Joint ventures and strategic alliances are used by organizations to expand their business and hence, improve their profits. Strategic alliance is an arrangement that is established between two or more companies so as to accomplish a common objective. Joint venture is a kind of strategic alliance, except that in joint venture, a third party entity is established between two or more companies to achieve a certain objective.
The two terms, joint venture and strategic alliance, are frequently used interchangeably by many people. This can give rise to confusions and misunderstandings; hence, it is important to differentiate between the two terms. In this article, we will describe the two terms in detail and present the differences between them.
Definitions and explanations
A strategic alliance refers to the establishment of an agreement between two or more parties to carry out an activity that is beneficial to both parties. The two parties remain independent from each other while working together to achieve a shared business objective.
A strategic alliance can be considered as a relationship between two companies that is created to enable them to carry out business along with one another. This alliance is more than a standard firm to firm dealing, but less than a merger or partnership. Resources may be pooled by the parties involved in an alliance, including knowledge, products, experience, capital, goodwill and distribution channels, among others. These parties continue to remain independent, while accomplishing new objectives.
The goal of a strategic alliance is to achieve synergy, where it is expected by the parties that the strength of the alliance on the whole will be higher than that of the individual entities. It comprises of exchange of technical expertise and economic specialization and sharing of risks, rewards and costs.
A joint venture refers to a business partnership formed between two or more entities, where they bring together resources to accomplish a given task or a business objective. A separate legal entity is usually formed, which is known as an incorporated joint venture. However, there are also unincorporated joint ventures in which a separate legal organization is not established.
The firms usually invest money and other resources to establish a jointly held new corporation, which is referred to as a joint venture. The firms put forward their skills, resources and technology in a specified percentage and share the costs, revenues and management of the company in percentages agreed upon when establishing the joint venture.
A joint venture is usually established for the following reasons:
- Obtaining vertical integration
- Enhancing skills
- Learning from the skills of the other parties
- Giving rise to forthcoming industry development
The establishment of a joint venture may lead to decrease in risk, optimal use of resources and increase in profits.
Difference between joint venture and strategic alliance
Difference between joint venture and strategic alliance is given below:
Strategic alliance refers to the establishment of an arrangement between two or more companies that work together by sharing their resources to achieve certain predetermined objectives. A joint venture, on the other hand, refers to the creation of an independent body by two or more organizations. These organizations pool their resources and capital for achieving their desired objective.
2. Independent entity
The two or more companies that establish a strategic alliance keep on functioning as separate and independent companies. On the other hand, a separate company is formed in joint venture. The companies that come together to form a joint venture function as a single entity, and do not function as independent companies.
The objective of a strategic alliance is to achieve maximum returns and generate profits, and to achieve this objective, the parties involved collaborate with one another to improve their collective performance. A joint venture, in contrast, has the objective of decreasing risk by collaborating with each other to achieve a business objective.
4. Formation of a contract
A contract may or may not be established in a strategic alliance. It may either be overtly declared or implied. However, a contractual agreement is established in a joint venture that specifies the duties and responsibilities of every party.
In a strategic alliance, there is delegated management, with the existing employees being assigned the different managerial roles. The management of a joint venture is, however, shared between the two parties, either equally or as agreed upon in the contract. Hence, there is bilateral management in a joint venture.
6. Part of
Strategic alliance is a type of collaboration or corporate partnering. On the other hand, a joint venture is a type of strategic alliance.
Joint venture vs strategic alliance – tabular comparison
A comparison of joint venture and strategic alliance in tabular form is given below:
|The formation of a partnership between two or more companies with the aim of achieving specified objectives||The establishment of an agreement between two or more parties to work in collaboration with each other to achieve some common goals|
|The companies that form a joint venture no longer operate independently||The companies that form a strategic alliance keep functioning as independent entities|
|Decrease risk||Increase returns and make profits|
|Formation of contract|
|Contractual agreement is formed||Contract may or may not be formed|
|Bilateral||Delegated to employees of the parties involved|
|Strategic alliance||Corporate partnership|
Conclusion – joint venture and strategic alliance
Joint venture and strategic alliances are formed by companies to expand their business and remain competitive in the rapidly developing world. As a joint venture is legally binding, it is often preferred by companies. A joint venture allows member companies to access the resources and knowledge of one another to ensure the best use of resources to achieve the business objectives more efficiently. However, because of the contractual agreements and legal limitations, a joint venture is less flexible as compared to a strategic alliance.
Keeping in view the pros and cons of both the approaches, the ultimate investment decision is made after evaluating all the aspects involved. The marketing situation and risk-taking ability should be examined and legal advice should be taken by the companies before deciding to establish a joint venture or strategic alliance.