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Learning from Failure: A Case Study of International Joint Venture Performance

• Edinburgh Business School

Research output : Contribution to conference › Paper › peer-review

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T1 - Learning from Failure: A Case Study of International Joint Venture Performance

AU - Robinson, Craig V

AU - Cunliffe, James Forrest

PY - 2019/9/4

Y1 - 2019/9/4

N2 - This paper examines the causes of international joint venture (IJV) failure, focusing on the case of a failed IJV between a US industrial company and a Saudi Arabian conglomerate from the perspective of the Saudi partner. Our objective was to identify factors leading to the failure of this IJV and examine these in relation to existing research, which tends to include only the western partner’s perspective. Data were collected via semi-structured interviews with relevant senior management, supplemented by an indicative questionnaire and an examination of historical company records. Analysis facilitated by NVivo identified a number of key issues including the importance of developing, and building on, early stage trust and the apparent low emphasis placed by Saudi management on the role of cultural differences in precipitating failure. This contrasts with existing research and suggests a number of areas worthy of further study.

AB - This paper examines the causes of international joint venture (IJV) failure, focusing on the case of a failed IJV between a US industrial company and a Saudi Arabian conglomerate from the perspective of the Saudi partner. Our objective was to identify factors leading to the failure of this IJV and examine these in relation to existing research, which tends to include only the western partner’s perspective. Data were collected via semi-structured interviews with relevant senior management, supplemented by an indicative questionnaire and an examination of historical company records. Analysis facilitated by NVivo identified a number of key issues including the importance of developing, and building on, early stage trust and the apparent low emphasis placed by Saudi management on the role of cultural differences in precipitating failure. This contrasts with existing research and suggests a number of areas worthy of further study.

T2 - British Academy of Management Conference 2019

Y2 - 2 September 2020 through 4 September 2020

Avoiding blind spots in your next joint venture

Joint ventures (JVs) often seem destined for success at the outset. Two companies come together in what seems to be an ideal match. Demand for the planned product or service is strong. The parent companies have complementary skills and assets. And together they can address a strategic need that neither could fill on its own. But in spite of such advantages, revenues decline, bitter disputes erupt, and irreconcilable differences emerge—and managers call it quits before creating real value.

Not all joint ventures fall apart so spectacularly, but failure is far from a rare occurrence. When we interviewed senior JV practitioners in 30 S&P 500 companies—with combined experience evaluating or managing more than 300 JVs—they estimated that as many as 40 to 60 percent of their completed JVs have underperformed their potential; some have failed outright. Further analysis 1 1. We examined joint ventures valued at more than $250 million that were launched between 1998 and 2012 and in which one of the parent companies was in the Fortune 250. confirmed that even companies with many joint ventures struggle, even though best practices are well-known and haven’t changed for decades. In fact, most of our interviewees endorsed several that have long been the gold standard for JV planning and implementation: a consistent business rationale with strong internal alignment, careful selection of partners, clear and open communication, balanced and equitable structure, forethought regarding exit contingencies, and strong governance and decision processes. So why do so many joint ventures fall short? Our interviewees suggest that in the rush to completion, even experienced JV managers often marginalize best practices or skip steps. In many cases, the process lacks discipline, both in end-to-end continuity and in the transitions between five stages of development—designing the business case and internal alignment, developing the business model and structure, negotiating deal terms, designing the operating model and launch, and overseeing ongoing operations. Moreover, parent-executive involvement often declines in the later stages. Finally, many JVs struggle with insufficient planning to respond to eventual changes in risk. Such lapses, even in the early stages of planning, create blind spots that affect subsequent stages and eventually hinder implementation and ongoing operations. We’ll examine each of these issues, along with the approaches some companies are taking to deal with them.

Rush to completion

Many of the practitioners we interviewed noted the pressure—from investors, senior executives, and the board—to get deals done quickly, as companies strive to stay ahead of evolving trends or aim to meet fiscal deadlines. When that pressure for speed meets the complexity of the JV process, it can overwhelm even experienced practitioners—especially during the transitions between stages of development. As the head of a global pharmaceutical company lamented, “We continually fall prey to the pressure to get a deal signed and then forget to plan for operational realities.”

Many companies lack the forethought and discipline to address those operational realities at each phase in a JV’s development and spend more time on steps where less value is at risk and less time where more value is at risk (Exhibit 1). Some rush through the business-case design by skipping steps—usually thinking that it will be easy enough to return to any issues later—and end up trying to reverse engineer the business case. Others focus more on a deal’s financials, which are familiar and comfortable for those with M&A experience, than on the less quantifiable strategic and operational issues, such as what might trigger a decision to walk away from a deal, the cost of ancillary agreements, the impact of exit provisions, and the effect of decisions to delegate authority. Still others substitute boilerplate agreement language in critical terms of the agreement or in arbitration clauses rather than tailoring them to the deal at hand.

Not surprisingly, our interviews suggest that taking such shortcuts leads to many proposed JVs failing prior to implementation. In general, as the head of business development for a high-tech company commented, “The assumption that a business case will just happen leads to a great deal of pain. People underestimate the difficulties they’ll encounter.” In one pharmaceutical partnership, for example, managers defined only a cursory business case, hoping to move quickly to reap the potential financial benefits of the arrangement. When they later were forced to reconsider certain decisions given the lack of focus and detail in the business plan, they realized that the two companies had different visions for the partnership and terminated it without realizing its expected returns. In another case, two healthcare companies quickly signed an agreement, only to need to restructure two years later to address misaligned operating processes that were dragging down performance.

The solution is intuitive: companies must find ways to balance the pressure for speed with the demands of planning a healthy joint venture—especially allocating their time and resources in line with the potential for value and impact. No single approach will work for every company or in all circumstances, but the approach taken by one global industrials company is illustrative. Any business unit presenting a JV proposal to the executive committee of this company must include in its presentation a detailed business case, an investment thesis, an assessment of competitors, and detailed profiles of priority partners. It must follow an explicit checklist of expectations for each stage in the planning process—including deal structure and terms, financial analysis, launch, and operating-model design. Senior managers must also use this checklist during progress reviews, both to ensure alignment and consistency and to serve as a forcing mechanism for raising issues. Although this approach demands significant time and resources even before detailed negotiations with a JV partner, it also increases everyone’s comfort and confidence in the vision for the deal.

Lack of leadership continuity

Companies often struggle to maintain continuity of vision as they develop and execute joint ventures. Even if they start with a clear business case and explicit internal alignment, the strategic intent can get lost in the details as execution issues emerge and people move in and out of the process at different stages.

Part of the problem is that a different team member is usually responsible for each of the five phases of a JV’s life cycle. In fact, among the different groups represented by our interviewees, including business development, top management, and business-unit leadership, none has responsibility for more than two phases. They also each have different ways of defining success and are compensated accordingly. Business-development teams, for instance, are typically evaluated and compensated based on the speed of a JV’s design and execution process, which can create a bias toward haste, even among the most thoughtful team members. Moreover, in all groups, senior decision makers often step back as others get involved, feeling they’re no longer essential. And JV managers themselves aren’t appointed, or don’t assume their roles, until late in the process, frequently about halfway through the launch, at which time the JV launch team abruptly pulls out.

When leadership is this disjointed, decisions made early in the process can have a disproportionate effect later on. In the transition between developing the business case and negotiations, for example, a lack of continuity can lead to poorly defined objectives and vaguely aligned priorities—which in turn creates confusion over who should drive business-model development, settle on deal terms, or manage the business unit itself. Worse, there is often no consistent internal referee to resolve trade-offs without reaching into very senior ranks—in many cases, the CEO.

To compensate for discontinuity, we’ve seen companies assign end-to-end accountability for a joint venture to a single senior business-unit executive with clear authority to make executive decisions, supported by team members who serve overlapping terms across the core phases of its design and execution. This creates a balance of executive sponsorship and specialized authority throughout the process. As one executive observed, “Successful JV development depends on a single empowered executive who lives and breathes the JV from business-case development to launch and handover to the management team.” The ideal candidate is a business-line leader or a future leader of the JV with experience in the JV’s strategy and operations.

Declining parent involvement

If allowed to proceed organically, JV planning would naturally require executive input throughout the entire process. While it may seem self-evident, many parent companies underestimate the detrimental impact of an absence of senior decision makers toward the end of the process. Even when they appoint a single JV manager as recommended, other senior executives are usually most present at the beginning of the deal design and initial partner meeting and then disappear until the final signing of the JV agreement—whether because they naturally refocus on other projects, because their interest wanes, or because they feel less useful on an ever-expanding team. In fact, many top executives are involved only in decisions regarding deal terms at a handful of points before the ink is almost dry (Exhibit 2). This creates tension and risk for the JV as more junior executives assume responsibility for negotiating an agreement.

To ensure that the structure and operating model are aligned with the vision and strategic rationale, critical issues must be resolved when senior decision makers are in the room. The best approach requires parent-company executives to resist putting decisions off, on the one hand, and to commit to being around for late process decisions on the other. Managers of one high-tech JV, for example, set firm and clear standards for both parents’ executive teams to keep decision making on track. Those executive teams committed to a high level of participation and accountability to ensure they were aware of and able to manage any issues; their involvement helped launch a large-scale JV quickly and smoothly and set the stage for a healthy long-term relationship that remains profitable today.

Since it isn’t always possible for executives and senior leaders to maintain a high level of involvement, companies may need to forgo the usual linear flow of decision making. That means front-loading the most important decisions— about which partner will have operational control, for example, or which critical positions each will hold—rather than waiting for them to emerge organically. Determining the right questions and the sequence of decisions will jump-start partner discussions and draw attention to tough decisions, such as how much control each partner has, that should be made by the leadership teams early rather than left to the JV launch team later on.

Insufficient planning to respond to changes in risk

At the beginning of any JV relationship, parent companies naturally have different risk profiles and appetites for risk, reflecting their unique backgrounds, experiences, and portfolios of initiatives, as well as their different exposures to market risk. Parent companies often neglect this aspect of planning, preferring to avoid conflict with their prospective partners and getting to mutually agreeable terms—even if those terms aren’t best for either the JV or its parents. But left unaddressed, such asymmetries often come to light during launch, expand once operations are under way, and ultimately can undermine the long-term success of the joint venture.

Certainly, some JVs must be rigidly defined to be effective and enforce the right behavior. But when that isn’t the case, JV planners too often leave contingency planning to the lawyers, focusing on legal protection and risk mitigation without the business sense, which shows up in the legalese of the arbitration process and exit provisions. Both tend to be adversarial processes that kick in after problems arise, when in fact contingency planning should just as often focus on the collaborative processes that anticipate changes and create mechanisms or agreements that enable parent companies to adapt with less dysfunction. As the head of strategy for one insurance company noted, “If a JV is set up correctly, particularly regarding governance and restructuring, it should be able to weather most storms between the parents.” Such mechanisms might include, for example, release valves in service-level agreements, partner-performance management, go/no-go triggers, or dynamic value-sharing arrangements and can allow a joint venture to maintain balance in spite of partners’ different or evolving priorities and risks.

One industrial JV launched in the mid-1990s used just such an adaptable approach to get through the financial crisis. While the JV had benefited both parents, its future was threatened when the crisis buffeted the majority owner. Rather than dissolve the partnership, the minority partner temporarily bought a larger stake in the JV, giving the majority owner some much-needed cash. Once it was back on its feet, the majority owner was able to buy back its full share and restore the ownership balance.

Even companies that rigorously follow the common best practices for JV planning will falter if the process lacks a comprehensive view of execution both within and in between stages of development. Maintaining vigilance and balancing these four pressures is critical to the success of a JV.

Note: This article, originally published in September 2014, was updated in April 2020 to reflect expanded analysis.

John Chao is a McKinsey alumnus, Eileen Kelly Rinaudo is a senior expert in the New York office, and Robert Uhlaner is a director in the San Francisco office.

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Learning from Failure: A Case Study of International Joint Venture Performance

• Strategy, Intl Mgt & Entrepreneurship

Research output : Contribution to conference types › Paper › peer-review

T1 - Learning from Failure: A Case Study of International Joint Venture Performance

AU - Robinson, Craig V

AU - Cunliffe, James Forrest

PY - 2019/9/4

Y1 - 2019/9/4

T2 - British Academy of Management Conference 2019

Y2 - 4 September 2019 through 6 September 2019

To read this content please select one of the options below:

Please note you do not have access to teaching notes, what do we know about the success and failure of international joint ventures in search of relevance and holism.

Philosophy of Science and Meta-Knowledge in International Business and Management

ISBN : 978-1-78190-712-2 , eISBN : 978-1-78190-713-9

Publication date: 30 May 2013

Rather than add another review of the numerous scholarly publications of success factors and performance of International Joint Ventures (IJVs) this study offers an overview of the extant research based on the findings, criticisms and recommendations of previous reviews. Scholars and practitioners interested in the research field may profit from our contribution in several ways. First, we provide a comprehensive overview of the state-of-the-art of the field in a table listing the characteristics of the most relevant review studies published in leading management journals. These special reviews offer more detailed analyses of the studies under investigation, different frameworks and proposals for future research directions. Finally, we summarize the criticisms and recommendations of previous researchers that have been ignored and discuss why many of those recommendations have gone unheeded and how future research may benefit from more systematic development of this field.

Nippa, M. and Beechler, S. (2013), "What Do We Know about the Success and Failure of International Joint Ventures? In Search of Relevance and Holism", Devinney, T.M. , Pedersen, T. and Tihanyi, L. (Ed.) Philosophy of Science and Meta-Knowledge in International Business and Management ( Advances in International Management, Vol. 26 ), Emerald Group Publishing Limited, Leeds, pp. 363-396. https://doi.org/10.1108/S1571-5027(2013)0000026019

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Insight from the world’s leading advisor on JVs and partnerships

Incorporating Water Street Partners

Why Joint Ventures Fail, And How to Prevent It

JV negotiations are only the first battle – once a JV is established, another wave of problems awaits.

Authored By

Joshua kwicinski, james bamford, david ernst.

APRIL 2016— SEASONED DEALMAKERS tell us that joint venture is a four-letter word. JV CEOs assert they have the toughest job in business. And many operating executives confess they would choose exile in Siberia over a joint venture rotation. These attitudes are not surprising, especially given how often JV s fail to deliver on their shareholders’ strategic, financial, or operational expectations. Ankura’s research on joint venture performance has consistently shown at least half of JV s fail on one or more of those counts (Exhibit 1) , among other sobering statistics.

The result of this failure? Many JV s limp along for years, consistently underperforming against expectations. Others are mercifully terminated by parents seeking an end to the bleeding. And some collapse spectacularly in a sea of recriminations and lawsuits. Some degree of failure is inevitable in business. New technologies sometimes do not work. Markets often do not materialize. Old needs can disappear. Regulations change.

Joint ventures are not immune to these ills. Ask Verizon, which pulled the plug after only one year on a video streaming JV with Redbox that failed to gain traction against Netflix. So too with Iridium, a 19-partner satellite phone JV that collapsed into bankruptcy nine months after launch in the face of massive upfront capital expenses, buggy technology, and poor commercial appeal.

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Exhibit 1: JV Performance

© Ankura. All Rights Reserved

But aside from these normal business challenges, joint ventures can also fall victim to other diseases caused by their unique ownership structure. Ankura has served hundreds of JV s and conducted dozens of research studies over the years, giving us a front-row seat to the multitude of creative ways that JV s implode – and providing us insight into how to inoculate against those outcomes.

Most joint venture failures are rooted in one or more of ten common causes. Some are more likely to occur early in the life of the JV; others tend to emerge as the venture reaches middle age. Keeping these failures at bay requires focus across the venture lifecycle, putting the onus on dealmakers, JV Board Directors, and JV CEOs alike for diagnosis and treatment (Exhibit 2) .

Exhibit 2: Common Causes of JV Failure

Source: Examples drawn from public filings and press reports; Ankura Consulting Group © Ankura. All Rights Reserved.

1) Misalignment on Venture Strategy

Maintaining agreement on strategy is not easy when reasonable minds can disagree – or when the shareholders are moving in separate directions. Our benchmarking of alignment between JV partners shows that 69% are at odds on long-term strategy, and 58% cannot agree on the JV’s upcoming annual budget.

Partners that disagree on strategy often provide conflicting guidance to JV management, creating confusion and delay, and forcing the JV CEO to spend time and effort overcoming internal owner differences (instead of focusing on running the business). This is especially problematic in fast-paced markets such as high-tech, media, and telecom, where real-time decisions are required, and initiative is lost in the face of multiple Board cycles to achieve shareholder alignment.

Some solutions: During the deal phase, companies can take a number of powerful but novel actions, including conducting strategic partner due diligence; using misalignment scenario planning to uncover frictions and test solutions; structuring scope and right to expand; and pre-agreeing on a multi-year JV business plan. During launch planning and beyond, companies should consider appointing to the Board senior executives with real internal clout and an aptitude for strategy; holding annual Board strategy off-sites; and establishing processes for handling misalignments when they emerge.

2) Over-Satisfying Parent Needs and Requirements

In its early days, the Star Alliance – a global airline partnership now owned by over 30 companies, including United, Lufthansa, Singapore Airlines, All Nippon Airways, and Thai Air – was so focused on satisfying every owner requirement that The Economist observed, “Star has no fewer than 24 committees to sort out such matters as network connectivity, purchasing, and customer relations. Chairmanships have been spread around to keep everyone happy. For those involved, it makes even Airbus Industries seem like a model of industrial efficiency.”

JV s have an understandable but dangerous instinct to try to satisfy every owner request – to build this product “bell” and that service “whistle” – instead of focusing relentlessly on the customer and what is realistic. This instinct leads to project delays and ballooning costs, and can sow the seeds of unhappy partners who eventually withdraw support from the monster they created.

When JV s are designed to act as a shared utility for three or more owners, they are particularly susceptible to lobbying for individual parent needs. A series of financial service industry JV s suffered from such infections. Integrion, an e-banking joint venture that included IBM and numerous major U.S. banks as owners, collapsed under the weight of a feature-laden product designed to meet the individual needs of 17 squabbling owners, without doing any one thing well.

Some solutions: Companies can take a number of steps to promote collaboration and balance, including crystallizing in the deal that parents are responsible for paying JV costs to meet their individual requests; developing a set of Guiding Principles during launch, which spell out what parents can and cannot ask the joint venture to do; appointing an independent Board Director to inject an impartial voice when reviewing parent requests; and formally tracking and reporting to the Board on the nature, timing, and costs incurred by responding to parent requests for support.

One highly successful healthcare IT joint venture we work with allows each owner to fund up to five software developers within the venture to design features that meet owner-specific requirements. Those developers are hired and managed by the JV – but their fully loaded costs and work program are the responsibility of the owner.

3) Insurmountable Culture Clash Between Parents

Many ventures are doomed to failure because the partners are incapable of working together effectively. At its most benign, this reflects the difficulty of bridging cross-border cultural differences to create a cohesive and effective JV culture. Our research shows that only half of JV employees have positive things to say about the culture inside their JV (Exhibit 3) .

Exhibit 3: Challenges of Creating a JV Culture

Source: Ankura JV Employee Engagement Benchmarking © Ankura. All Rights Reserved.

At its worst, culture clash is caused by a partner who demonstrates a different ethical yardstick, as Walmart discovered in India when its JV with Bharti was rocked by allegations of local bribery and corruption. Or it comes from a partner who views the relationship as a one-way street to extract value with no intent of collaborating, as Danone discovered when its Chinese partner, Wahaha, secretly manufactured and sold identical JV products outside the JV.

Some solutions: Early on, companies should ensure that due diligence focuses deeply on a potential partner’s corporate culture, values, and decision-making – including talking to their counterparties in other partnerships. During the deal, the partners should write legal agreements that specifically require the venture to adopt the strictest shareholder policies and processes for ethical conduct. During launch, the JV team should hold joint workshops to identify cross-border cultural differences and communicate expectations as to how the JV’s own culture should function – including ethical guidelines.

4) Inadequately Defined Operational Interfaces with the Parents

Joint venture legal agreements say little on the day-to-day structure of operations, and that space must be filled in by launch teams from the shareholders. In some cases, this process fails to sharply define which partner’s processes and systems the venture will utilize, causing each parent to bombard the venture with overlapping and sometimes contradictory expectations. In other cases, the parents agree to import one partner’s processes and systems without adapting them to the venture’s situation. Our research shows that these kinds of mistakes during launch can erode up to 50% of venture value.

Consider the case of a $10 million startup biofuels JV, which was expected to match every one of the corporate processes of its large-cap global owner, as if it were an internal business unit. The JV was saddled with a structure that destroyed its entrepreneurial spirit, and costs that made it uncompetitive in the market.

Some solutions: During the deal, companies should begin thinking through operations early enough to drive certain guidance into the deal itself – like what reporting and information is required, or the source of key systems and processes. After deal close, the partners should invest in a launch process that produces a blueprint for the JV’s operating model – and captures the JV’s internal organization and staffing, how money will be made, and the JV’s level of independence from shareholders within each business function. A robust Operating Model Blueprint also includes process maps for key decisions, an articulation of the JV’s policies and processes, and a plan for the JV’s reliance on parents for services. This blueprint should be made into a core reference for parents, the Board, and JV management.

5) Parent Failure to Deliver on Capability-Related Contributions

Joint ventures are fundamentally about combining the parents’ assets and capabilities in unique ways to unlock opportunities that neither partner could access alone. Legal agreements usually obligate a shareholder to contribute capital and certain assets (such as brands, factories, and customer contracts) to the venture. But the most important contributions to a JV are often capabilities– skills, technologies, processes, relationships, and ways of working. And these are notoriously hard to adequately define within the legal agreements.

By contrast, JV legal agreements may include some form of technology licensing or service agreement that specifies the venture’s access and rights to certain known technologies, such as software or systems. But these deal terms often miss the more implicit capabilities, such as know-how, expertise, and market relationships. To handle this, legal agreements tend to rely on ownership interests and broader financial incentives to motivate the parents to do the right thing.

But this is an imperfect – and often flawed – solution. For instance, in an Asian beer joint venture in which a global brewer purchased a 50% interest in a local brewer, half of the $200 million in expected value was to come from sales and marketing synergies. These synergies were almost entirely based on the assumption that the global brewer would deliver new, cutting-edge branding, marketing, and sales techniques to the venture, which had an antiquated approach to customer loyalty, demand generation, and distributor management. Unfortunately, the global partner failed to second top sales and marketing staff into the venture – and those that they did place in the venture had no experience in Asia or emerging markets. Adding salt to the wound, the JV struggled to get access to experts and the latest marketing techniques back in the parent. The net result? Half of the anticipated deal value never materialized.

Some solutions: Companies should define all tangible and intangible contributions with specificity, and structure incentives into the deal to encourage shareholder follow- through (e.g., financial penalties or exit rights for failure to deliver). For example, an Asian pharmaceutical company that entered into a JV solely to learn a U.S. biotech partner’s scientific capabilities came up with a creative approach. They structured the JV agreement to include more than two dozen specific Key Learning Landmarks (KLLs) – like the ability to design a new product, or to perform an analytic technique – that the partner was expected to deliver. The agreement then linked meaningful financial payouts and penalties to the delivery or non-delivery of these KLLs.

Once the deal is done, companies should consider putting senior Directors on the Board who have the internal clout to ensure that the JV receives key contributions; building a formal parent-endorsed learning agenda to document the nature and timing of intangible contributions to the venture; and using annual scorecards to track parent performance in delivering those contributions.

6) Over-Valuing Strategic Objectives to Justify the Deal

Ventures are often sold internally as a way to achieve strategic objectives like market access, future positioning, or learning. That is not the same as having a strong financial and business case. JV s are notoriously hard to model, with their various opaque financial flows and parent-JV economic relationships. Strategic interest in an opportunity can overwhelm sharp inquiry into cost and revenue predictions, making it hard to internally reject opportunities. Only half of JV dealmakers believe that they are strong at building a JV business case, and only a quarter believe that they are good at JV financial modeling (Exhibit 4) .

Exhibit 4: JV Dealmaking Gaps

What’s more, internal sponsors may be promoting the JV based on speculative assumptions about the indirect benefits it will unlock for the broader business. For example, a slate of defense companies invested almost $1 billion in forming an emerging market JV to provide aircraft maintenance. The business case envisioned the JV winning contracts from multiple regional countries, while unlocking access to more equipment sales. Six years later, not a single service contract has been won outside the host nation, and limited sales could be traced back to the JV. When partners are not honest internally (or with each other) about if, how, and when the JV itself will make money, eventually the bill comes due.

Some solutions: Companies should require deal teams to generate a business case with the partner that defines specifically where and how the venture will make money; subject these business cases – particularly for large, strategic opportunities – to an internal review and challenge process by senior leaders who can say no; map the Total Venture Economics to understand the direct and indirect benefits of JV ownership for every partner (and to validate internal assumptions about indirect value creation solely for the company); and hold JV s to the strictest of financial assumptions, including tougher hurdle rates than wholly-owned projects.

7) Changes in Parent Circumstances Minimize JV Relevance

JV s can quickly fall out of favor inside a parent company as the parent’s financial condition deteriorates or its ownership structure changes (e.g., it merges with or is acquired by another firm) – or as key senior leaders who internally sponsored the JV depart from the company. Whether these changes lead to benign neglect or outright starvation of necessary capital and other support to the venture, they can destroy an otherwise-successful JV. The Global One telecom JV between Deutsche Telekom, France Telecom, and Sprint was on path to deliver industry-leading capabilities, and was buoyed by high customer ratings. It came undone quickly as two partners sued each other over M&A activities outside the JV, and the third partner sought a merger that would force its exit from the venture.

Some solutions: Dealmakers should use strategic partner due diligence to uncover tenuous financials before getting into bed with a partner. If a deal is done, companies should build relationships with multiple senior executives in the partner, as well as selected future leaders in the next tier down, in order to build ties that can weather any storm.

8) Inability to Address Asymmetric Economics When They Arise

Ownership shares and profit distributions are typically defined in the JV agreement – but dividends are rarely the only economic relationship between the parent and the JV. Most ventures have a web of supply and offtake arrangements and service contracts with their parents, who are also seeking ways to maximize the indirect value that the JV creates – by unlocking doors to new customers, enabling bundled product offerings, satisfying regulators, etc.

These diverse streams of JV returns to shareholders can lead to huge asymmetries in value creation for each parent. For example, a detailed financial model of a four-partner alternative energy industry JV based on a radical new technology revealed significant differences in projected NPV, cash flow profiles, and break-even results for each partner, due to how capital contributions, offtake rights, and other obligations were structured (Exhibit 5) . These asymmetries were large enough to threaten the JV’s continued existence. Indeed, that future instability led one partner to pull out, which then led to a collapse of the venture.

Exhibit 5: Asymmetries Revealed in Venture Financial Model

One executive described partner imbalance in these terms: “At some point, usually pretty quickly, an asymmetry will reset itself, because if the losing partner cannot get to a win, it usually can make the other partner lose…so then the venture becomes lose-lose for a period, and the partners either find a way to make it win-win, or they exit.”

Some solutions: When structuring a deal, the deal team should map the Total Venture Economics to understand the direct and indirect benefits of JV ownership for every partner; negotiate an ownership split that appropriately reflects all direct and indirect sources of value creation; structure JV-shareholder supply or service relationships with arms-length pricing (and mechanisms for audit, benchmarking, and re- negotiation); and give the JV CEO full flexibility over sourcing services (including shifting to third parties) in order to limit the most contentious value discussions.

9) Inability to Grow and Evolve the JV with the Market

Markets are constantly shifting, as competitors deploy new products, disruptive innovators appear, and consumer tastes change. Like any other business, a JV needs to change to stay relevant. When JV s cannot change – because the shareholders’ agreement is too narrow and there is no appetite to change it, because parents cannot provide a capability the JV needs to evolve, or because JV management lacks the capabilities and skills needed to successfully lead the business in a new direction – then the JV is likely to begin a long trip toward oblivion. Consider the Sony-Ericsson JV, which went from the world’s fourth-leading mobile phone manufacturer to an afterthought as consumer tastes shifted, and as the shareholders lacked a competitive solution against the likes of Android and Apple.

Some solutions: Companies should work with the partner to identify potential business and ownership evolution paths during the deal phase; map out a playing field of products and geographies into which the JV will be allowed to grow without rejection from its parents; and design the JV agreement with pre-agreed methods to collaborate on evolving the JV when the future arrives (e.g., provisions for making changes to ownership, governance, delegations of authority, scope, capital investment, or other terms that impact the JV’s market strategy).

10) Picking or Sticking With the Wrong Operating Model

A key issue in structuring a JV is defining the JV’s desired overall level of independence from the owners – including how dependent the venture will be on parent company secondees, systems, processes, and services, and how the owners will relate to each other. We call this the JV’s operating model. Parents do not always strike the right level of independence, saddling the JV with a structure that is ill-defined, outdated, or incapable of succeeding in the market to deliver on the shareholders’ strategic, operational, and financial objectives. Natural resource JV s are especially susceptible to this problem, as evidenced by the rocky performance and eventual operating model restructuring of JV s like Kashagan, Syncrude, and Altura Energy.

But making a change to the operating model is no small task. JV s must navigate through thorny shared decision-making that slows the pace of needed revisions. Our benchmarking of 150 JV s revealed routine delays of as much as 30 months in making necessary structural changes, with 10 to 30% improvements in operating income when the restructuring was finally allowed. Take the example of a multi-billion-dollar metals industry JV designed to process raw materials on behalf of four parents. The shareholders generally agreed on the appeal of operational improvements and capacity expansions offering $1 billion in revenue increases but bickered for years on the details. By the time they agreed to restructure, hundreds of millions of dollars in profit had been lost. Other JV s are not so lucky – they never reach agreement. Not surprisingly, restructuring that leads to improvements in the JV’s bottom line also contributes to overall success. Our research shows that 79% of JV s that are able to make structural adjustments are viewed as successful, versus 33% of ventures that remain unchanged (Exhibit 6) .

Exhibit 6: JV Success Rates

Source: “Your Alliances Are Too Stable,” Bamford and Ernst, Harvard Business Review © Ankura. All Rights Reserved.

Some solutions: JV partners should consider whether the operating model should be independent, interdependent, or partner-operated based on the JV’s phase, scope, synergies, and need to leverage shareholder skills; negotiate a JV agreement that contains formal restructuring triggers (based on defined metrics); build a formal review process into the governance system to test whether operating model changes are needed; and make the Board Chair and JV CEO responsible for taking stock of needed venture changes on a regular basis.

Beyond these ten main causes of JV failure, two other areas – poor governance, and weak organization and talent – are often associated with JV distress. These areas are unlikely to directly cause JV failure on their own. Rather, they are a form of internal bleeding, and tend to compound the difficulty of addressing issues mentioned above.

Governance: Having a governance system that is simply too cumbersome to function allows some illnesses to take root. Consensus decision-making can lead to damaging delays and deadlock in fast-paced industries, and exacerbates the challenges of setting a strategy or evolutionary path for a JV. Consensus is a key part of JV s – but the most successful JV s also have governance systems with built-in pressure-relief valves to overcome disagreement, enable decision-making, and keep all parents pulling in the same direction.

Organization and Talent: The other key enabler of failure is not building an effective JV management team and organization. Has the JV managed to get access to and retain top secondees from the parent companies? Has the JV developed a compelling employee value proposition for those working directly for the venture? Has the Board delegated sufficient authority to JV management to be able to run and grow the business, thereby unleashing the JV’s entrepreneurial energy? Is the JV organization adequately insulated from shareholder overreach into operational details – or does the organization suffer from a “joint venture tax” where far too much time is spent responding to shareholder needs? Joint ventures that do not have good answers to these questions will find it extremely difficult to attract, retain, and motivate staff, and to respond to all the other threats that await them.

Download the PDF version of this article.

How We Help: Governance & Restructuring

We understand that succeeding in joint ventures and partnerships requires a blend of hard facts and analysis, with an ability to align partners around a common vision and practical solutions that reflect their different interests and constraints. Our team is composed of strategy consultants, transaction attorneys, and investment bankers with significant experience on joint ventures and partnerships – reflecting the unique skillset required to design and evolve these ventures. We also bring an unrivaled database of deal terms and governance practices in joint ventures and partnerships, as well as proprietary standards, which allow us to benchmark transaction structures and existing ventures, and thus better identify and build alignment around gaps and potential solutions. Contact us to learn more about how we can help you.

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Operationalizing Joint Venture Governance

It’s time to raise the bar on JV governance. Doing so demands operationalizing the legal agreements and aligning the shareholders on how the governance will actually work. A JV Governance Framework can do just that.

JV Secondee Guidelines: Getting a Grip on Secondees

While recognizing the right for any company to organize itself as it sees fit, we assert that those that follow this guideline have a higher chance of success – and much lower levels of dysfunction – with its secondees.

Succeeding in Cross-Cultural Joint Ventures

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About the Authors

Joshua Kwicinski is a Managing Director based in Washington, DC. He has more than a decade of experience in advising on all aspects of the partnership lifecycle, including deal strategy, transaction structuring, ongoing governance, and restructuring/exit. He has advised senior executives and dealmakers at both a corporate and individual JV level across a range of industries, including oil and gas, metals and mining, aerospace and defense, financial services, biotechnology, and others.

James Bamford is a Senior Advisor at Ankura based in Washington, DC. He joined Ankura with the firm’s 2020 acquisition of Water Street Partners, which he co-founded in 2008. Water Street Partners has been independently ranked as the number one global advisor on joint ventures since 2017. Prior to Water Street, he was global co-lead of the Joint Venture & Alliance Practice at McKinsey & Company.

David Ernst is a Senior Advisor at Ankura with more than 35 years of experience advising on strategy, transactions, restructuring, and governance matters. David is recognized as a global expert in the field of joint ventures. He has advised dealmakers and senior client executives across a range of industries, including oil and gas, chemicals, metals and mining, semiconductors, consumer goods, and health care. During his career, he has advised on more than 250 venture transactions in 33 countries, involving more than $300 billion in value, and has also served more than 100 existing joint ventures on governance and restructuring.

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Sony Ericsson Failure Case Study: 6 Reasons Why

• June 28, 2023
• Blog , Company's failure stories

Table Of Contents:

Sony Ericsson was a joint venture between Sony Corporation and Ericsson, established in 2001, with the aim of combining Sony’s consumer electronics expertise with Ericsson’s telecommunications technology. However, the joint venture faced various challenges and ultimately struggled to compete in the rapidly evolving mobile phone market.

Let’s dive into the various reasons that contributed to the Sony Ericsson failure case study and the lessons business leaders can learn from it.

Unveiling the case study of Sony Ericsson’s failure

Sony Ericsson was considered a pioneer in the mobile phone industry due to its innovative designs and features, such as high-quality camera capabilities and music playback.

As a result, Sony Ericsson was able to establish a strong brand presence in 2001.

But soon the Sony-Ericsson joint venture confronted challenges, and their target profit deadline was moved from 2002 to 2003.

Here are some key factors contributing to Sony Ericsson’s failure.

1. They failed to innovate

There are countless companies that went out of business because of their lack of innovation. And the ones that top the list do not understand the changing customer’s preferences.

The primary reason why Sony phones failed was the market misrepresentation of their product.

Sony Ericsson failed to keep pace with rapid technological advancements and innovations in the mobile industry. The company struggled to introduce groundbreaking features and attractive smartphones that could compete with rivals like Apple’s iPhone and Samsung’s Galaxy series.

2. Industry shifts and economic downturn

New innovations keep emerging in the world. Once, shifting from a dial keypad to digital seemed a farfetched idea, and look at the mobile industry now!

Business leaders must be well aware of the constant industry shifts and act accordingly.

For example: In 2003, mobile phone prices began to decline, but Sony Ericsson continued to produce expensive cell phones, resulting in lower-than-expected profits. Additionally, Sony Ericsson made significant investments without an in-depth knowledge of present market conditions.

The mobile industry experienced significant shifts during the time Sony Ericsson was in operation. The rise of smartphones and the decline of traditional feature phones caught Sony Ericsson off guard, and the company struggled to adapt quickly to these market changes.

3. Misjudging R&D’s importance

Bad leadership can ruin even the best teams. Sony, at that time, prioritized cost-cutting initiatives and job losses.

The company had 12,000 employees in June 2008, and after launching this cost-cutting initiative, it reduced its global workforce by approximately 5,000 people.

R&D is like the oil of an innovation engine and people its enablers.

Still, Sony Ericsson perceived them as a financial burden and closed R&D departments across regions.

As a result of this change, Sony Ericsson was unable to produce innovative products for customers, which was the primary reason for the joint venture’s failure.

Maybe it’s time to give those R&D people applause for the work they do!

It’s important that companies employ effective R&D tools and techniques to provide consumers with novel and individual mobiles.

However, Sony Ericsson’s research and development were out of date.

4. Poor marketing and product positioning

Another major issue that Sony Ericsson faced was their inability to cater successfully to different markets.

After forming a joint venture, the business began operations without a comprehensive understanding of its customers’ requirements.

As a result of this lack of knowledge, their products begin to suffer losses, and they are forced to withdraw their product line from the market.

For instance, in 2002, Sony Ericsson discontinued production of Code Division Multiple Access (CDMA) mobile phones for the US market and began concentrating on GSM as the dominant technology.

The company’s product lineup was often criticized for being too diverse and lacking a clear focus. Sony Ericsson released numerous models, but the lack of a cohesive product strategy led to confusion among consumers and made it difficult for the brand to establish a strong identity in the market.

5. They were slow at changing

Sony’s Walkman series and Ericsson phones had numerous innovations, such as a colored screen and a digital camera.

However, their innovation began to slow down when they started manufacturing Android phones.

The Xperia X10, for example, received positive reviews for its design. The disadvantage was that it used Android 1.6 during a period when competitors were using 1.

Because of the highly skinned OS, the firmware update took a long time.

Sony Ericsson faced challenges with its software platform. The joint venture initially relied on its proprietary platform, but the market was moving towards more open and versatile operating systems like Android and iOS. The delay in adopting a popular and widely supported operating system hindered the competitiveness of Sony Ericsson’s smartphones.

6. The tough competition

Moreover, other businesses gradually began to offer similar features to Sony at a lower cost.

Sony Ericsson attempted to add new features, such as a 4K screen, but it was pointless since a 6-inch screen doesn’t need a 4K screen.

Sony continued to produce expensive phones but missed a significant differentiating component. As a result, they progressively faded from the market.

Additionally, the expensive price tag was a significant weakness in Sony’s phones. Sony attempted to compete directly against Apple.

However, since Apple was the market leader, it had a competitive edge over other manufacturers. No other phone provided a better user experience than Apple’s iPhones.

The mobile manufacturers at the time were focused on inexpensive phones.

Their strategy was to obtain as many customers as possible, even if it required sacrificing features. But Sony went in the reverse direction. They began producing high-end phones.

Intense competition from established players like Apple, Samsung, and later Chinese manufacturers like Huawei and Xiaomi put Sony Ericsson at a disadvantage. These competitors were able to offer more appealing and feature-rich smartphones that captured a larger market share.

Sony Ericsson Failure: From the horse’s mouth

In 2012, Sony Mobile’s CEO said, “That is where the value is, that is where the money is,” referring to the top segment and explaining that the objective was to “play to our strengths – the premium brand that Sony stands for.”

Hideki Komiyama, the Chief Executive of Sony Ericsson, said in 2009, “We just happened to be number three in the third quarter. I’d like to be No. 3 by ourselves by 2011.”

“Right now it is not clear how the industry will be shaping up in 2009 or 2010. We know it is challenging.” he said, adding that the company was “preparing accordingly.”

He added, “We have to start analyzing products where we generate higher margins and eliminate the models where we have lower margins.” He also stated, “At this moment we’re under heavy rain. You have to look for shelter. But when you’re in the shelter you start preparing.”

In 2011, Sony acquired Ericsson’s stake in the joint venture. In the end, the result: Sony Ericsson Failure.

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Danone v. Wahaha (a Clash of Giants) Case Study

Situation analysis, strategic issues, recommendations, works cited.

The case between Danone v. Wahaha was controversial, but sometimes expected in joint ventures. In essence, breach of contract is an insincere act by the so called dominant company due to vested interest and greed for control of stake in the joint business operation (Daniels, Radebaugh and Sullivan 32).

The giant company would like to keep its dominance in decision making and resource allocation, thus could practice double standards, while dealing with its partner in the merger. In such cases, the other party would not have any choice, but to seek legal means of addressing the stalemate. This is the exact situation in which Danone Food Company from France found itself in, as presented in this case, when it realized that its partner, Wahaha Beverage Company violated their contract.

Considering the case, the shared operation gave Danone a 51 percent shareholding in the joint company. Since the company had become the leader in manufacturing and distributing bottled water, it considered having a working partnership with Wahaha Company. However, Danone realized that the latter company was bottling and selling drinks as a separate entity without informing its partner, thus violating the previously signed agreement.

The businesses were almost related, thus the two companies agreed to work together in a non-competitive manner. In this regard, trading secretly in a similar business was against the spirit of the agreement because it could jeopardize the operations of the joint venture (Hill 59).

The secret bottling and selling of drinking water could compromise the quality of the product, a situation that might have caused the production of much litres of water, which were seized for safety concerns. This raised issues of water quality that the joint venture was producing and Danone Company thought this was a form of betrayal in its business endeavor. Here, the questionable water quality was linked to the operations of Wahaha Company, even though the reality about the bacteria that was found in the bottles.

The other situation that the joint venture found itself in was the struggles between the competing interests, in which Danone considered its opponent to have violated the contract they signed, while Wahaha took its partner to be interfering with its operations and profitability.

The situation was complex because Wahaha applied for arbitration in the case whereas the opponent acquired a court order to freeze the assets of ten companies associated with Wahaha. In this situation, once the contract was signed, it bound the two companies to comply with its provisions until they agree in writing to dissolve the contract (Daniels, Radebaugh and Sullivan 32). Therefore, whether the government approved it or not, each party accepted to work with one another in a non-competitive and mutual manner.

One of the strategic issues was to resolve the breach of contract that Wahaha Company secretly committed despite signing an agreement to work together without competition. In this case, a contract is binding and once agreed on must not be violated at all cost. The two entities agreed to work together and had to uphold the ethical issues regarding the contract (Hill 102).

The other strategic issue that raised concern was Zong’s claims that the exclusive and non-competition agreements were unfair. This was indeed hypocritical owing to the fact that he actually agreed to sign the contract to have a joint venture and not to compete with Danone Company products directly.

If he knew that the agreement was unfair, he could not have accepted the offer to work together and pursued his business interest alone. His media attack against the partner, purporting to be in the spirit of Chinese nationalism was unjustified since it promoted discriminatory and immoral business dealings” after binding himself in the contract (Angwin 18). In this case, the common venture was trading in water and beverages and thus, Zong neither had legal nor moral rights to trade in bottled water.

The other issue that stood out in the case study was the controversial resignation of Zong, who was the group’s chairperson. In fact, the act was not supported by facts, but based on unnecessary claim that the partner was ruining reputation. This was unjust because he was supposed to follow a better means of conflict resolution in case there was any (Wild and Wild 104).

Considering the agreement, Danone Company had 51 percent share in the joint venture, meaning that it had an upper hand on the management and decision making in the new company. The “bullying and slander” accusations he labeled against his partner and remaining adamant that “he would make sure that Danone does not win for sure and his company does not lose for sure” could be treated as double speak and was not supported by reliable evidence.

Another issue that significantly featured in the case was the competition that Wahaha Company experienced when Danone Company launched its business operations in the Chinese market. Wahaha claimed that by investing in major Chinese drinks companies, the foreign business entity had interfered with its performance in the local market, thus it needed compensation. This issue raises the question of fear for business contest because a company should devise measures to compete with the opponent fairly, without signing an unviable contract (Angwin 45).

In this case, the other strategic issue that featured prominently was lack of consultation among the Wahaha’s affiliate companies before it signed the contact. This means that the agreement was not inclusive and Zong committed to it without involving other stakeholders (Wild and Wild 106). This was evidenced when Mengnui Dairy Company made it official that it did not agree to the terms of the joint business

It is recommended that before signing a contract, the parties involved should read and understand the terms and conditions. When, the terms are clear, managing conflicts become very easy instead of resorting to an industrial action that might compromise the business operations and reputations of the wrangling companies (Ricky and Pustay 24).

In this case, it seemed that Wahaha Company entered an agreement that it did not understand, neither was it aware of the implications of the contract. This is a form of business insensitivity that is not acceptable in international trade between two corporations, which have formally agreed to work together. Similarly, the management of Wahaha group of companies should understand that going against the agreement is a crime and not an ethical business practice in International trade.

Other than opting for a direct legal option to resolve the issue, the other strategic recommendation would be to use arbitration as the aggrieved company resorted to have Stockholm to mediate the issue. The intermediary was to look at the information carefully and make impartial decision on the controversy that threatened the business relationship between the two companies. In attribution, the best way would be to compromise the interest of each interested party so that none loses its investment in the joint venture.

The success of a business depends on its ability to have the bargaining power in the local market, and where the decisions are arrived at in an inclusive way. In such cases, the business interests should override the individual interests of the entities working together.

Therefore, Danone Company should not aim at dominating the joint operations and subordinating the activities of the partners because this could create unnecessary tension during the implementation joint business activities. On the other hand, the Wahaha group of companies should not take home advantage to humiliate the business partner during the business transactions.

Since a contract is binding, no party should go against the provisions and should seek amicable way of handling the situation. In this regard, the other strategic recommendation would be that the joint venture should have a conflict resolution mechanism to determine the emerging issues of self interest without compromising the activities of the joint venture.

This means that the two companies opting to work together would have a way of channeling their grievances, thus solving the internal wrangles without waging war publicly against each other. Therefore, instead of finding ways to attack and counter attack the opponents, each party would strike a compromise by negotiating the best option. However, if all the internal attempts to resolve the matter fail, the best option would be to seek legal intervention properly without applying double standards.

Angwin, Duncan. Mergers and Acquisitions , New York, Wiley, 2007. Print.

Daniels, John., L. Radebaugh and D. Sullivan. International Business , Upper Saddle, NJ: Pearson-Prentice-Hall, 2010. Print.

Ricky and M. Pustay. International Business (Global Edition), 6th Edition, Upper Saddle, NJ: Pearson-Prentice-Hall, 2010. Print.

Hill, Charles. International Business, New York, NY: McGraw-Hill, 2010. Print.

Wild, John and K. Wild. International Business (6th Edition), Upper Saddle, NJ: Pearson-Prentice-Hall, 2010. Print.

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IvyPanda. (2019, December 15). Danone v. Wahaha (a Clash of Giants). https://ivypanda.com/essays/danone-v-wahaha-a-clash-of-giants-case-study/

"Danone v. Wahaha (a Clash of Giants)." IvyPanda , 15 Dec. 2019, ivypanda.com/essays/danone-v-wahaha-a-clash-of-giants-case-study/.

IvyPanda . (2019) 'Danone v. Wahaha (a Clash of Giants)'. 15 December.

IvyPanda . 2019. "Danone v. Wahaha (a Clash of Giants)." December 15, 2019. https://ivypanda.com/essays/danone-v-wahaha-a-clash-of-giants-case-study/.

1. IvyPanda . "Danone v. Wahaha (a Clash of Giants)." December 15, 2019. https://ivypanda.com/essays/danone-v-wahaha-a-clash-of-giants-case-study/.

Bibliography

IvyPanda . "Danone v. Wahaha (a Clash of Giants)." December 15, 2019. https://ivypanda.com/essays/danone-v-wahaha-a-clash-of-giants-case-study/.

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