Why joint ventures fail

February 17, 2015

check-listJoint ventures are a popular, but risky, strategy for expanding business activities.  While access to financial, technological and human resources from a joint venture partner can accelerate growth, termination of a joint venture prior to the end of the term established at the beginning is unfortunately a fairly common issue for joint ventures and a good deal of data and information has been collected regarding the failure of joint ventures and some of the factors that might be useful in explaining their performance. It is difficult to draw generalizations from this information since each joint venture has its own unique set of circumstances; however, parties should be mindful of the possible effect of one or more of the following pitfalls:

  • In many cases, the technological objectives of the relationship were never realized due to the loss of interest on the part of one of the partners in utilizing the relationship as the vehicle for the development and exploitation of the specified technology.
  • The pre-formation planning for the relationship is often inadequate and, perhaps, too hasty. For example, a distribution relationship might fail if the product was inappropriate for the target market or the parties failed to adequately assess relevant competitive factors.
  • The partners fail to communicate effectively prior to formation of the relationship. In addition, relationships suffer from the unwillingness of managers to effectively contribute and share generic and industry-specific knowledge with representatives of the other participant, leading to mistrust between personnel from both partners.
  • The partners fail to reach a consensus on the fundamental objectives of the relationship. In many cases, this phenomenon is evidenced by undue concern regarding methods or procedures, thereby limiting the flexibility of the relationship to utilize alternative methods to pursue the overriding objective. Similarly, the partners may impair the chances of success for the relationship by limiting its activities to a narrow product or customer group.
  • Even when the partners do appear to reach an agreement regarding the fundamental objectives of the relationship, confusion often occurs when the partners fail to recognize the importance of acquiring knowledge and process experience in the course of the relationship that can be used in a diverse set of product and market areas. In some cases, it can be misleading to measure the performance of the relationship as simply a function of revenues or market share.
  • Incorrect or inflexible objectives often lead to poor strategic decisions regarding the operation of the relationship. For example, the partners may be driven to ill-advised cost-cutting efforts to increase demand and the rate of growth for the products being manufactured and sold by the venture. However, as a result, competitive production facilities of one or both of the participants may be eliminated or conflicts may arise due to business objectives of the partners arising outside the scope of the relationship.
  • While the relationship is based, in part, on the desire of the partners to effectively utilize their respective comparative advantages, the prospects of the relationship will often flounder due to the unwillingness of one or both of the participants to share control or provide the needed support to the relationship. For example, one of the partners may be unwilling to commit senior managers and technology to a joint venture subsidiary rather than to a subsidiary.

Any number of additional factors have been cited for the failure of joint ventures, including burdensome communication costs due to the unwillingness of one of the partners to delegate control over the day-to-day operations of the business; impasses on major issues without adequate dispute resolution procedures; conflicts with other internal functional and financial objectives of one of the partners; inability of the partners to agree on the proper allocation of responsibilities and rights upon termination of the relationship; and, finally, the lack of experience and skill in areas required for successful pursuit of the objectives of the relationship.  For further discussion of termination of joint ventures, including documents and other tools that can be used during the termination process, see Structuring and Negotiating Joint Ventures (§§ 248:1 et seq.).