Joint Venture in the Construction Industry in Spain

Joint Venture in the Construction Industry in SpainAn estimated 20,000 fit stakes apply been organize worlwide over the past two years. Such strategic solelyiances roll in the hay digest headache owners with foresighted-term security, new revenue channels, and , very much, the anchor needed to concord stableness in separatewise turbulent waters. A successful conjunction threaten give notice open the door to a wold of future provideship opportunities (Robert L.W each(prenominal)ace 2004)Factors instanter at play in our economy make it to a greater extent feasible and more critical than ever for small business owners to leverage the power of vocalise venturing. These factors takeThe emergence of the customer economyAdvances in technology that have neutralized time and space contraintsChange brougt on by shifting demographicsMore entrepreneur- and more oportunities- as a result of downsizingIn the midst of these world-changing trends, what is often missing from a succe sffull business strategy atomic number 18 the critical alliances and strategic partnerships that depart help leverage the strenghts and minimise weaknesses. Forging stick approximates and strategic alliances will allow business to win millions contracts as the partner with large companies to offer with, breadth, and deepness demanded in the martplace.Done swell up, reefer surmisals provide twain participating businesses with a chance to learn and benefit from each other, and to achieve results neither could achive wholly. In this discourse will be explained- how to enter into enunciate posts well so a social club can prosper in ways it never could by doing it aloneCONTENTSPageACKNOWLEDGEMENTS iABSTRACT iiCONTENTS iii arguing OF TABLES vLIST OF FIGURES viINTRODUCTION 11.1 Introduction 21.2 Objectives of Dissertation 2Contents 3JOINT VENTURE EXPLAINED2.1 Joint Ventures Explained2.2 The Rationale of Joint Venture Formation2.3 Joint Venture Formation2.4 circumspection and ImplementationLITERATURE REVIEW3.1 Forms of Joint Venture3.2 Motives of grading a Joint Venture3.3 Selection of Partners3.4 Preliminary Agreement and Negotiation explore Methodology4.1 Research Approach 404.2 Research Ethics 414.3 Interviews 424.4 Survey 46FINDINGS AND DISCUSSION5.1 Basic Conflicting Interests5.2 Loss of Autonomy and Control5.3 FindingsCONCLUSIONS AND RECOMMENDATIONSLIST OF TABLESLIST OF FIGURESChapter OneIntroduction and Objectives of DissertationIntroduction trading once grew by one of two ways grass roots up, or by acquisition. Today business grow through alliances- all kinds of dangerous alliance, stick surmisals, and customer partnerign, which by the way, very some people understand?(Peter F.Drucker 2007)Experiences of joint venture wariness in the construction constancy traced back to the early 60s. It appears that characteristics of this industry favor the pro military strength of joint ventures formation. Although statistics atomic number 18 not avail able, this is obviously unbent in relation to the infrastructure amplifyment of Spain at the present momentThe determination of the .1.1 Objectives of DissertationThis paper attempts to review the living literatures on solicitude of joint ventures its merits and problems, particular issues arisen and suggested anxiety techniques to cope with such obstacles in operating a joint venture.Interviews were conducted with two cured staffs of one of the partners of a joint venture make by four construction firms. The joint venture is currently undertaking one of the Train Station Core Projects to be completed before July 2011. It is hoped that hand-on experiences of these senior staffs, at the level of Management Committee of the joint venture, as well as the operational level of the joint venture, would provide us valuable sharpness and opinion on the art of joint venture focussing, as a reflection and complement to the general review of the literatures.The key objectives beTo cr itically mensurate the existing literature to Corporative alliances issues and the role of International Strategy in applying these issues.To establish the importance Strategic alliances with competitors in the international market.To guess the purposes of strategic alliances as well as to what extent might be successful a company.To determine other factors that influences companies in seeking Joint Ventures.To assess the credits of value creation.To study likely pitfalls in doing a Strategic Alliance.To draw conclusions upon a joint venture in a character reference study.1.2 ContentsIn Chapter 2, the organization of interest is depict in detail a unyielding with an explanation of its forms. In Chapter 3 the literature in relation to joint venture and strategic alliances in general and its exertion within the company is critically reviewed. Chapter 4 describes and justifies the research methods employed and includes a section on the ethical considerations of the calculate. I n Chapter 5 the receiveings of the one-to-one interviews, In Chapter 6 the findings are analyzed and evaluated in relation to the published research literature. In Chapter 7 a joint venture framework for the SMART Services is presented along with a plan for its murder. Finally, in Chapter 8 conclusions are drawn and recommendations are made for future work.A list of references is provided and the appendices contain pertinent information, documents (including, the survey fountainheadnaire) and collated data.Chapter 2Joint Venture Explained2. Joint Venture ExplainedA joint venture is the coming together of two (or more) independent business for the sole purpose of achieving a specific egresscome that would not have been achievable by one of the firms alone.(Source Wallace 2004)2.1 The Rationale of Joint Venture FormationThe form of joint venture provides benefits and a skeleton, based on which the circumspection philosophy of the joint venture builds up. . (See Figure 1)Figure 1 Joint Venture. Business BenefitSource Trendsetter Barometer, PWCIn regard as of share of prudence, there are dominant parent ventures, share management ventures and independent ventures. Degree of involvement of parents in these types of joint ventures differs, and in turn these joint ventures face different types of nature and management problems. At operational level, there are surfacees of integrated structure and non-integrated structure. The nature of the business and the share of responsibilities in unhomogeneous aspects of the business will be the determination factors of choiceGenerally speaking, the choice of form of joint venture should be made in ossification to what contri saveions are required of the parents in order to achieve the purpose of forming the joint venture. Companies forming joint ventures basically intend to develop markets and returns. rough-cut reasons are to suit government policies, pooling resources, danger sharing, twist business relation an d to reduce competition.The first step to form a joint venture, after realizing that such tactics is desirable, is to select a partner. servant on selection of partners concentrates on three major themes shared objectives, mutual trust and co-operation, and abilities of the authorization partners.Appropriate partners should be compatible in their objectives of forming the joint venture and their expertise/K instantaneouslyledge on the business. Right partners also should possess similar management styles normally. Lastly it is important that potential partners real bearing is realizes, to avoid future major dis haltments.2.2 Joint Venture FormationWhen the partners have reached initial agreement to form a joint venture, often a exploratory agreement is signed. It forms a basis for the drafting of the detailed agreement, and provide framework for the partners to work together and proceed to more detailed planning works. save incidental negotiations following for the preliminar y agreement often provide good chances for the partners to understand more thoroughly the expectation of potential partners. It is not uncommon that a final agreement cannot be reached because major conflicts are revealed in the process of subsequent negotiations after preliminary agreement.It is always intended to write agreements to cover all contingencies. But some managers consider that it is not so serviceablely attainable in view of the rapidly changing environments nowadays. Instead, emphasis should be placed on building up mutual trust and thus it is important to in incorporate a sense of fairness into the joint venture agreement. Generally defined, well understood mutually, and regardful to each others rights in return to their contributions committed.It is suggested that the best solutions should be an agreement covering all possible contingencies, together with the design of a tensile mechanism allowing changes to be agreed surrounded by efficiently term promoting cooperation and mutual trust.A very important aspect in drafting the joint venture agreement is the design of reward system for the partners. Pay-off in the form of product flow between the parents and the joint venture is often the source of major management problems and conflicts. Such product flow diverts attention of the parents from the joint ventures benefits. Again, fairness and willingness to co-operate are the keys to resolving such problems. If at all possible, market comparing is a useful guide to fix the transfer price in a fair sense.The primary fearfulness of a partner in forming a joint venture is probably the story of control over the business. In respect of split of ownership, majority-minority shares are sometimes preferred, as the majority of partner can act as leader for the joint venture and thus gives direction in a less ambiguous manner for the operation of the joint venture. On the other hand, come companies prefer equal shares to ensure willingness of all partners to contribute efforts as required and they may also feel more comfortable that all partners have equal status? in the joint venture.Ownership distribution is less important than how operation control is actually apportioned. There is no determine on thumb on allocating operation control. General guidelines are that each parent should be motivated to make necessary commitments continuously in accordance to their abilities, and that each parent should be cherished in its interests. To enhance long term co-operation, exploitation of other partners interests must not be attempted. It must be emphasized that full equality in operating control requires untold more efforts from all partner, and the joint venture would have to be operated in day-to-day on-going negotiations and compromise among the partners.2.3 Management and ImplementationStandard joint venture organization consist of two components the management board and operation organization. The management board is the highest authority of the joint venture. The composition of the board and jurisdiction of the board determine largely the share of power among the partners. To build an effective board, board members should be delegated enough and necessary authority by their own companies in making decisions and vote in the board. They should endeavor to maintain mutual trusts among the partners, to sustain the common name and address and objectives of the partners and to the exercise effective control over the joint venture. This is better to clearly separate the operation organization independently from the management board, to avoid biases or perceive biases towards one particular partner.As mentioned earlier, staffing is a possible and often effective way of controlling the joint venture operations. But overact may hark back resentment from other partners. It will be uttermost(a)ly difficult to build up cohesiveness of the operation organization from all the partners. The organization will maybe segregate into groups of their own companies. Theoretically, secondly is desirable only if considered necessary for the needs of the joint venture. Otherwise recruitment from outside can more easily maintain the independence of the operation organization.The joint venture manager is an important role, as the leader for the operation organization, the bridge between the child and the parents, and sometimes as the go-between? for the parents if disputes arose among them. He has to possess negotiation skills, people skills, and selling skills to bring together mutual co-operation form all parties concerned. He is often found to be touch on in ambiguous consanguinity, with his sub-ordinates and supervisors, and wit the parent companies. In order to achieve his task of pleasing everybody and avoiding conflicts and tension between the parties concerned, he has to be highly large-minded and ambiguity.The joint venture manager should be loyal only to the joint venture, not to any o f the parents. He has to be perceived as neutral, otherwise his opinions will never be convincing to other people. Biased loyalty of the joint venture manager will arouse other parents taking harmful cadency against smooth operations of the joint venture. Being neutral is an important qualification of the joint venture manager in order to gain autonomy and trust, which in turn makes the joint venture more likely to succeed.The joint venture agreement implied an independent operation organization separated from the parents to be fully answerable for daily management of the business and that the operation organization enjoyed a high pointedness of autonomy. In practice, the independence and autonomy were granted to the operation organization, only if all parents, in particular the joint venture manager, will act truly neutral. Without such belief, parents were able to exercise disruptive negative measures to hinder the normal implementation of management for the joint venture opera tions.The case also supported that the quality if the joint venture manager in negotiation skills and human relations, and its relationship with the parents was a paramount importance of the success of the joint venture. A strong leader might be harmful for a joint venture, but a practical and flexible manager surely is very useful.Chapter ThreeLiterature Review3.1 Forms of Joint Venture3.3.1 Share of managementThe fundamental question in management of joint ventures is the degree of involvement of partners in decision making processes on major policies as well as day-to-day operations of the joint ventures. In this respect, joint ventures are often categorized into three types(Stephen I. Glover and Craig M. Wasserman 2003)Dominant parent ventures in which management decisions are dominated by one parent, either formally by majority voting rights in all major aspects or informally by management settings to control key decisions makings without significant involvement from the other party.Shared management ventures in which management of joint venture operations are shared between the parents, either shared by each providing resources in certain functional areas or shared by pooling resources at most levels of the joint venture operations. Characteristics of this type of joint venture are the necessity of betray negotiation and agreement between the partners at most all levels and aspects of the business management.Independent ventures in which parents involvements in the management of the joint venture is very little, as it is left almost entirely to an independent group of personnel employed under the joint venture. The roles of parents are not too much different from shareholders, except that they may be providing other distinct types of resources as well as capital and there are only a few shareholders.Dominant parent ventures and independent ventures are thought to be more trouble free, as they require less interaction and thus less potential conflicts be tween the parents. However, there are no concrete evidence to suggest that these two types of ventures will be more likely to succeed than shared management ventures. Obviously the choice of joint ventures types is dependent on the situation and nature of the business and the parents characteristics.Circumstances often call for shared management but no other choices, simply because joint efforts are required to achieve what is intended. Pooling of resources, and thus a mixed input of management efforts from both parents, may be the fundamental desire of forming the joint venture. In such cases, dominance of one parent certainly cannot fulfil the purpose of the strategic alliance and the question is to overcome the difficulties of shared management on joint ventures operations.Legal FormIn terms of the legal form of the joint venture, there can be three choices (Dennis Campbell and Antonida Netzer 2009)Consortium it refers to a grouping, create on a one-off basis, which is governed by a contractual agreement. The contractual agreement is made to define clearly the position of each of the parents, including a specification of the authority, responsibility, liability and power of each party.Parnership it can take a form of formal partnership. The parties are then effectively treasure in law as partners. The joint venture is considered as a business entity on its own, in legal terms, separated from the individual parties. As partners, each of the parties is legally liable for any debt or disregard committed by other partners on behalf of the joint venture, which may not be the case if formed as a consortium depending on details of the contractual agreement of constituting the consortium.Incorpotation joint ventures which are intended to be a permanent business are usually constituted as an incorporate entity. This would enable the parties being insulated from the risks of the business of the joint venture, as a limited company. The major disadvantage is that th e profit and bolshie sustained by the joint venture as incorporation cannot be set off against that of the parent companies for tax purpose.3.1.3 Operational StructureThe two extreme categories of operational structure of a joint venture are integrated joint venture and non integrated joint venture (Dennis Campbell and Antonida Netzer 2009)Integrated Structure the parties agree on a certain proportion of capital and resources investment and a prescribed profit or loss sharing formula, and they both participate on every level of execution of the joint venture business.Non-integrated Structure in such case, the joint venture usually provides for general management machinery, which looks after general administrative and coordinative roles for the joint venture business. The whole business is then shared out into packages or portions which are assigned to the parents to execute and operate such packages or portions as designated in the joint venture agreement (Appendix A)In practice joint ventures are usually a premix of these two approaches. The question is the degree of integration to be adopted for the given set of circumstances faced by the joint venture. For that joint venture business that can be divided into clear cut portions and such divided portions will suit the capability and resources of different partners, non-integrated approach will usually be adopted. While the joint venture business is complex and it requires a centralised management of all aspects of the business, the management will be integrated.Integrated approach is more difficult to manage. Conflicting interests and ideas between the partners can arise more often than non-integrated approach. But it is often unavoidable as the nature of the joint venture business mar not is possible to be divided neatly into portions.On the other hand, for non-integrated approach, complicated contractual argument can arise between partners. In case of joint venture agreement in a basis of joint and seve ral responsibilities, it is not uncommon that the partners lodge contractual claims against each other on non-performance or default of the other parties in executing their portion of the joint venture business resulting loss to the whole joint venture from third party claims.The Case playing fieldThe parents attempted to adopt a mixture of shared and independent management for the joint venture under study, as implied in the conditions of the joint venture agreement. The management committee of the joint venture, which was the highest level of decision making and policy setting, were composed of one representative each partner.In respect of operational structure, a mixture of integrated and non-integrated approach was adopted. While a separate joint venture organization supposedly independent from the partners managed and operated the whole joint venture business integrally, the project was divided into portions and packages which were then subcontracted back to the partners under the joint venture3.2 Motives of forming a Joint VentureCompanies forming joint ventures basically intended to develop markets and products i.e. to strength the firms existing business, to take the firms existing products to new market, to obtain new products that can be sold in the firms existing markets, and to diversify into new businesses (Mark de Rond 2003) These objectives can be achieved through various ways, as shown in figure 1.1But why choose a joint venture to try to achieve these objectives? Common reasons are (Das y Teng 2000)Government Policies because of licensing requirements of the government for undertaking a certain type of business in a country, e.g. for construction works in Spain some(prenominal) foreign companies may wish to form joint ventures with local companies who have the required licenses at hand in order to enter the market first, while they at the same time apply for the necessary licenses which may take months or even years in some cases. Many gover nments, who attempt to protect the development of certain industry of their countries, establish regulations that prohibit foreign companies to set up wholly owned subsidiaries. If foreign companies wish to explore the market of those countries, they have no choice to form joint ventures with local companies.Risk Sharing in very large and risky projects that companies feel uncomfortable to bear but unwilling to give up the business opportunity, several companies share the risk by undertaking the project jointly. These risk may be commercial risks (finance, source of materials, technical uncertainties, etc) or political risks (change un government policies, unstable political status of the country, etc)Figure 1 Motives for joint venture formationNew MarketsExisting MaketsTo use up Existing Products To Foreign MarketsOpen MarketsClosed MarketsTo Diversify into New BusinessLearning from your partnerLearning with your partnerTo Strengthen the Existing BusinessAchieving economies of ou tmatchAcquiring technologyReducing financial riskTo Bring Foreign Products To Local MarketsMarketing and distributionScrewdriver assemblyDeveloping local technology engine room flow back to parentExisting Products New ProductsSource (Das y Teng 2000)Pooling of resources companies often join to develop business that requires a combination of different resources (finance, technology, market access, local experience, etc) that none of these companies possess all of them, e.g. a combination of market access by one company and technical knowledge of a product by another, combination of different technical skills that are necessary to develop a product, or a combination of several companies resources to achieve economies of scale.Building business relation some companies form joint ventures with in order to build up wide business relations among the industry. They believe that this will enable them to increase their networks of business and that it may be helpful for their further busine ss developments in long term.Reduce competition joining with your competitor automatically reduce the degree of competition. This is particularly useful if there are only a few potential competitors only. It is not uncommon to find in certain industry that formations of joint ventures effectively create monopolistic or oligopolistic conditions.The Case StudyIn the construction industry inherent risks involved in the projects are the major concern of a companys business strategy. Sharing of commercial risks (financial burdens on the company, source of raw materials, technical uncertainty involved with the works) for large scaled projects is the major reason of forming joint ventures. Because of the huge amount of resources involved and the multi-disciplinary nature of the projects, pooling if resources from several companies is necessary to gain sufficient competence in order to tender for the works. non a single company may have all the necessary skills and sufficient amount of res ources that are required for those Train Station Core Projects. Formations of joint ventures become the most common tactics for the construction firms to undertake those projects.Political risk is also a major concern especially for foreign firms who are not familiar with the policies. Most foreign firms conceive that formation of joint ventures is an effective way of securing the safety of the business, particularly when undertaking infrastructure development projects of honorarium terms. Large construction firms (both local and international firms that were interested and had potential to undertake these large projects) gradually formed into groups of consortium to tender for these jobs. As a result, the industry transformed into competing allied groups, instead of competing among individual firms. Although such transformation might be unintentional at the time these companies first formed joint ventures, they now became aware of such advantage and might use this again as one of the useful tools in future when considering the companys strategy competitions in the industry.3.3 Selection of Partners3.3.1The Criteria of Choosing a PartnerConsiderations on selection of partners concentrate on three majors themes (Lynn Krieger 1991)Shared objectivesMutual trust and willingness to co-operate andHaving necessary skills/resourcesThe task is to find a compatible partner in respect of these three major themes. The right pair or group of partners often implies an asymmetry of partners, i.e. the right partners often have different quality and characteristics so that they will complement with each others on the need of the business. Basic consideration is whether the potential partner can provide what you need and the confidence of the potential partners willingness to co-operate.They may not have the same objective but their co-operation should fulfill each others objectives. They may not have the expertise on the same area, and they should possess different knowledge so that when combined together their competence will be strengthened. In fact two partners having expertise on the same area often is the source of conflicts as both will consider their own approach is superior without due respect on the other partners expertise on the field.But right partners should desirably have similar management styles and outlooks so that their overall business strategy would go along the same direction. Otherwise, conflict on major business policy that is originated from the incompatibility of the partners expectation on what the joint venture should achieve eventually arise someday Lyn Krieger put forward two prepositionsThe more similar the culture of firms forming a shared management joint venture, the easier the venture will be to manage.The more similar in size are the parents of a shared management venture, the easier the venture will be to manage. A significant size mismatch between a ventures parents can create a lot of problems for the venture.Cultur e here refers to both corporate culture and the culture of the country from which the firms are based. These propositions are based on the principle that managers, to be effectively working together, need to be able to evaluate each others judgment and the way of working before they can build up a cohesive team. The second proposition is an extension phone of the first one as size of the company can contribute to difference in corporate culture.One should also be alert on any hidden agenda of your potential partner (Kathryn Rudie 2003). Confidence on the observation of your potential partners real intention and objective to form the joint venture is a pre-requisite condition before a decision can be made on the choice of partners. The classic tragic case of Beijing Jeep is a good example of hidden agenda. Both partners did not spell out clearly their real intention of what was to be achieved, and both partners did not understand thoroughly the other partners real intention before subscribe the joint venture agreement. Unreasonable conflicts arose not long after formation of the joint venture, when both parties realized that they were expecting something beyond the wishes of the other party. The tragedy ought to be avoidable if both parties made clear of their expectations before signing on the joint venture agreement.3.3.2 The Process SelectionIt is suggested that a step-by-step approach should be adopted to develop relationship with potential partners (Kathryn Rudie 2003)Prepare a checklist desirable quality of the partnerSearching out for potential partners based on the checklistPrepare proposals and issues to study and negotiate with the potential partnerIf possible, try out a joint venture of small scale before committing long term and large scaled joint venture businessTheatrically, this process enables the partners to develop faith and mutual trust and allows better mutual understanding before placing large financial stakes on joint ventures with unfam iliar partners. Obviously, this takes a long time and in practice the ever changing business environment often does not wait for such long process of partner selection. Business opportunities simply slip away before the good partner relationship can evolve in this way.In real life, it is often founded that good joint venture partner relationship is assumed at the time of signing the joint venture agreement, and the assumption is often based on personal relationship between the CEOs of the companies.The Case StudyMajor consideration in selection of partners was what resources the partner could bring in to supplement his shortages and strengthen the competence of the company to successfully tender for the job. Reputation and track record in the international construction industry was the first item to check on, particularly as the potential partner was new-comers to Spain.It was admitted that the other partners intention of choosing the company was not fully known at the time of formi ng the joint venture. At that time, it was only understood that the company was chosen by other partners because of its local experiences in Spain and the feeling of political security that the firm could provide as a whole owned company. It was now gradually revealed that