Definition
A Joint Venture is a business arrangement where two or more parties pool their resources for the purpose of accomplishing a specific task or business goal. It involves shared ownership, risk, and control. On the other hand, a Strategic Alliance is a collaboration between businesses, where they agree to co-operate and work together without forming a new company, typically to make use of the unique capabilities of the other and achieve a mutual benefit.
Key Takeaways
- A Joint Venture (JV) and a Strategic Alliance are both cooperative arrangements between two separate entities. However, in a Joint Venture, the entities create a new third party entity which they both own and control, whereas in a Strategic Alliance, the entities remain separate and collaborate on a specific project or activity while retaining their independence.
- In a Joint Venture, both partners share the profits, losses, and management of the new entity, ensuring that risks and rewards are evenly distributed. In a Strategic Alliance, the partners do not always share risks and rewards equally as there’s no formal entity created. Rather, it involves pooling of resources for mutual benefit while retaining separate identities.
- A Joint Venture often requires more commitment and investment in terms of resources and time compared to a Strategic Alliance, as it involves more layers of integration and cooperation. Conversely, a Strategic Alliance allows for more flexibility, thereby being less complex and quicker to establish. It is often pursued when companies want to tackle a short-term challenge or opportunity without the full commitment of a Joint Venture.
Importance
Understanding the difference between a joint venture and a strategic alliance is essential in the world of finance as it helps in deciding the most effective way to collaborate while achieving business goals. A joint venture involves two or more businesses combining resources to create a separate legal entity, in which each partner shares profits, losses, and control.
This means both companies share the risks and rewards, making it essentially a short-term partnership for specific projects. On the other hand, a strategic alliance does not form a new entity but is a cooperative agreement between businesses for a mutually beneficial project or to share resources while remaining individually owned and retaining their independence.
Strategic alliances often involve fewer resources and less commitment than joint ventures. The choice between a joint venture and a strategic alliance depends on the specifics of what each business is trying to achieve, their desire for control or shared risk, and the regulations in their respective industry.
Explanation
A joint venture is a business arrangement between two or more organizations that decide to pool their resources to accomplish a specific task or business goal. This could be a new project or any other distinct business activity. It essentially serves the purpose of strategic growth by allowing companies to share resources and risks.
They are often used for significant projects where the overall investment is too high for one party to bear. Joint ventures are also commonly employed to craft a stronger presence in the market, gain expertise, and facilitate accessibility to new markets. The participating firms still remain independent entities outside the joint venture, and the venture is its own entity.
On the other hand, a strategic alliance is an agreement between businesses, in which they agree to cooperate for a defined period to achieve a common objective. Strategic alliances are used for a variety of purposes such as, to access a broader market, or to bring together complementary skills and assets that neither company could develop on its own. It essentially enables businesses to work in co-operation while retaining their autonomy, allowing each to benefit from the strengths of the other.
Unlike joint ventures, in strategic alliances, no new entity is created. Business entities involved in a strategic alliance share benefits and management oversight, but remain independent.
Examples of Joint Venture vs Strategic Alliance
Joint Venture: Sony Ericsson – The joint venture between these two multinational corporations, Sony (a Japanese company) and Ericsson (a Swedish company), was established in
They came together to pool their resources in the creation and sale of mobile phones. Sony provided their expertise in consumer electronics, while Ericsson brought their knowledge of telecommunications technology to the table. Eventually, Sony bought out Ericsson’s share, turning the joint venture into a wholly owned subsidiary.
Strategic Alliance: Starbucks & Barnes and Noble – In the mid-1990s, Starbucks entered a strategic alliance with Barnes & Noble. The alliance allowed Starbucks to set up cafes within Barnes & Noble stores, providing a cozy, caffeinated space where book-lovers could read and sip in one place. On the other hand, Barnes & Noble was able to attract more customers who were drawn to the convenience of a bookshop with an on-site coffee shop. Unlike a joint venture, neither company bought into or gained control over the other, they simply worked together to create mutual benefits.
Joint Venture vs Strategic Alliance: Volvo and Uber – In 2016, Uber and Volvo entered into a $300 million deal for the joint development of autonomous driving cars. The goal of the joint venture was to manufacture base vehicles that could be purchased by Uber and outfitted with their autonomous driving systems. However, years later, in 2020, the relationship transformed into more of a strategic alliance as Uber sold their autonomous driving unit to Aurora Technologies but continued to partner with Volvo to deploy self-driving cars.
FAQ: Joint Venture vs Strategic Alliance
What is a Joint Venture?
A joint venture is a business arrangement in which two or more parties agree to combine their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture, each of the participants is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.
What is a Strategic Alliance?
A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This collaboration can occur for various reasons, including business expansion, development of new products or services, and entering new markets, particularly overseas. Unlike in a joint venture, businesses in a strategic alliance do not form a new entity.
What are the key differences between a Joint Venture and a Strategic Alliance?
The primary difference between a joint venture and a strategic alliance is that in the former, a new company is formed. The two parties continue their respective operations and manage the new company together. In contrast, a strategic alliance does not involve creating a new company. Instead, two companies collaborate to achieve a mutually beneficial objective while operating as separate entities.
Which one is better, Joint Venture or Strategic Alliance?
There isn’t a definitive answer as to which is better between a joint venture and a strategic alliance. It depends on the companies’ needs, resources, and objectives. A joint venture might be more beneficial for companies looking for a long-term collaboration or high level of integration. On the other hand, a strategic alliance might be ideal for short-term projects where companies want to remain independent.
Can a Joint Venture evolve into a Strategic Alliance?
Yes, a joint venture can evolve into a strategic alliance. This usually occurs when the partners in the joint venture see the benefit of working together but do not want to maintain a separate business entity. In such cases, transitioning to a strategic alliance allows the partners to continue collaborating while streamlining their operations.
Related Entrepreneurship Terms
- Equity Participation: This refers to the proportion of a company owned by its shareholders, and it often comes into play in both joint ventures and strategic alliances.
- Cross-Shareholding: This term refers to the process where two companies own shares in each other, furthering their affiliation. This is a common model in joint ventures.
- Collaborative Agreement: These are terms and conditions agreed between two companies looking to enter into a collaborative relationship such as a joint venture or strategic alliance.
- Non-Compete Agreement: These agreements are often implemented during the formation of joint ventures and strategic alliances to protect the interests of both parties involved.
- Synergy: This term refers to the added value produced when two entities choose to combine their efforts, which is the guiding principle behind both joint ventures and strategic alliances.
Sources for More Information
- Investopedia: A comprehensive resource for investing and personal finance education.
- Entrepreneur: An online source of articles and advice for entrepreneurs, including topics on joint ventures and strategic alliances.
- Harvard Business Review: Offers articles from experts in the fields of business and management, including joint ventures and strategic alliances.
- McKinsey & Company: Provides articles on global management consulting, offering expert advice on business strategies such as joint ventures and strategic alliances.
