan collapsed between 1972 and mid-1976. Many of these were large ventures that involved prominent U.S. companies such as Avis, Sterling Drug, General Mills, and TRW. And a Harvard Business School study reveals that 30% of a sample of 1,100 joint ventures formed before 1967 between American companies and partners in other developed countries proved unstable because of strategic and organizational changes made by a venture’s parents. These ventures were either liquidated or taken over by one partner, or control passed from one partner to the other.1 The 37 experiences on which I base this article provide further evidence of poor joint venture performance: 7 collapsed and 5 were drastically reorganized. The majority of the 37 were run by North American and Western European companies, and all included a local partner. I will examine the causes of joint venture difficulties and present evidence that not all joint ventures are prone to failure. If the problem types can be avoided—or managed very carefully—joint ventures can be highly successful. The Difficulties of Double ParentingThe problems in managing joint ventures stem from one cause: there is more than one parent. The owners, unlike the shareholders of a large, publicly owned corporation, are visible and powerful. They can—and will—disagree on just about anything: How fast should the joint venture grow? Which products and markets should it encompass? How should it be organized? What constitutes good or bad management? This last issue flares up when one parent believes that short-term performance is crucial while the other thinks that building a solid base for the future is more important. At the board level differences in priorities, direction, and perhaps values often emerge, for the board of directors contains representatives from each parent. The result can be confusion, frustration, and slowness in making decisions. Some typical examples of conflicts illustrate this problem:
In such cases, an apparently straightforward decision becomes long and complex. The general manager, summoning all his negotiating skills, has to persuade each parent that the other is not getting preferential treatment. The slowness and the confusion of the decision-making process at the board level can place a joint venture at a distinct competitive disadvantage. Dominant Parent vs. Shared ManagementIn spite of the great potential for conflict, companies in several industries routinely—and successfully—depend on joint ventures. In the land development and construction business, for instance, they are often used to obtain sufficient financing to assemble large land tracts or to undertake major building projects. Joint ventures are also common in oil and gas exploration. These kinds of projects are all dominant parent enterprises—that is, they are managed by one parent like wholly owned subsidiaries. The dominant parent selects all the functional managers for the enterprise. And the board of directors, although made up of executives from each parent, plays a largely ceremonial role as the dominant parent executives make all the venture’s operating and strategic decisions. In shared management ventures, of course, both parents manage the enterprise. In 12 of the 20 such partnerships in this study, both parents contributed functional personnel. The board of directors, also consisting of executives from each parent, has a real decision-making function. While shared management ventures can arise in any industry, they are most common in manufacturing situations in which one parent is supplying technology and the other knowledge of the local market. The Exhibit shows managements’ assessment of performance, suggesting that dominant ventures outperform shared management ventures. (Independent ventures, which I shall not go into in this article, are free of interference from either parent and perform well; but since freedom in part results from good performance, their high performance ratios are not surprising.)
Exhibit Managements’ assessment of joint venture performance The difference in failure rates between dominant parent ventures and shared management ventures is striking. Since shared management ventures are not consistently used for riskier business tasks, their higher failure rate is a strong indication that they are more difficult to operate than dominant parent ventures. For this reason, corporate executives should know when dominant parent ventures are feasible and use them whenever possible. When Can Dominant Ventures Work?The trade-off between using shared management and dominant joint ventures is clear-cut: Will the extra benefit of having a partner who is helping to run the joint venture outweigh the resulting disadvantages? That the amount and type of help needed from a partner changes over time complicates the choice. Usually, a manager will require the partner’s managerial expertise in, say, technology or market-related matters for a few years but will soon learn enough so that such help is no longer needed. If, however, the technology or market in question continues to change quickly, the partner’s permanent help may be needed. Many companies prefer to start with a shared management venture that they can later convert to a dominant venture. Once both parents have become accustomed to operating the venture, however, such transitions are difficult to make. Thus, if a partner is chosen for reasons other than managerial input—financial backing, access to resources, patents, or because it consumes a large amount of the product to be made—a dominant parent venture provides the best fit. The president of one Canadian passive venture partner viewed his company’s participation simply as a financial investment, offering a good return at an acceptable level of risk. Dominant parent joint ventures are also appropriate when a company takes on a partner solely in response to pressures from a host government. In such a situation, foreign companies often prefer to find a passive local company that (1) has no knowledge of the product, (2) is willing to be a passive investor, and (3) is neither a government agency nor controlled by the government. If the local partner never learns the joint venture’s business, the dominant parent’s bargaining position with the host government will remain strong. The passive partner, which may be supplying large sums of money or important technology to a venture over which it will exert very little influence, must trust the competence and honesty of the dominant parent. This partner’s representatives on the board of directors cannot be expected to play a large role, especially if the board meets infrequently and perfunctorily. Using Shared ManagementDominant parent rather than shared management joint ventures are more likely to be successful. As previously stated, however, shared management is critical in ventures where both partners’ continuing managerial involvement is needed. And while half of the shared ventures in this study had to be liquidated or reorganized, the others worked well. Given the problems that a board with representatives from each parent can create, it is not surprising that autonomy plays an important role in the achievements of shared ventures. The veteran manager of one venture cited a critical success factor for any venture: early success. This gives the general manager a base of credibility so that when the inevitable downturn occurs, the manager has the freedom to ask the parents for help if necessary, rather than having it thrust on him or her. Deteriorating performance in a shared management venture, however, obliges each parent to become more involved in the details of the venture. This reduction in the manager’s autonomy slows and confuses the decision-making process, and performance worsens. Such a small fluctuation thus triggers a series of events that can throw the system out of equilibrium, leading to the destruction of the venture. The worst case of parental overinvolvement I found concerned a U.S. company where the manager made no meaningful decisions. Rather, he spent most of his time collecting information for, and making presentations to, his board of directors. He complained: “In no area was either parent willing to defer to the other’s knowledge or expertise. I felt I was dragging an elephant behind me whenever I tried to do something.” It takes considerable willpower for a parent company not to intervene when a venture is faring poorly. One Canadian company in the study did restrain itself, to its ultimate benefit. When performance began to falter, the Canadians allowed their British partners to become more involved but did not jump in themselves. When the British failed to rectify the situation, the Canadians approached them directly—not via the joint venture—and argued that they had had their chance and should now let the Canadians run the show. This was done and performance improved. Ownership & DominanceOf course, majority ownership and dominance of a joint venture do not necessarily go hand in hand. The parent holding only 24% of one venture’s shares was its exclusive manager. And one parent dominated four other ventures, despite the fact that they were 50-50 deals. Many companies avoid 50-50 joint ventures, although they can be managed by one parent if the passive partner agrees. Of course, not all parents of shared management ventures own equal shares, as evidenced by 5 of the 20 shared ventures in this study. The manager of one successful 50-50 venture stated that the ownership made little difference to the general manager of a shared management venture. In his view, it was the manager’s job in a 51–49 or up to a 60–40 venture to ensure that no decisions were “forced” by shareholders’ vote since the goodwill of the minority partner would be lost—to the lasting detriment of the venture. In this particular case, the eight-man board consisted of four executives from the American parent, three from the German parent, and the general manager, who was a former employee of the German company. The manager made it clear to both parents that, should any issue come to a board vote, he would vote with the German parent executives—even if he disagreed with them—thus creating a four-four deadlock. In other words, all issues would have to be negotiated. Yet in 14 years of his administration, no issue has ever been put to the board for a formal vote. Staffing a VentureNaturally, joint ventures that draw functional managers from both parents are more difficult to manage than those that do not. Managers of international joint ventures may not only have communication problems because of language barriers; they may also have different attitudes toward time, the importance of job performance, material wealth, and the desirability of change. Particularly troublesome are programs between partners from developed and developing countries. For example, an American-Iranian venture (one of only two in the study between the developed and developing worlds) did have problems until a new general manager sent most of the Americans back home. They could not adapt to dealing with a work force that had, on average, a grade three education. The Americans were replaced with Iranians who were first sent for short training periods with the U.S. parent. Performance improved considerably. Of course, such differences can delay the creation of an effective, cohesive management team.2 The ability of managers to interpret one another’s estimates—the forecasts of a sales manager, the delivery promises of a production manager, the cost estimates of an engineer—can develop more rapidly in a group that shares many basic assumptions, in which everyone is seen as working toward the same objective. The president of one Canadian venture with functional managers from three companies supported this notion:
“The differences in corporate background show up in a number of ways. In one division, I discovered I had insulted a senior manager by going directly to a subordinate to get some information. In his previous company, the hierarchy was very strictly observed, and if you wanted information you asked at the top and the request was relayed down until someone could answer. Then the answer came all the way back up. I’m used to an operation where you go directly to the man who can answer the question. Employees of another division are disgruntled with the bureaucracy they find here. They are used to a small, entrepreneurial organization. What we regard as the facts of life, like the time taken to get an approval, they look at with surprise and dismay.” Life also becomes more difficult for a joint venture general manager if the functional executives from the parents, rather than the board of directors, serve as the venture’s main links to the parent. In one way, these links will be valuable assets by easing the transmission of technical and other information from the parents to the venture; but on the other hand, they can force a functional manager to pay more attention to the events in and signals coming from the parent company than in the joint venture. One West Coast manager summarized the problem of trying to create a cohesive management team in such a situation:
“You cannot use your organizational position, because you are not sure where the loyalties of those below you really lie. The people who work for you are not necessarily appointed by you, so your hiring, firing, and promotion powers are limited.” Should Both Parents Contribute Managers?In spite of the comments so far, joint ventures that had managers from both parents performed neither better nor worse than those that did not. (Four out of the eight shared management ventures in this study that did not use executives from both parents were successful, compared with six out of the eleven that did—not a significant difference.) One of the dominant parent ventures had a general manager from the passive parent. Apparently, the foreign dominant parent wanted to curry favor with the local government. Partly as a result of this unusual staffing decision, the venture became one of only two dominant parent ventures in this study that failed. The general manager explained the impotence he felt:
“I was in a very peculiar and often frustrating position, since I did not control the major parameters of the business. We made most of our purchases from [the dominant parent] at a price fixed by them, and we sold nearly all our output to them, again at their price. Product mix, and even the production schedule, was beyond my control. My number two man reported to his superiors in Germany every day; but because of the language problem, I never knew exactly what was being discussed. Because of the difference in parent pay scales, he was being paid even more than I was.” Having managers from only one parent in a venture can lead to frustrations for the managers as well as parent company executives. One venture manager blamed the demise of his venture on the fact that the technology-supplying U.K. parent had not sent a full-time technical manager to the Canadian venture. Delays caused by explanations via telex, telephone, and letters to the British that their technology needed modification enabled the competition to enter the market first and ultimately prevented the venture from obtaining the market share it needed for survival. Clearly, there are both pros and cons to using functional executives from both parents in a shared management joint venture. Research suggests no right or wrong staffing choice. But if a venture falls on hard times, mixed staffing may add to its problems. One European venture provides a dramatic example of the disintegration that can set in. The American and European parent companies had each supplied the venture with two functional managers, and the Europeans had also supplied its general manager. An American in the U.S. head office explained:
“We had no quarrel with the general manager. He was competent and tried to represent each side fairly; but when it came right down to it, there was no question about where his loyalties lay. As things got tough in the market, they started to make changes in the venture that we did not approve, and our functional managers reported them to us. The problem was that our managers were not supposed to be communicating directly with us; our information was supposed to come from the general manager. At a board meeting, we made the mistake of asking some very pointed questions that made it clear we knew some things they didn’t want us to. As a result, our manager who had given us the information was cut off by the others, and we got nothing more. Over time, the split between the managers from the two companies grew, and the place practically became an armed camp.” Not surprisingly, this joint venture was dissolved shortly thereafter. Guidelines for Joint Venture SuccessKnowledge of what to expect with different types of joint ventures—and even the recognition that there are different types—is a key to prevention of failure. Another is to plan the management process in a joint venture before it is set up. One manager in New York explained that, in establishing a European joint venture, he spent 50% of his time on legal work to ensure that each parent got a fair deal, 30% of his time selecting the products that the venture would turn out, and 20% deciding on the approach to the market. But the manager allocated no time to determining the input that each parent would make to decisions about the joint venture. At last word the venture was performing satisfactorily, despite continuing debates between its parents concerning its management. Such an approach is particularly foolhardy since a company may end up with a shared management venture that it could have avoided with foresight and planning. Some important guidelines, then, on the use of dominant parent and shared management ventures are the following: 1. If one parent’s operational skills are unnecessary to the success of a joint venture, the other parent should oversee the venture. When forced by a foreign government to enter into a joint venture, then, a company should choose a local partner willing to play a passive role, which is most likely to be found in an unrelated business. Such a choice will also minimize the possibility that the local company will learn enough about the business that the foreigner’s skills will become unimportant in the eyes of the local government. 2. If both parents’ skills are necessary to the success of a joint venture, but those of one parent can readily be transferred on a one-time basis, the other parent should dominate the venture. If, for instance, a foreign partner has great technical skills in a slowly changing area, it should transfer the skills to the venture and allow the local parent to make the key decisions. Many managers, however, would rather enter into a license agreement than become a passive joint venture partner because the risks are much lower. They feel uncomfortable making a substantial equity investment without having a significant decision-making role. There are several possible responses to the dominant parent vs. license agreement situation. First, many technology-supplying companies, instead of putting up cash, ask for equity in exchange for their technology. (Of the foreign parents in this study, 47% did, in fact, receive equity in exchange for their technology.) Second, a joint venture may have a better chance of success than a licensee because technology transfer between a parent and a joint venture is usually easier than that between a licensor and licensee.3 And third, technology-supplying parents that intend to play a passive role will be much more careful about choosing a partner than a licensee. Thus, the overall risk-return ratio for a joint venture is usually superior to that of a license agreement. 3. If the skills of both parents are crucial to the success of the venture, a shared management joint venture is appropriate. A shared management venture will result in better decisions than either parent could have made on its own, although the process of making those decisions will almost certainly be slower than that in competing companies. For the sake of efficiency, a company should: (1) choose a partner with complementary rather than similar areas of expertise, so that each company will have separate competencies, and (2) give the joint venture general manager as much autonomy as possible, with the board making decisions only when necessary. The degree of each partner’s reliance on the other’s skills can change dramatically over time, sometimes eliminating the need for a shared management joint venture—or for any venture at all. Representatives of 13 of the 19 parent companies in the study stated that, at the time their ventures were formed, they could not have carried out the task without the partner’s help. By the time the study was completed, however, only 6 still felt that this was true. The learning process naturally weakens the desire of companies to keep their joint ventures together. And the frustrations in sharing power may no longer be balanced by the feeling that, in spite of the difficulties, the venture is worthwhile. “Why not go it alone?” becomes an increasingly powerful argument. Thus, as circumstances change, parents should be willing to modify a venture. In two cases in this study, dominant parent ventures were converted to shared management ventures; in two others, the reverse process took place. Less drastic modifications may also be required to keep the venture in tune with its parents’ needs and its environment. And as the use of joint ventures increases, flexibility to meet the inevitable challenges and changing conditions will play an ever-expanding role in their survival. 1. These data were collected as part of the Harvard Business School’s “Multinational Enterprise and the Nation State” project, under the direction of Raymond Vernon. The study was reported by John M. Stopford and Louis T. Wells, Jr. in Managing the Multinational Enterprise (New York: Bowie Books, 1972) and by Lawrence G. Franko in Joint Venture Survival in Multinational Corporations (New York: Praeger, 1971). 2. This argument is based on the notion of core skills developed by Leonard Wrigley in his unpublished Harvard Business School thesis, Divisional Autonomy and Diversification, 1970. 3. For a further comparison between license agreements and joint ventures, see my article, “Technology Acquisition: License Agreement or Joint Venture?” Columbia Journal of World Business, Fall 1980. A version of this article appeared in the May 1982 issue of Harvard Business Review. |