Identifying The Key Success Factors
Companies and industries today are constantly adapting to a very dynamic and increasingly global market. The development of business strategies is no longer limited to the local setting, but is planned out to cover for exigencies and market demands that may affect a company on a regional and international scale. Mergers, acquisitions and consolidations have been widely used by organizations to remain competitive in the global economy.
As such, companies have also been starting joint ventures (JVs) in order to form strategic alliances with other companies. A joint venture involves two or more organizations (called the “parents”) which agree to share capital, technology, and human resources to create a new entity under shared control. It a business strategy wherein a company can expand its operations but at the same time minimize its risks since it is, in effect, merely “dipping its toes in the water” without committing to a long-term relationship.
Through JVs, companies can gradually separate a business from the rest of its organization, while allowing a buyer to assess the true value of its intangible assets, since 80% of JVs are reported to end in sale by the parent company of the joint venture to a buyer (Hewitt Associates, 2008). Similarly, an international joint venture (IJV) is a business arrangement wherein a domestic company – an owner of a technology, resource, product or service – seeks to exploit or develop that technology, resource, etc. , in a foreign market.
It involves a contractual undertaking between two or more parties to collaborate on and perform a specific task or project over a certain period of time (Eco-Legal and Management Advisory Services Limited, 2003). IJVs have become increasingly popular in the past decade (Beamish & Delios, 1997) as companies find themselves under pressure to expand internationally, in order to stay competitive. Joint ventures can offer the following advantages to companies (Hewitt Associates, 2008): • They provide companies with the opportunity to obtain new capacity and expertise.
• They allow companies to enter into related businesses or new geographic markets, or obtain new technological knowledge. • They have a relatively short life span (5-7 years) and therefore do not represent a long-term commitment for the companies. However, IJVs are challenging to manage and often lead to failure. In 12 past studies of IJVs, Beamish and Delios (1997) found that the performance of between 32 and 61 percent of the IJVs in each sample was unsatisfactory. In Russia in particular, managing an IJV is no small task.
There are many challenges in setting up an IJV in Russia, and most investors have been traditionally wary of investing in such business arrangements due to the many risks and challenges associated with joint ventures on Russian soil. IJVs in Russia must deal with problems such as weak infrastructure, a constantly changing environment, corruption, constantly changing legislation, and bureaucracy (Fey, 1996). However, despite these challenges, it should be noted that Russia is the largest country in the world, with over 148 million people.
It occupies one-eighth of the world’s land. Its work force is inexpensive and highly educated since the average Russian is better educated than the average American. Russia is also rich in natural resources – it is considered one of the largest oil producers in the world (Fey, 1996). Thus, Russia presents great opportunities for a successful IJV business arrangement. Due to the inherent difficulties associated with setting up an IJV in Russia, however, it is important to design an IJV agreement that will minimize risks and maximize the advantages that Russia has to offer.
Russia is too important a market and has too many attractive resources to be ignored by foreign investors (Kvint, 1994). The international oil and natural gas industry, in particular, is one of the most vital markets in the world. This industry serves as a source of energy and basic raw materials which form the basis of a host of other industries such as the manufacturing, agricultural, and service industries. Russia holds the world’s largest natural gas reserve and the eighth largest oil reserve in the world.
It is also the largest gas exporter of natural gas, and in recent times has emerged as the largest exporter of oil as well (Katsioloudes & Isichenko, 2007). The country’s energy industry is thus a force to reckon with, and has become increasingly important in the global economy especially after the Russian economy has steadily moved away from a centrally planned system towards a capitalist model (Katsioloudes & Isichenko, 2007). Thus, despite the challenges and risks involved in starting an IJV in Russia, there are nevertheless many advantages and benefits that can be gained from such a business arrangement.
Section 2. Aims and Objectives of the Study The primary research objective of this study is to determine and discuss the key success factors (KSFs) that would ensure the success of a Russian-foreign venture agreement. The study will in particular focus on the IJVs immersed in the oil and natural gas industry. To implement this research objective, the research study aims to examine the history and trends on international joint ventures (IJVs) in Russia, the problems they encounter, and the KSFs that will ensure the success of starting IJVs in Russia.
The study will make use of a review of related literature and case study analysis. Even though the thesis will focus on IJVs involved in the oil and natural gas industry, it will cite various case studies of other companies in other industries as well, in order to get a more comprehensive understanding of effective strategies for successful IJVs in Russia. In answering the primary research objective of this research, the thesis will further explore the following secondary research objectives:
• To provide a background on joint ventures (JVs) and international joint ventures (IJVS) as a whole, particularly as to their advantages and disadvantages. • To understand the role of IJVs in Russia’s gas and oil industry. • To highlight the problems that IJVs encounter in Russia which contribute to the high failure rate of many of these business arrangements. • To identify the key success factors (KSF) that determine the success of IJVs in Russia.
• To examine the importance of the identified key success factors and the contribution of each factor to the success of IJVs. Section 3. Significance of the Study This research study is relevant because it will seek to improve the success rate of international joint ventures (IJVs) investing in the Russian oil and gas industry by identifying the key success factors (KSF) that will ensure such success. The Russian oil and gas sector generated total revenues of $123. 5 billion in 2005.
In 2003, the country’s energy exports accounted for one-fourth of Russia’s gross domestic product (GDP), opening the floodgates to droves of foreign investors excited to cash in on this booming industry (Energy Information Administration, 2005). Russia has also overtaken Saudi Arabia as the world’s leading oil and fuel exporter (Datamonitor, 2006). A huge bulk of investments in the Russian oil and gas industry comes from IJVs arrangements where many organizations set up jointly-owned business entities while at the same time maintaining their independence from each other (Johnson & Scholes, 1999).
Major American, Japanese, Norwegian, and English petroleum organizations have set up IJVs with local organizations in Russia, but despite the numbers, the failure rate of IJVs have by far outnumbered their success rates (Katsioloudes & Isichenko, 2007). The alarming rate of failure of numerous IJVs in Russia poses as a serious threat to the development of the Russian energy industry, and on the country’s economic growth as a whole (Katsioloudes & Isichenko, 2007). As such, this thesis is significant in that it will seek to provide recommendations that may help in reversing the increasing failure rates for IJVs in Russia’s energy industry.
The findings of this research study can serve as guidelines that will help to ensure the success of an IJV in Russia, which in turn will contribute to the further development of the country’s gas and oil industry, and ultimately, to the improvement of the Russian economy as a whole. Section 4. Background on the Study A joint venture (JV) constitutes a separate legal entity which is jointly-owned and jointly-managed by the two or more parent organizations, or the “venturers.
” As a general rule, a JV must have the following essential characteristics: 1) a separately identifiable joint venture entity; 2) an ownership interest in such entity by each joint venturer; and 3) an active management involvement, or deliberate abdication of the right to such involvement, by each joint venturer (Eco-Legal and Management Advisory Services Limited, 2003). There are two kinds of joint ventures: the equity joint venture and the contractual joint venture. Joint ventures involve a 50/50 participation of both venture partners, wherein each contributes 50 percent of the equity in return for 50 percent participating control.
The degrees of ownership and control, as well as the expected returns, are results of negotiations between the two contracting parties. Problems may arise at this point when parties negotiate their expected valuations or returns, particularly if the joint venture happens to be in a country with a controlled economy or when one party is contributing land or goods and that party happens to be from a country where such land or goods may not have readily ascertainable free market values (Eco-Legal and Management Advisory Services Limited, 2003).
There are certain advantages to this 50/50 arrangement, the most obvious is that both partners are equally at risk and have equal rights and obligations as to each other. The Eco-Legal and Management Advisory Services Limited (2003) further provides for the following advantages for organizations that enter into JV agreements: • A company with insufficient resources may utilize the financial resources of another company with similar needs or interests, especially with regard to embarking on a particular project.
In such a case, both companies will bear the share the potential risks involved in the new venture and reduce the burden of investment costs since all expenses are split into two between the two companies involved. • The parties may extend their capabilities and business opportunities by pooling together their resources, technology, and expertise. • Either one of the parties may expand its market power or even expand into a foreign market with which it has no familiarity.
A JV agreement is especially helpful because the venturer who is located in the country or area where the other venturer wishes to expand is more familiar with local business customs and trends. The challenges in forming JVs are not limited to those challenges experienced for Russian JVs and international joint ventures (IJVs) alone. Studies show that a majority of large JVs encounter serious financial or managerial problems within the first two years of operation. Some common difficulties encountered by joint ventures in general are listed below (Hewitt Associates, 2008):
• The philosophy governing expectations and objectives of the joint venture agreement is unclear. • There is an imbalance in the level of investment and expertise brought to the joint venture by the two parent organizations. • The senior leadership and management teams for the joint venture receive inadequate identification, support, and compensation. • The JV partners possess disparate, and usually conflicting, organizational cultures and operational styles. • The JV’s size is modest compared to the two parent organizations.
Thus, poor or unclear leadership, different corporate cultures, and a poor integration process contribute greatly to the failure of JVs, by analogy, of IJVs as well. Similar to the challenges outlined by Hewitt Associates (2008), the Eco-Legal and Management Advisory Services Limited (2003) provide for the following similar challenges that may lead to the failure of JV agreements: In sum, entering into a joint venture agreement is definitely not for the faint of heart.
JVs offer a host of benefits to the parties involved, but both parties cannot simply enter into an agreement without carefully weighing out the risks involved and coming to terms with goals, expectations, and capabilities of each party. What makes it especially harder for JVs and IJVs in Russia is that in addition to the challenges that JVs in general have to deal with – whether or not they are located in Russia – they also have to deal with other problems that are unique to the Russian business industry and economic milieu.
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