Introduction
If you are running a business, your main goal should be to maximize profit. It completely depends upon which method you are using, as there are many avenues to expand your business.
Joint ventures, or Strategic alliances, are two business arrangements that are similar in some aspects but different in practice.
Joint Venture vs. Strategic Alliance
A Joint Venture is a legal entity that merges resources and functions as a single entity, whereas a strategic alliance is an informal agreement that shares resources but preserves individual identities and operations.
Difference Between Joint Venture and Strategic Alliance in Tabular Form
| Basis of Comparison | Joint Venture | Strategic Alliance |
| Meaning | A Joint Venture, commonly referred to as ‘JV’, is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. | A Strategic Alliance is an informal agreement that shares resources but maintains individual identities and operations. |
| Objective | To mitigate risk by working together to carry out a business objective. | To maximize returns and generate profit. |
| Independence | They combine their resources to make a separate legal entity. | Parties work together but operates separately and independently. |
| Contract | There is a document that specifies the responsibilities and expectations of both parties involved in a given agreement or partnership. | Parties work together but operate separately and independently. |
| Management | It is a bilateral agreement between two parties where the profits and responsibilities are typically shared equally or as agreed upon. In some cases, a new management team is formed. | The management is usually appointed from existing employees of the parties involved. |
What is a Joint Venture?
A Joint Venture (JV) is an agreement between two or more parties to combine their resources and work together toward achieving a specific goal or undertaking a project, whether it's a new venture or an existing business activity.
In a Joint venture, each participant is accountable for the profits, losses, and expenses related to it. However, the venture operates as a separate entity, independent of the participants' other business interests.
A Joint Venture (JV) is an agreement between two or more businesses to merge their resources with the aim of achieving a specific objective.
Although they can assume any legal structure, they are considered a partnership in the informal sense of the term.
A typical application of JVs is to collaborate with a local company for the purpose of entering a foreign market.
Types of Joint Venture
Joint Ventures are of four types, namely, Project-based joint ventures, vertical joint ventures, horizontal joint ventures, and functional-based joint ventures.
Project-Based Joint Venture
This kind of joint venture is of a particular purpose or project and ends once the work is done. It's a short-term partnership between companies and is exclusive to that project. For example- A Construction project where two or more companies work together to build a new office building.
Vertical Joint Venture
When companies come together to achieve mutual benefits in the supply chain, they can share resources and knowledge, reduce costs and risks, and increase their market share. For example, A Partnership between a manufacturer and a supplier. By working together, they can streamline the supply chain and reduce costs, making their products more competitive in the market.
Horizontal Joint Venture
When two competing brands in the same industry work together, it's called a horizontal joint venture. They can share resources and knowledge, reduce costs and risks, and increase their market share. For example, two competing car manufacturers could collaborate to develop new technologies and reduce production costs.
Functional-Based Joint Venture
This kind of joint venture is when companies collaborate to achieve a mutual benefit based on their expertise in certain areas, allowing them to work more efficiently. Companies evaluate if they will perform better together and more efficiently before entering such a joint venture.
What is a Strategic Alliance?
A Strategic Alliance is when two companies work together on a mutually beneficial project while maintaining their independence. It can help businesses expand into new markets, improve their product line, or gain an edge over competitors. The relationship can be short-term or long-term, and it allows both businesses to work toward a common goal that benefits both.
Types of Strategic Alliance
There are three primary forms of strategic alliances. These three types of strategic alliance vary in the degree of financial investment each company makes into the agreed-upon effort.
Joint Venture
A joint venture is when two companies agree to come together and create a new separate company that each of them becomes parent to.
Equity Strategic Alliance
An equity strategic alliance is similar to a joint venture in terms of outcome goals, but it's funded differently. In this type of alliance, one company invests in another's equity.
For example, when two companies, like Starbucks and PepsiCo, create a joint venture where Starbucks invests in PepsiCo's equity to produce and distribute bottled coffee drinks.
Non-Equity Strategic Alliance
It is when two entities recognize that they can benefit from working together and they do not need to transfer equity to each other. For example, two companies, like Apple and Nike, come together to create a partnership where they share their expertise to create a new product, like Apple Watch Nike+. They don't need to transfer equity to each other.
Main Differences Between Joint Venture and Strategic Alliance in Points
- In a joint venture, collaborating companies create a new entity, while in a strategic alliance, the participating companies maintain their separate legal identities.
- In a joint venture, participating businesses split profits and losses based on their ownership stakes in the new entity, while in a strategic alliance, participating businesses don't always have to split profits and losses.
- Joint ventures are more complex than strategic alliances. A strategic alliance is a form of collaboration or corporate partnering.
- In a joint venture, there is bilateral management, whereas in a strategic alliance, delegated management is more common.
Conclusion
It seems that companies are leaning towards strategic alliances to manage risk and gain access to a variety of competencies, markets, and technologies. Joint ventures can also be advantageous since they allow companies to pool knowledge, assets, and funds without affecting the parent company.
