Both joint ventures and strategic alliances involve two or more companies collaborating to achieve a certain goal or task. But there are differences between the two — and knowing them could mean the difference between the success and failure of a potential partnership. The main difference is that in a joint venture, the participating firms sign a contractual agreement and form a new jointly-owned legal entity whereas, in a strategic alliance, firms collaborate without forming a new entity.
In this post, you’ll learn more about how each strategy works and how to decide which one is right for your business. Keep reading.
What is a Joint Venture?
A joint venture (JV) is a business arrangement in which two or more companies agree to combine certain resources and work together to carry out a particular task. Tasks might include the research and development of new products, venturing into a new market, or other operational pursuits.
The JV partners maintain their own separate business operations and continue to exist apart as they did before the JV. The venture itself, however, exists as a new and separate business entity — either as a partnership or a corporation. All revenues, costs, and profits that come with the JV, therefore, are considered separate from each organization’s business interests.
The JV participants usually sign a formal agreement that sets forth the extent to which each will exercise control over the activities of the venture as well as how they will share its profits or losses. The agreement can also specify how long the joint venture will last.
Why Form a Joint Venture?
Companies form joint ventures for several reasons including:
To Leverage Resources
One common motive for a JV is for companies to benefit from the complementary advantages or strengths of one another.
For example, two entities might come together with the goal of creating and marketing a new product. One entity may have superior manufacturing and distribution facilities. The other might have a greater marketing network that can help capture market share fast upon launching the new product. So by taking advantage of each other’s strengths, they both profit.
To Save Costs
JVs are a cheaper and less risky alternative to mergers and acquisitions (M&As).
Essentially, a JV allows a firm to use the resources of another one to achieve a commercial goal rather than using large sums of money to buy a business outright.
To Enjoy the Benefits of Combined Expertise
The combined expertise of two or more companies entering into a JV can breed innovation. While the companies might initially form a JV to accomplish one particular task or goal, they know that other innumerable, unknown benefits can arise in the course of their partnership as a result of combining their expertise.
What is a Strategic Alliance?
A strategic alliance is a collaborative agreement between two or more companies that wish to pursue mutually beneficial goals, but in which there’s no creation of a separate legal entity. As such, a strategic alliance is less binding and more flexible than a JV.
In the course of carrying out their mutually arranged activities, the companies in a strategic alliance will most likely share their resources, revenues, and profits. They can pool their knowledge, experience, and personnel as they see fit, with each company filling in the gaps of the other.
Why Form a Strategic Alliance?
Companies usually form strategic alliances for the same main reasons they form joint ventures: to share resources, save money, and combine expertise. The only difference is that in a strategic alliance, the agreement and relationship between the participants are less formal.
Joint Venture vs. Strategic Alliance: What are the Key Differences?
Here are three key differences between a joint venture and a strategic alliance.
1. Legal Documentation
A JV is a new and separate legal entity, and so, it usually comes with a binding contract. Arriving at the contract often requires meetings and sign-off from multiple parties from the participant companies.
In a strategic alliance, the two or more parties agree to terms and can “seal the deal” with no more than a handshake. There might be a letter of understanding or an agreement to spell out the terms and set expectations for all parties. But the documents are typically not part of a binding contract, as would be the case with a JV.
So, since there is no binding contract in a strategic alliance, how do the organizations know when the alliance has run its course? When does it end? Typically, it’s when the alliance achieves its goals. But even if the strategic alliance fails, for example, due to poor performance or disagreement, the absence of a binding legal contract means that the parties can simply part company and go their separate ways.
2. Management Status
Again, a strategic alliance is not its own legal entity. A JV, on the other hand, is. Because of this, the management structure is often different.
Executives of companies entering into a strategic alliance generally maintain their current professional roles while taking on extra responsibilities as demanded by the alliance. On the other hand, because the JV is a separate legal entity, its structure often requires a completely different management team overseeing its operations.
3. Benefits vs. Risk
Companies usually form strategic alliances to maximize the benefits and opportunities that each can bring to the table. In a JV, however, the emphasis is often on limiting risk. Such would be the case, for example, when two competing manufacturers create a JV to unite operations in a particular region to minimize labor costs, taxes, and tariffs.
The table below summarizes the key differences between a joint venture and a strategic alliance.
|Joint Venture||Strategic Alliance|
|Involves the creation of a new legal entity in which each participant owns a share||No creation of a new legal entity|
|Includes a binding contract that specifies all the terms and conditions of the deal||A binding contract is not necessary. Participants can seal the deal through a simple handshake|
|Involves the creation of a completely different management team to oversee the JV’s operations
|There’s no creation of a new management team. Companies’ executives just take on extra responsibilities as demanded by the alliance while maintaining their current professional roles.|
|The primary aim of a JV is to share or reduce risk||The aim is to maximize the benefits and opportunities that two or more companies bring to the table|
How to Decide Between a Joint Venture and Strategic Alliance
The right strategy for your business depends on your specific circumstances and the goals of the partnership.
Choose a joint venture:
- For large-scale projects that require significant resources and capital investment. An example is new product creation.
- For high-risk projects where sharing the risk can reduce overall exposure.
- For projects and ventures that require a long-term commitment and a shared vision.
- Where there’s a need for joint ownership of new intellectual property.
Choose a strategic alliance:
- For projects that call for a particular set of skills, expertise, or technology that you don’t have.
- For projects that aren’t resource-intensive, but that still need collaboration for success or that would benefit from collaboration. Examples are joint marketing campaigns or the sharing of distribution channels.
- To share knowledge, information, or research and development.
CapLinked Can Help You Execute a Joint Venture or Strategic Alliance Successfully
Whether you choose to pursue a joint venture or a strategic alliance, it’s important to have a secure and efficient way to share confidential information and documents with your potential partners.
CapLinked’s virtual data rooms (VDRs) offer exactly that — a secure and reliable platform for all deal participants to store, share, and edit sensitive documents.
With advanced features like customizable permissions, collaboration tools, and document and version management, CapLinked VDRs can speed up due diligence and keep you organized from start to finish.
Sign up for a free CapLinked trial today and take the first step toward a successful joint venture or strategic alliance.
Houston Chronicle – What is the Difference Between a Joint Venture and Strategic Alliance?
Investopedia – Joint Venture: What Is It and Why Do Companies Form One?
International Franchise Association – What is a strategic alliance?