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Partner selection for joint-venture

agreements
R G Williams and M M Lilley

choosing a spouse4. It is an individual decision, and the


The selection of partners for joint ventures poses many ideal partner for one marriage may be a mismatch in
problems for potential participants. The paper examines another. Possibly as a result of this attitude, little has
the influencing factors which should be taken into account been written about joint-venture partner selection.
so that the performance of such alliances can be improved. Geringer5,6 is one of the few people to have studied the
A model is developed which places the factors in sequence subject at any great length. He sets out several factors
within the evolution of j’oint-venture projects. An inter- which need to be considered in the selection of suitable
nationalj’oint venture is considered to illustrate and prove joint-venture partners. This paper takes Geringer’s cri-
the model. The case follows the general sequence of events teria for partner selection, and places them in chrono-
described by the model, but it is concluded that the model logical order within the general process of partner
provides a broadframework rather than a prescriptive set selection; it examines the individual importance of each
of activities to be followed in strict sequence. factor in selecting suitable partners, as well as the stages
in the selection process at which they should be con-
Keywords: business management, joint ventures, inter- sidered. The model is then compared with the approach
national cooperation adopted by a large UK chemical company in its search
for a joint-venture partner to rationalize the production
of PVC.

The growth in international cooperative behaviour be-


MODEL AND ITS INTERPRETATION
tween companies represents a significant change in the
nature of commerce. These changes pose many problems Figure I illustrates the process of selecting a joint-ven-
for joint ventures, whether national or international, and ture partner. The left-hand column shows a flowchart of
management practices for dealing with these are still the phases involved in the selection process, and the
developing’. right-hand column represents influences which come into
The stability of any business organization is influenced play at particular stages.
by a number of factors, for example the health of the Primarily, a company needs to distinguish its future
industry, the degree of competitive rivalry, and the goals and act accordingly. Such aims may involve ex-
efficiency of production, innovation and management2,3. panding to a new market, gaining access to new technol-
Joint ventures are affected by any of these, as well as the ogy, distribution networks and marketing experience, or
cooperative behaviour of the partners. The selection of rationalizing production, exploiting economies of scale,
an appropriate partner, therefore, is paramount in im- or minimizing transaction and production costs. Once
portance if the joint venture is to succeed. the company’s future objectives have been identified, the
Executives may enter into arrangements before being next step is to decide how they can be accomplished. If
fully aware of the consequences, only to find their the need for a joint venture is then identified, the
partner’s management style, innovations, motivations subsequent problem is the selection of a suitable partner.
and commitment are at odds with their own*. It can be Initially, companies need to be concerned with stra-
argued that choosing a business partner is very like tegic compatibility, complementary skills and resources,
relative company size, and financial capability. It should
European Business Management School, University of Wales, thus become apparent which firms cannot provide the
Swansea, Singleton Park, Swansea SA2 8PP, UK necessary attributes to form a successful joint venture.

Vol 11 No 4 November 1993 0263-7863/93/040233-05 0 1993 Butterworth-Heinemann Ltd 233


Partner selection for joi~~t-~e~ltL~~e
agreements

Strategic compatibility improve competitiveness without adversely affecting the


total business.
It is essential that partners have the same general
objectives in forming a joint venture; differences in
strategy produce conflicts of interest among partners. Complementary skills and resources
Determining a prospective partner’s motives is often
difficult, but it is an essential task. This analytical process Another primary selection criterion to be considered
should involve not only the firm’s current situation and should be a potential partner’s capability of providing
goals, but also scenarios of likely future strategies. It is the skills and resources sought by the other firm, for
important to remember that, generally, no matter what example finance, distribution, and marketing. If the
the initial agreement on control and ownership may have company cannot provide these factors, joint-venture
been, environmental and strategic changes over time formation with that particular company should not be
may alter, which, in turn, may well affect the original pursued.
agreement. To determine such complementarity, the key success
Joint ventures tend to work only as long as each factors for the joint venture should be defined, and then
partner believes that it is receiving benefits, or is likely compared with the prospective partner’s current and
to benefit in the relatively near future. Owing to differ- proposed position. Areas where deficiencies exist should
ences in goals, what is good for one firm may be a then be considered carefully, and, wherever the necessary
disaster for another. A compatible partner, ideally, criteria are not met, the company should be rejected.
therefore, is one with similar values and goals, in both Returning to the case study, the Italian company met
a short- and long-term sense. This is particularly critical the necessary requirements as they operated in markets
when the strategy stakes, such as the size of investment, different from those of the UK firm, and they were a
and the potential effect on corporate image, increase in multisite, multiplant organization, As a result, the com-
scale. If such strategic compatibility does not exist, the pany could rationalize production and provide the
joint venture should not be pursued. necessary facilities for continued operations.
Looking at the case study, the major objective for the
British entering into a joint venture was production
rationalization. The company indeed rejected two firms Relative company size
as prospective partners at this stage in the selection Joint ventures have the best chance of long-term success
process as they did not meet the necessary requirements. if both partners are comparable in sophistication and
The Italian company selected was considered to be size. Larger companies typically offer greater ‘staying
suitable as they, too, wished to reduce capacity and power’, being able to commit a greater volume of
resources over a longer time horizon. However, joint
ventures between firms of different sizes are often just-
ifiable. A smaller firm may share its innovative technol-
Defimtion of
New mark~,finan~e, ogy with a larger firm offering finance, marketing,
- technology, economies
future goals
of scale, costs,
distribution etc. Significant size differences can, however,
rationalisation etc lead to problems. One concern is the possibility of the
c domination of one firm over the other.
ldentificotion of a A related problem is that partners’ different oper-
need fora joint
venture ational environments and corporate cultures may appear
to be incompatible. For instance, the bureaucratic en-
i vironment of many large firms, with relatively slow
identification of I Strategic compatibility decision-making apparatuses, contrasts sharply with the
prospective - 2 Complementary skills and more entrepreneurial and quick-response orientation
partners resources
I characteristic of small firms.
3 Relative company size
Some problems arising from a difference in size can be
4 Financial caoabilitv
overcome by creating a special operating environment
for the joint venture. For instance, the effects of partner-
size differences can be reduced by giving the joint venture
I
a free hand in many activities, permitting quicker re-
. sponses. This emphasis on autonomy is particularly
5 Compatibility between
Detailed
- operating policies appropriate for ventures which confront rapidly chang-
negotmtions
6 Compatible management ing environments. A willingness to allow such autonomy
i teams might, therefore, be a consideration in the selection of a
7 Trust and commitment partner.
Relimmofy
project ,8 Mutual dependency Even if managers strongly desire partners with similar
imolementation I9 Communrcation barriers cultures, that need not restrict joint ventures to firms of
the same size. The relevant measure is often not absolute

/I corporate size, but the relative size of the respective


business units. Managers may, therefore, seek partners
of similar sizes at the business or the division level. Both
partners should, therefore, have similar perceptions of
Figure I. Partner -selection process time as a vital component in the joint venture’s success.

234 International Journal of Project Management


R G WILLiAMS AND M M LILLEY

This particular issue was fundamental to the ent in the success of a joint venture. The inability of
UK/Italian venture. Both the companies needed to be management to ‘take to each other’ is frequently cited as
able to sustain similar plant closures, as well as provide the basis for rejecting a prospective partner or terminat-
the relevant facilities for continued operations. As a ing a joint venture. The essential ingredient is staff with
result, the agreement could only expect to be successful the skill and intuition to spot problems before they arise,
if the companies were of similar relative size. and with the competence and influence in their own
organization to solve such problems quickly. Managerial
compatibility can thus enhance the partners’ ability to
Financial capability achieve consensus on critical policy decisions, and to
Finally, for this stage, it is essential to be sure that a overcome obstacles. An additional consideration when
prospective partner can generate suf%ient financial re- selecting a partner is, therefore, the quality and turnover
sources to maintain the venture’s efforts. During a joint of the critical personnel within the management team.
venture’s early stages, when large negative cashflows are Effective management also requires well defined report-
common, the presence of a ‘limit’ can jeopardize an ing and information systems to provide adequate com-
entire project. It is not always possible to identify a munications channels between the organizations
company’s fmancial limitations~ however, its financial involved, with the aim of promoting unified planning
history and overall financial standing may well indicate and control.
potential problem areas. 1t may, nonetheless, be prudent When the case study was considered, it was found that,
to include a clause in the joint-venture agreement to as a result of the 50: 50 division, anything other than a
cover such an eventuality, similarly structured management team would have been
This particular perspective did not require much at- inappropriate. There were also few problems in selecting
tention in the case study as any problems in this area staff as geographical location often restricted choice.
could always be overcome, since the two companies were
large multinationals with the necessary resources avail-
able to them. Trust and commitment
Having considered these first four characteristics with Forming and operating a joint venture over the long
respect to the proposed joint venture, it should now be term requires more than cordial relations between man-
possible to reject certain firms as prospective partners, agement teams. An executive must determine whether a
Others can be shortlisted, At this stage, it is necessary to potential partner is willing and able to make the relation-
enter into more detailed negotiations to judge a partner’s ship work, The partner’s perceived ~stwortbiness and
suitability. A company should now be interested in commitment are pivotal considerations, especially if the
analysing the following: compatibility between operating proposed joint venture involves one firm’s core technol-
policies, compatible management teams, trust and com- ogies or other proprietary capabilities which are the
mitment, mutual dependency, and communications bar- essence of the firm’s competitive advantage. One ap-
riers. proach is to seek majority control, and another is to
structure a legal agreement to address every such contin-
gency. However, these responses are unlikely to promote
Compatibility between operating policies compatibility. Each partner, therefore, needs to be com-
Partners should be clear about the types of policy with fortable in believing that the other will honour the spirit,
which they will be comfortable working, for example and not just the letter, of the agreement. A joint-venture
accounting systems, investment, and vacation policies relationship is delicate at best, and, without fundamental
Differences in operating approaches often result from trust and commitment by each party, there is little hope
cultural biases, and managers, not conscious of the for a successful working relationship. Thought should,
existence of these biases, may take it for granted that therefore, be given to selecting a suitabie negotiator and
there is a ‘right’ way to do things. support team to build good relationships and win confi-
The compatibility of partners’ operating policies dence.
should, therefore, be considered before a joint venture is The UK and Italian companies undertook discussions
formed. Differences need to be ironed out at this stage for a considerable length of time to reach a final
to avoid severe problems later on. agreement. In so doing, trust and commitment were built
The UK and Italian companies considered this par- up, although the UK company did not consider this
ticular issue in great detail to reach agreement on the perspective as a separate issue, but rather as a function
organization’s structure and operations. The main area of all the other factors that they contemplated through-
of contention was administration, as the production sites out the selection process.
would not be moved. The two firms decided on a
coordination centre and a separate controlling hofding
company, The sites were chosen to benefit from tax Mutual dependency
concessions, as well as for their central geographical Joint ventures are a means of creating strengths, rather
location” than intensifying weaknesses, by the partners comple-
menting each other. Many managers view dependency
Compatibge management teams on other organizations as undesirable, and have avoided
such situations when possible. Yet, with proper match-
In addition to agreement an operating policies, compat- ing, both partners should perceive a vested interest in the
ibility between management teams is an essential ingredi- success of the joint venture.

Vol I 1 No 4 November 1993 235


Partner selection for joint -venture agteemenfs

Thus, there should be some identifiable mutual need, firms to cooperate in some activity before formalizing
with each partner supplying unique capabilities or re- agreements. Such cooperation may then lead to a part-
sources that are critical to success. When one partner is nership in the form of a joint venture. This incremental
strong in areas where the other is weak, and I;ice uersa, approach enables managers to keep adding to the com-
mutual respect is fostered, and conflict can be mitigated. plexity of things that they trust a partner to do on the
It is usually better to choose a strong partner, as it is a basis of previous experience. Such an approach keeps the
mistake to think that a strong association can be created expectations of a partner lower, and enables managers to
with a weak partner. be more analytical in assessing why a particular venture
A ‘middle level’ of dependency is the optimal. If the did not work out.
level of dependency is too small, the joint venture is
unlikely to survive difficult times. However, too much
dependency, such as when small firms enter joint ven-
DISCUSSION AND CONCLUSIONS
tures with much larger partners, may prove unstable,
because of the potential consequences of the loss of a As this paper has shown, the case study generally follows
partner. One option to avoid the risks of dependency is the theoretical process. The nine different perspectives
to include a clause in the joint-venture agreement. This were considered in the selection process, with one excep-
may stipulate that the unilateral decision to terminate tion: mutual dependency. However, it is thought that,
the venture would result in a substantial charge of some rather than implying a deficiency in the model, this is a
sort. peculiar case, because of the nature of this particular
When the case study was considered, it was found that joint venture. All the other factors were considered by
this factor was not looked at during the selection the UK company, and at the stages expected in the
process. This approach probably results from the fact model; there was one exception, in the sequence of
that the joint venture is a 50: 50 partnership between two ‘communications barriers’, which was perceived early on
companies of equal size and status. Neither of the in the selection process, and dealt with as and when
companies, therefore, considered the situation to be problems were identified.
problematic. The model does not, therefore, provide a prescription
for selecting partners, but offers a framework for what
and when certain aspects should be considered. By their
Communications barriers nature, projects are unique, and a degree of discretion
should be used in applying any general model to a
Finally, the ease of communication between the partners
particular project. In some cases, some factors will be
is another potential problem which should be considered
more important than in other cases, and these may need
when evaluating a potential partner’s suitability. The
to be considered at different times from those suggested
greater the cultural gap between the firms forming a joint
by the model. Nevertheless, the model does present a
venture, the more difficult it will be to create the
general strategy to be followed.
necessary cohesion. Such problems can occur as a result
Many joint ventures have been cancelled, even after
of differences between national or ethnic cultures, in-
years of negotiations and costly feasibility studies, be-
cluding language, as well as differing corporate cultures.
cause of economic factors, changes in goals and so on.
Cultural differences can impede the development of
At any rate, it is better for the money spent on planning
rapport and understanding between partners.
to be wasted, rather than greater losses being risked by
Managers of different nationalities may have differing
such a venture being proceeded with.
attitudes to such basics as the desirability of material
The joint venture studied to test the selection model
wealth, the importance of on-the-job perfo~ance~ or
has been operational for several years. The detailed
the desirability of change. This may lead to greater
partner-selection process used by the companies in-
expenditures of time in negotiations, possibly delaying
volved is considered to have played an important role in
negotiations or major decisions. However, this factor
ensuring continued cooperation between the two compa-
should only be considered as a supplementary criterion,
nies. It is felt that such analysis overcame many problem
as language and culture tend not to be insu~ountabIe
areas early on, leading to smoother and more efficient
barriers, particularly for partners from developed na-
operations. However, as with all ongoing partnerships,
tions.
the future may reveal a different scenario which could
When the UK and Italian companies considered this
have been avoided if it had been foreseen and considered
problem area, the differences were found to be minor.
during the selection process.
The only requirement was a little understanding and
A changing business environment brought about by
adaptation by all concerned.
the single European market, the North American free-
trade area and the opening of markets in the former
Communist countries will encourage many companies to
Selection
broaden their horizons into new countries and markets.
Each of the above nine perspectives need to be taken into In such environments, international joint ventures are
account by any firm before a joint-venture partner is likely to be a popular means of extending business
selected. Certain criteria will be more important to some activities while sharing risk and expertise.
companies than others, and they should be judged Emphasis needs to be placed, by all companies, on
accordingly. However, even at this stage in the selection detailed planning and discussion to reduce the risk of
process, it is not always advisable to enter into a joint disastrous problems. A great deal of attention needs to
venture immediately. An initial period could be used for be paid to partner selection for joint ventures by any

236 International Journal of Project Management


R G WILLIAMS AND M M LILLEY

company, as mistakes can be avoided. The process is Harrigan, K R ‘Strategic alliances and partner asym-
highly demanding in terms of energy, time, persistence metries’ Manage. Znt. Rev. (1988) (special issue)
and diplomatic ability. However, it is hoped that its Kogut, B ‘A study of the life cycle of joint ventures’
crucial importance is clear, and that those companies Munage. fnt. Rezq. (1988) (special issue)
which make such planning efforts will also reap the Berg, S V and Friedman, P ‘Corporate courtship and
benefits. successful joint ventures’ Calif: Manage. Rev. Vol
XXII (1980)
Geringer, J M ‘Partner selection criteria for devel-
oped country joint ventures’ Bus. Quart. (Summer
1988)
REFERENCES
Geringer, J M ‘Strategic determinants of partner
1 Kiliing, J P Strategies for Joint Venture Success J P selection criteria in international joint ventures’
Killing (1983) J. int. Bus. Stud. Vol 22 No 1 (1991) ~~41-62

Rhys Williams is a lecturer in


management science at the
European Business Manage - Melanie Lilley obtained a ist-
ment School of the University class degree in European man -
of Wales, Swansea, UK, where agement science from the
he teaches project manage- European Business Manage -
ment. He graduated in struc- ment School of the Universit~~
tural engineering from the of Wales, Swansea, UK. She
Un~l~ersity of Wales, Cardty> studied business at the Univer -
and gained an MSc in man- sity of Strasbourg, France,
agement science from Imperial and continued her studies at
College, London, UK, and a Swansea, gaining an MPhil on
PhD from the University of the analysis of joint ventures in
Wales. His experience in- Western Europe. She is now
cludes a number of years in the based in Paris, France, as a
co3~truction industry and !ocaf government. His main re- marketing consultant with a
search interest is in mode&g and simulation applications in particular interest in South
project munagement. East Asia.

Vol I I No 4 November 1993 237