When two Organisations pool markets and expertise which results in lower costs and generates profits they are creating?

A commercial enterprise between two or more businesses for tactical and strategic purposes

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Top 10 Advantages of Joint Ventures
Risks of Joint Ventures
When Should a Joint Venture Dissolve
Other Resources

A joint venture (JV) is a commercial enterprise in which two or more organizations combine their resources to gain a tactical and strategic edge in the market. Companies often enter into a joint venture to pursue specific projects. The JV may be a new project with similar products or services, or it may involve creating an entirely new firm with different core business activities.

Companies initiate a JV through a contractual agreement between all concerned parties. The profit and loss from the venture are shared by the participants.

Top 10 Advantages of Joint Ventures

A joint venture offers several advantages to its participants. It can help a business grow faster, increase productivity, and generate additional profits.

1. Shared investment

Each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.

2. Shared expenses

Each party shares a common pool of resources, which can bring down costs on an overall basis.

3. Technical expertise and know-how

Each party to the business often brings specialized expertise and knowledge, which helps make the joint venture strong enough to move aggressively in a specified direction.

4. New market penetration

A joint venture may enable companies to enter a new market very quickly, as all relevant regulations and logistics are taken care of by the local player. A common joint venture arrangement is one between a company headquartered in country “A” and a company headquartered in country “B” that wants to obtain access to the marketplace in country “A.” With the formation of the joint venture, the companies are able to expand their product portfolio and market size, and the country B company obtains easy access to the marketplace in country A.

5. New revenue streams

Small businesses often face having limited resources and access to capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can expand more quickly. The larger company’s extensive distribution channels may also provide the smaller firm with larger and/or more diversified revenue streams.

6. Intellectual property gains

Advanced technology is often difficult for businesses to create in-house. Therefore, companies often enter into joint ventures with technology-rich firms to gain access to such assets without having to spend the time and money to develop the assets for themselves in-house. A large firm with good access to financing may contribute their working capital strength to a joint venture with a firm that has only limited financing capabilities, but that can provide key technology for the development of products or services.

7. Synergy benefits

Joint ventures can offer the same type of synergy benefits that companies often look for in mergers and acquisitions – either financial synergy, which lowers the cost of capital, or operational synergy, where two firms working together increases operational efficiency.

8. Enhanced credibility

It typically takes a significant period of time for a young business to build market credibility and a strong customer base. For such companies, forming a joint venture with a larger, well-known brand can help them achieve enhanced marketplace visibility and credibility more quickly.

9. Barriers to competition

One of the reasons for forming a joint venture is also to avoid competition and pricing pressure. Through collaboration with other companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace.

10. Improved economies of scale

A bigger company always enjoys economies of scale, which again is enjoyed by all the parties in the JV. This refers back to the notion of operational synergy.

Risks of Joint Ventures

There are several benefits to forming a joint venture, as detailed above, however, joint ventures can also create challenges. Forming a venture with another business can be complex in terms of the time and effort required to build the right business relationship. A new JV can cause the following problems:

The new set of partners may have different objectives for the joint venture, and pursuing separate objectives may threaten the success of the venture. For this reason, it is important when forming a joint venture arrangement that the objectives of the venture be clearly defined and communicated to everyone involved at the outset.
Cultural mismatches and different management styles between the two firms engaged in the JV can lead to poor integration and cooperation, again threatening the success of the enterprise. It’s best to pursue JV opportunities with companies that have a corporate culture similar to that of your own company.
Imbalance in the levels of expertise, investment, or assets brought into the venture by the different parties may lead to problems between the two parties. One party or the other may begin to feel that it is contributing the lion’s share of resources to the project and resent a 50/50 distribution of profits. It can be avoided by frank discussions and clear communication during the formation of the joint venture so that each party clearly understands – and readily accepts – its role in the JV.

When Should a Joint Venture Dissolve

Joint ventures are usually formed with certain defined objectives and are not necessarily intended to function as a long-term partnership. Below are some of the common reasons for dissolving a JV:

The time period that was initially established for the joint venture to operate has been completed, and the parties agree that there is no further benefit to be gained from continuing the venture.
The individual objectives of each party are no longer aligned with the common objectives of the JV partnership.
Legal or financial issues have arisen with one or both of the parties that make continuing the JV no longer viable.
No significant revenue growth has resulted from the JV, and it is thought unlikely that worthwhile growth will result from continuing the arrangement. In other words, the parties discover that the benefits they had hoped to reap from the JV have not materialized and are not likely to even if the JV were continued.
Changes in market conditions, such as new economic policies or a shift in political conditions, lead the JV partners to conclude that the joint venture is no longer likely to be profitable for either party.

Other Resources

We hope you’ve enjoyed reading the CFI guide to Joint Ventures. To continue learning and advancing your career, these additional CFI resources will be helpful:

Strategic Alliances
Amalgamation
Statutory Merger
M&A Synergies

Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers and acquisitions (M&A). Synergy, or the potential financial benefit achieved through the combining of companies, is often a driving force behind a merger.

Synergy is the concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts.
If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.
The expected synergy achieved through a merger can be attributed to various factors, such as increased revenues, combined talent and technology, and cost reduction.
In addition to merging with another company, a company can also create synergy by combining products or markets, such as when one company cross-sells another company's products to increase revenues.
Companies can also achieve synergy between different departments by setting up cross-disciplinary workgroups in which teams work cooperatively to increase productivity and innovation.

Mergers and acquisitions (M&A) are made with the goal of improving the company's financial performance for the shareholders. Two businesses can merge to form one company that is capable of producing more revenue than either could have been able to independently, or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction.

Because of this principle, the potential synergy is examined during the M&A process. If two companies can merge to create greater efficiency or scale, the result is what is sometimes referred to as a synergy merge.

Shareholders will benefit if a company's post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues, combined talent and technology, and cost reduction.

In addition to merging with another company, a company may also attempt to create synergy by combining products or markets. For example, a retail business that sells clothes may decide to cross-sell products by offering accessories, such as jewelry or belts, to increase revenue.

Synergy can also be negative. Negative synergy is derived when the value of the combined entities is less than the value of each entity if it operated alone. This could result if the merged firms experience problems caused by vastly different leadership styles and corporate cultures.

A company can also achieve synergy by setting up cross-disciplinary workgroups, in which each member of the team brings with them a unique skill set or experience. For example, a product development team may consist of marketers, analysts, and research and development (R&D) experts.

This team formation could result in increased capacity and workflow and, ultimately, a better product than all the team members could produce if they work separately.

Synergy is reflected on a company's balance sheet through its goodwill account. Goodwill is an intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Examples of goodwill include a company's brand recognition, proprietary or intellectual property, and good customer relationships.

Synergies may not necessarily have a monetary value but could reduce the costs of sales and increase profit margin or future growth. In order for synergy to have an effect on the value, it must produce higher cash flows from existing assets, higher expected growth rates, longer growth periods, or lower cost of capital.

In 2021, Thermo Fisher Scientific, a producer and supplier of scientific instruments, equipment, software, services, and consumables, purchased clinical research services provider, PPD.

Thermo Fisher acquired PPD for $47.5 a share, for an all-cash deal valued at $17.4 billion. Through the purchase, Thermo Fisher is expected to realize synergies worth $125 million over three years. This includes approximately $75 million of cost synergies and $50 million of operating-income gains through revenue-associated synergies.

In general, synergy is positive. The idea is that the combined efforts of two or more entities are greater than those entities alone. In business terms, however, though companies may aim to achieve synergy by joining forces, the end result often lacks synergy, making the endeavor a wasted one.

Synergies are primarily realized in three areas: revenue, cost, and financial. Revenue synergies result in higher revenues for the parties involved, cost synergies result in lower costs, and financial synergies result in overall improved finances, such as lower interest rates on debt.

Workplace synergy is when employees work together to create a more productive working experience. This can include areas such as feedback, clearly defined goals, performance-based compensation, and overall teamwork to tackle problems that would be more impactful than if done alone.