Unlocking value with joint ventures
A joint venture can be a powerful way to create completely new offerings and value in situations where traditional M&A or organic expansion efforts could fail to deliver the desired outcomes. Here are three archetypal gambits each based on recent August customer engagement.
1. Expansion to a new market segment:
August helped a supplier and its customer expand to a lucrative niche market segment. Historically, the market segment was dominated by one dedicated company that had full focus and strong financial backing to do what was needed to succeed. Both supplier and customer had some small-scale presence and operations in that particular business, which had been considered non-core, however they lacked the resources and focus to truly capture the market opportunity.
Now the supplier and the customer wanted to join forces and establish a new challenger. Together they decided to formulate a joint venture and transfer the existing assets and people into the NewCo. The goal for their new JV was to promote rapid growth in the new niche segment by introducing new digital solutions and services that would transform the industry. Only the coming years will tell whether the JV will succeed in attracting the most progressive customers and competent people to the ambitious journey.
2. Scaling cost and turning focus on strongholds:
A Fast Moving Consumer Goods (FMCG) company had been struggling for years with its profitability due to heavy fixed costs. The struggle had also made it difficult to focus on developing business to growing sales. August worked with the company to evaluate its strategic scenarios. After evaluating multiple alternatives, the team decided the most feasible option was to form a strategic partnership with another company operating in the same market.
The strategic partnership rationalized the cost structure and improved profitability immediately. In addition, this made it possible for the FMCG company to focus on its strongholds. Once the strategic partnership was ramped-up, the organization was free from “the cost structure burden” blocking development that enables now building new businesses in core areas and attract new talent to the company. Thus, the strategic partnerships also laid the foundations for future long-term top- and bottom-line development.
3. Restructuring capacity together:
August worked with two direct competitors, operating in an industry with structural overcapacity and declining demand, to evaluate the possible value of establishing a JV. Both players had already downsized their own production capacity to a point where further capacity reductions were not practical. A JV was thus seen as an opportunity to pool the remaining production assets together, downsize smartly and further develop the remaining assets.
The economic rational of the JV was more than lucrative. One party’s CEO commented that ‘this is the highest EBIT improvement possibility that exists in this industry’. Value comes from establishing one ‘mega factory’, running it above the optimal volume threshold, and avoiding spending CAPEX on older production sites which already should have been shut down.
Despite the strong shareholder value potential, the JV agreement has not yet been signed. Issues regarding control, co-operation model and trust between two arch rivals have so far overweighted the potential benefits.
Experience tells that like in M&A in general, about half fail of JVs to meet their original targets. The typical reasons for failure includes, for example, unclear objectives causing misalignment between the companies. Each partner has its own goals, market pressures, and shareholders. As such, the partner companies might hold different strategic interests for the arrangement. In addition, as the partners share their control of the arrangement, decision-making and oversight are more complicated. Moreover, the partners have separate reporting systems, processes, and metrics. Finally, some more typical challenges relate to lack of effective communication and newness of the situation. It’s worth keeping in mind that forming a joint venture might be a once in a career situation for most leaders.
Despite the potential pitfalls, however, we encourage leaders to Brave the Future and consider what role Joint Ventures could play in their strategic agenda.