External growth - joint ventures + strategic alliance Flashcards
What is a joint venture?
A formal business arrangement between two (or more) businesses who commit to work together on a particular project.
- It involves two or more businesses pooling their resources and expertise to achieve a particular goal.
- Both parties invest money, time and effort in the project.
In a joint venture what happens to the risks and rewards?
The risks and rewards of the enterprise are shared.
In a joint venture are resources combined?
Yes, both parties invest money, time and effort in the project and pool their resources and expertise to achieve a particular goal.
How is a joint venture and a merger different?
A joint venture is different from a merger because there is no change of ownership involved for either firm, as a new entity is formed, but with a merger the two businesses become integrated.
With a joint venture is a new business entity formed?
A joint venture will often result in the creation of a new business to implement the venture.
What is the length of a joint venture?
It may only be in existence for a particular project, or it could be ongoing.
With a joint venture do the companies have to be in the same country?
No
What is an example of a joint venture?
Virgin Mobile India is a joint venture between Tata Teleservices and the Virgin Group.
- Before the venture Tata didn’t have a developed mobile phone brand image and Virgin didn’t own any telecommunications infrastructure in India.
- As a result Virgin uses Tata’s networks to offer its services under the brand name ‘Virgin Mobile’ and in turn it provides Tata Teleservices with experience and expertise in designing, marketing and servicing of mobile phone products.
Why do businesses undertake a joint venture?
- The capital cost of a project may be very high and may be well beyond the resources of a single business. Therefore a joint venture allows both parties to share the cost burden.
- A single business may consider the venture too much of a risk. The construction of the channel tunnel was a joint venture for this reason.
- It also enables businesses to share strengths, and increase their competitive advantage against others.
- It can be an effective way of gaining access to markets or resources in another country.
- Business expansion
- Development of new products
- Moving into new markets, particularly overseas
What is a disadvantage of a joint venture?
A joint venture requires drawing up a contract that specifies responsibilities and goals. This may be expensive due to the legal costs but will be crucial for avoiding disagreement in the future.
What is a strategic alliance?
An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project.
What is the difference between a joint venture and a strategic alliance?
They are similar, but alliance means co-operation rather than the sort of partnership that usually comes with a joint venture.
- A strategic alliance is typically less involved and less permanent than a joint venture.
- With a strategic alliance there won’t be the creation of a new company and each party will clearly maintain its own identity.
What is the aim of a strategic alliance and joint venture?
Each party hopes that the benefits from the alliance will be greater than those that could be obtained from operating on its own.
How can companies co-operate in a strategic alliance?
The co-operation between companies could come from the sharing of (say) technology, information, or risks.
What is an example of a strategic alliance?
Spotify and Uber. They joined they resources so that Spotify could offer premium uses the opportunity to play their playlists in the Uber and Uber can provider riders with an opportunity to listen to their own playlist.
-This is beneficial for both as it gives both a unique selling point compared to competitors and can pursue prospects from the other’s existing customer base.
