Question:
Discuss about the Joint Venture for Competitive and Risky Environment.
In today’s fast-moving competitive and risky environment, organizations that fail to strategically plan for their future do not hold a firm position in the market for a longer period. In simple words, commercial strategic planning is a long-term planning that considers all external and internal variables and recognizes the segments of the target market. Therefore, any organization that gives due regard to commercial strategic planning can easily attain success by fulfilling every desired goals and objective. Moreover, to form better relationships with a specific target market, many types of legal relationships like joint venture, distributor, agent, etc can be entered into by an organization to execute their strategy of thriving in the market. Thus, this report intends to focus on such legal aspects of commercial strategic planning in the context of the Russian market.
Entry strategy of an organization is generally a mode of entry that is adopted to enter a new global and competitive market. Such modes of entry are basically legal relationships that can be utilized to establish a fiduciary relationship in the market. Such relationships are an agency, distributor, and joint venture agreements that can play a vital role in becoming significant to a business strategy of a specific organization. Under a distributor relationship, the supplier or manufacturer can easily supply his products to the distributor who can thereafter sell the same to their customers, after adding a margin to cover their profit and other expenses. In contrast to this, an agency relationship exists when the agent has permission from the supplier to take orders from customers or to establish a legal relationship betwixt the customer and supplier (Levine & Prietula, 2013) . Nevertheless, the basic difference betwixt both these legal relationship is that in an agency, the agent operates according to the desires of the principal, whereas a distributor operates on his own behalf but by pursuing a contractual relationship with the principal to buy specific goods and thereafter market them directly. In contrast to both agency and distributor, joint ventures are that kind of legal relationship which can be easily formed informally (Cohn et. al, 2005). However, it must be noted that the terms and conditions of the relationship must be already set out in the joint venture agreement. There is no proper legal definition for such joint venture, but it is usually an unincorporated joint venture when it comes to legal relationships. Nevertheless, joint venture legal relationships are a cooperative and commercial arrangement betwixt two or more businesses to execute a particular business strategy for mutual profits (Alter, 2003).
The best advantage of getting engaged in a distributor relationship is that the supplier is capable of passing a high degree of risk that is related to the items. Furthermore, a distributor is more motivated to sell the products bought from the supplier because he takes a higher risk for failing to sell. Similarly, the advantages of involving in an agency relationship are that these are less risky from the competition law issues. Besides, the courts of EU have stated that wherein any agent bears nil risk for activities for which he has been appointed, the EU regime will not be applicable for such segments of the agreement that can prevent the way the agent can sell the products of the principal (Cohn et. al, 2005). Further, an agency relationship is more suitable for situations wherein the supplier intends to maintain high control over the pricing and marketing of the products. In contrast to these, a joint venture relationship is also beneficial especially when the organization intends to capture the target market by sharing the risks with the venture partner (Hemmer & Labro, 20008. This can allow them to maintain a lead in the market and obtain better opportunities towards expertise and capacity. Furthermore, in this competitive market, such relationships can easily offer creative ways for organizations to exit from non-core operations. However, even though these legal relationships have their own advantages, they have their disadvantages as well that can prevent organizations to avoid involvement in the same. In an agency relationship, it may happen that the agent has very lesser resources than the distributor, thereby creating various issues for further growth (Alter, 2013). Furthermore, an agent may have his own ways of selling his product in the target market that may not align with the ideals of the principal. Further, the agent may also sell products to customers who can compromise the value of such items, thereby causing huge losses to the principal. In relation to distributor relationships, a distributor always faces a problem of having insufficient sales force for introducing newer products in larger markets like Russia (Alter, 2013). Another reason why distributor relationship is disadvantageous is that even after unsatisfactory services from them, disengaging the distributor is very difficult to be conducted. In relation to joint venture relationships, the most disadvantageous thing is that there is a high level of misbalance in the asset, investment, and expertise level of all the partners involved in the agreement. Furthermore, success in joint venture especially in highly competitive markets like Russia requires immense analysis and research of the objectives. Therefore, these are the three-key vital legal relationships that ABC Ltd (fictional enterprise) can form with any organization present in Russia (target country).
The focus of ABC Ltd is enhancing partnerships through exporting strategy. Whether legal relationships align these with the target country/market
Based on the previously mentioned analysis of the key legal relationships in commercial strategic planning, it can be seen that agency relationship is more likely to benefit an organization, especially in cases wherein it intends to market the products of another enterprise or wishes to develop its present network of distribution. In other words, if ABC Ltd intends to enhance its distribution network and market the products of another organization in Russia, then getting involved in agency relationships will be very relevant for it (Olsen, 2012). Furthermore, if it is considered that ABC Ltd intends to capture the international markets through export strategy, then agency relationships can fetch more benefits to them, as the agent can easily represent them in the global markets. Besides, this can also assist the organization to focus on developing its partnerships with the target country or market. Furthermore, in relation to the distributor, if the focus of ABC Ltd is exporting, such relationship is widely used in practice when the organization’s objective is better served by these structures in contrast to establishing a corporate presence. However, it must be noted that choosing an agent and distributor is a time-consuming process, as ABC Ltd will have to meet with its partners in the target country physically and analyze whether the agency is better than distributor relationship and vice-versa. However, since distributor agreements take approximately two months to take effect in Russia, it will not be relevant to opt the same (Svejenova et. al, 2015). Furthermore, a joint venture with Russian enterprises are very common and are formed through on-shore joint venture vehicle or forming the venture outside of Russia. Such relationships can assist in enhancing the partnership connection betwixt the EU and Russia. Moreover, exporting can also be easily facilitated through such relationship. Hence, agency and joint venture relationships are more relevant in this context.
The nature of business opportunity has grown in uncertainty, complications, and now evolves at an enhanced pace, making it problematic to proceed alone. Especially, for large capital projects, joint ventures have been regarded as the best available method to access huge expertise and assist organizations to trial a global market entry with a minimal amount of resources. In relation to this, there are various key items that must be taken into due consideration that can cause a prospective partner to walk away from the table. If such terms are prevalent in the joint venture agreement, it will be more beneficial for the organization’s interests and entry strategy.
The first most important term forming part of the agreement is that it should strictly mention whether there is any protected territory wherein the organization is not allowed to utilize its marketing strategies to capture the area. Such fight for the best description of your territory is the most relevant joint venture agreement term because many enterprises are willing to budge over territory (Svejenova et.all 2010).
Secondly, every joint venture agreement must incorporate a guaranty segment that can be extensive in nature. The ideology behind this can be attributed to the fact that this ensures adequate coverage of expenses that are reasonable and must be given to the covertures on an agreed basis. Further, it may happen that either of the parties’ desire to involve third parties like suppliers and landlords. In relation to this, it must be mentioned in the agreement that the covertures must be equally liable for all the financial responsibilities associated with their business, which includes the use of confidential details (Zhang & Cueto, 2015). With such terms in the agreement, the entry strategy of the organization will not be disturbed as it will be ensured that any financial obligations are not to be borne by it alone.
The third most important term in the arrangement must be the specification of an end-date of the same. This is because each party is likely to run an entirely distinct business collectively, and it is therefore important to have all the milestones specified so that activities of every partner can be thoroughly tracked. Such conditions in the agreement also enable the covertures to plan their other endeavors in an appropriate way. For instance, if XYZ Incorporated and the other party (ABC Ltd) is already in terms that they will adopt an export marketing strategy to capture other areas, having a deadline will assist them in fulfilling their motives effectively and in time. The length and kind of renewal right is another important term that must be present in the agreement because if renewal rights are not negotiated properly, the entire marketing strategy of parties may turn up to be a disaster. Therefore, having proper renewal terms and conditions in the joint venture agreement can allow them to be sure of the fact whether they can continue with the same or they must walk away. Another relevant term forming part of the agreement must be disclosure of the fact of who owns what? In other words, it must be mentioned that whether the parties have an equal share of the resulting outcomes, or the percentages vary in nature. For example, if XYZ Incorporated intends to acquire eighty percent of the resulting profits, then there must be an appropriate measurement technique to decide whether the provision of such percentage to the enterprise is valid or not (Svejenova et. al, 2015). Moreover, if this term is absent from the agreement, it may happen that the entire plan of getting access to expertise and professionalism with a minimal amount of resources, is wasted (Rosenbaum, 2016). Hence, ABC Ltd must make sure that it eliminates any provision that gives XYZ the right of first refusal. Another relevant term that must be prevalent in the agreement is that what will happen if either of the party fails to perform their roles and duties in an appropriate manner. The presence of such term in the agreement can allow ABC Ltd to be assured of the fact that the other party (XYZ) cannot just enter into the agreement and sit idle. Moreover, it may happen that either of the parties is unable to dedicate their previously-stated share to the venture, or is encountering some other contingency. This is called as cross-default provision in the agreement that can prevent any of the parties from punishing the entire venture for the failure of one party (Svejenova et. al, 2015). Hence, in any case, the presence of such term in the agreement will be good for both the parties as they will know in advance what will be the outcomes if they back-off or are unable to deliver what they assured previously. Besides, the entry strategy of ABC Ltd to capture the market through exporting can also be safeguarded, as it will not be hindered if XYZ Incorporated creates any complications (Fortgang et. al, 2003). Further, ABC will also not be punished for non-fulfilment of its duties outside the terms and conditions mentioned in the agreement. Lastly, it may also happen that even though the joint venture agreement is in place, yet a disagreement possibility can arise. In relation to this, if there is a term that can solve any kind of dispute or conflicts betwixt the covertures, an agreeable solution can be easily made when such a scenario arises. For instance, it may be agreed that either a third-party may come up to the rescue or both the covertures may opt to solve the dispute in court (Fortgang et. al, 2003). This means that the rules can be settled before and moreover, there is a chance to know when and how the dispute arises that can be settled by amicable means.Therefore, such term may not only protect the entry strategy of ABC Ltd but it may also assure it of the fact that the decision of getting into a joint venture with XYZ Incorporated will not go in vain (Coyne & Garvin, 2013).
Therefore, these terms are the most significant terms that must form part of the joint venture agreement because it safeguards the strategic planning of ABC Ltd and allows it to access global markets and expertise with a very minimal amount of resources. The agreement is all about working together, preparing to invest money and time collectively, and above all to unleash an item for the customers that are better than what would have been facilitated individually.
Conclusion
It can be seen from the above-mentioned analysis that commercial strategic planning can easily assist an organization to attain its goals and objectives. Furthermore, establishing legal relationships also play a key role in this scenario as it allows an organization to capture the target market by framing entry strategies. Overall, all the previously mentioned legal relationships are vital but in relation to Russia, distributor agreements consume immense time that can cause huge losses.
References
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