BMA799 Strategic Management : Joint Venture is a Process

Introduction

Joint venture is a process in which two or more organization come together for achieving a common goal. For the strategic growth joint venture work very effectively. Joint venture adds value to the work and the sharing of thoughts of 2 companies can easily achieve the target, these ventures are formed in the long term business (Forbes 2017). Many companies believe rather than spending amount in the introduction of new product, company can have a joint venture with a company who is having good market share. It is essential for the development of the area and its infrastructure. Energy sector is one of the essential sectors for fulfilling the public requirements. Energy sector is the common sector in which the formation of the joint venture takes place. Each and every joint venture gets success; it is very difficult to say this. There are many challenges which joint venture can face in energy sector. Further the report focuses on the joint venture that took place between the two companies that Mobil and NNPC. In this joint venture the company NNPC in Nigeria holds 60% of the share and the rest of the 40% equity shares are acquired by the Mobil Company.

Motivation behind the joint venture

There are some of the benefits which company gets, and that motivates the company to form a joint venture. Every company has their own specialty in the field and considering that the other company forms a joint venture. In Nigeria, NNPC joint venture emphasis on expanding the business in the international and the foreign market. NNPC have some of the factors which make the company to involve in the joint venture.

Spreading capital for investment

In the joint venture, the two companies which are engaged in the process of the joint venture can separate their capital. Each and every company needs to spend money to start their business. That amount will be divided in two companies which will reduce the monetary burden (Harjoto & Jo, 2015). NNPC spend huge amount in conducting and operating the procedure. This is the only motive of the NNPC to get involved in the joint venture agreement with the largest company Mobil. All the expenses that are going to take place in the joint venture company are going to bear by the two companies.

Competition

When two companies form a joint venture then it is said that the power of the company combined and they will be able to work with double efficiency (D'Alimonte 2017). With that power companies can easily form a strategic move against the competitors (energy sector competitors) with use of the technology and innovative ideas of the company. In the market NNPC collectively with Mobil can give a tough competition to the other oil and gas companies who are involved in the joint venture.

Technology 

Technology now a day plays important role for the company, each and every company wants to use advance technology for their business. With the use of the technology company will be able to make the improvement in the extraction of oil and gas (Kong & Ohadi, 2010). For advance technology company needs to expand more and more, which might be not affordable for the company and there might be possibility of certain challenges that company needs to face. These aspects might be a reason for the NNPC to form a joint venture with mobile which will take care of the challenges related to the technology.

Risk sharing

The industry of oil and gas involve massive risk in the management and that the company needs to bear. For this in oil and gas sector most of the companies like to prefer Joint venture. NNPC involved in the joint venture so that the management of the risk can be done by the company easily. Company needs to take care of the safety measures of their employees as there is a risk factor in the extracting and refining the oil from the land.

Resources

In energy sector especially in oil and gas industry thee company need to fulfill the skilled and unskilled responsibility. In the long run businesses organization may face different challenges related to the resources. Joint venture helps to fulfill the responsibility in the faster manner with efficiency. Talking about the joint venture between NNPC and Mobil together the company is able to produce up to 1000,000 bpd (Nigerian National Petroleum Corporation 2017).

Legal restrictions

There are some of the legal restrictions on the organization who explore the energy sources. Apart from it in the legislative jurisdictions of many countries there is strict restriction on the exploration of the energy. In the joint venture formation the organization together creates a team who take care of the legal formalities and procedure. These some of the restriction can affect the working of the company. So NNPC get motivated with some of the features of the joint venture, which make them to choose the joint venture for doing business.

Benefits of joint venture 

Joint venture is formed with the accomplishment of the common goal, for achieving this goal there is need of expert knowledge to earn profit. Expert knowledge helps in the oil and gas industry to achieve the goal. This benefits the joint venture company working and they regularly perform the activity. This is the reason because of which NNPC allowed Mobil to take the crucial upstream project responsibility of Nigeria. The below benefits are some of the benefits which company consider while forming joint venture.

Sharing profit and expenses 

Joint venture is formed for earning the profit; basically the organization who forms joint venture expects huge profit out of it. The partners will also do equal investment in the project for earning profit out of it (Chima, 2011). NNPC use the advantage of the technology along with Mobil company capacity just to fulfill the requirement of the operations which help the company to earn huge profit but have to bear expenses. In Nigeria the profitability of oil and gas industry is quite higher than further countries.

Bearing Risk

The risk is high in the oil and gas industry as this is included in the big business where there is possibility of the disappointment of the project. The risk is bearded by both the partners in the joint venture business (NIBUSINESS INFO.CO.UK 2017). In Nigeria oil and gas industry, the investors are in risk bearing condition. NNPC and Mobil have to bear risk together when they found failure of the project or losses in the project. Oil and gas projects are the big projects in which risk factor is common factor (Exarheas 2015).

Initial Growth of the business

The business needs growth which is possible with the investment, being in Joint Venture. Being in joint venture by using proper techniques company can be able to achieve the objective, which result in the growth of the company (Kelland, 2014). For NNPC and Mobil initial growth of the business is important than only they will be able to maintain the smooth working. The whole process of extracting energy needs the guidance of the expert, with the expect guidance company can easily be able to achieve the growth. The initial growth of the business will motivate the company further for taking corrective steps.

Better outcome

After being in the joint venture company will be able to get the best outcome for the business. Company will be able to fulfill the demand of the business which says the need of the resources (financial, human), expert advice. By fulfilling the demand of the business, business will be able to give better outcomes (Merrow, 2012). In oil and gas industry with the expert advice industry will be able to give better outcome. NNPC and Mobil together can appoint the expert who can guide them.

Being innovative

If the companies are involved in the joint venture that those companies need to be innovative as they will invest huge amount in their business. For making the investment and business successful the companies need to be innovative, hence joint venture motivates the companies to think differently (Info Entrepreneurs 2017). With the emergence of the innovative idea there will be smooth working in the production and the distribution of the work. Mobil take care of the responsibility in Nigeria which make the NNPC to think about innovative ways with free mind.

Challenges faced by joint venture

Apart from the benefits of the joint venture there are some challenges of joint venture that is faced by the company. Talking about energy sector (oil and gas industry) is also facing challenges. The two partners in the joint venture have different opinions and ideas about the single goal; this may create a possibility of the conflict in the organization (Hu & Xu, 2013).  These disputes affect the working of the company and result in the failure of the joint venture. Below are the some points which show the challenges faced by NNPC and Mobil.

Restricted flexibility

In the oil and gas industry there should be restricted entry flexibility, too much flexibility can impact the working of the company. In the joint venture both the company faced challenges between the flexibility and conventional approach. NNPC leaders should take the responsibility to avoid confusion in the organization which enhances the productivity and efficiency of the work.

Lack of knowledge

Joint venture do have some of the set rules and regulations, there might be possibility when one of the company involved in the joint venture is not aware of the set rules and restrictions (Douglas 2016). That is the profitable point for the other company; other company can easily take the benefit of joint venture. With the exposé of the advantages; there will be conflict among both the companies which eventually affect the business and can cause the shutdown of the joint venture. Both the companies NNPC and Mobil needs to make sure the rules related to the joint venture.

Personal profit 

In the joint venture the two parties share the profit once there joint venture earns that profit. There is no individual profit; both will get collective profit from the joint venture business. In the oil and gas industry, one party can do unfair trade practice to earn personal profit (Oh, et. al., 2010). Thus by doing so one party is cheated by the other party, this cause conflict in the joint venture.

Clashes of culture and management styles

The participation of two or more companies in the joint venture result in the change in the preferences, taste and their culture that may lead to change in the culture and management styles, this effect the working of the company. This shows that the companies who are involved in the joint venture have poor connections among them. In the oil and gas industry both the company needs to be on the same base, this business involve high risk so company have to take corrective steps.

Handling government pressure

Government is aiming at reducing the ambitious carbon which is growing now days. For that now oil and gas industry have to think for the new and innovative ways to exact natural resources from land. This will help in reducing the population and reduce the emerging power of the pollution (Primeast 2014).

Lack of coordination

Both the parties involved in the joint venture, have their different vision, mission and organizational values which affect the working of the company. Though, in the joint venture both the parties work for the common objective and goal. But with the change in the culture values there may be chances of the clashes between the parties. For example, Mobil employees have their different working as compared to NNPC Nigerian employees. So companies have to avoid any such workplace issues.

Assets and their claims

Joint venture includes assets of the company so there may be confusion between the claims of the assets. Organization should make the legal contract of loyalty and confidentially to prevent the legal issues among the parties. It will be smooth for the company to make the investment in the assets in oil and gas industry.

Examples of the joint ventures

Nigeria is depended on the joint venture for oil and gas resources. People of Nigeria need natural resources which come from the joint venture with other countries (Onyeaso, 2017). Saudi British Joint Business Council (SBJBC), the company is the leading brand and provides refine natural resources to the general public.  Saudi Arabia is having many joint ventures with other big companies (Reza Akhondi, et. al., 2010). The companies complete the full procedure from extraction of natural resources to refining it and later distributing it through different channels of the distribution. The joint venture for a long time needs consistency in the work of the companies. There should be presence of the mutual understanding between both the companies. The decision taken by these joint venture companies should be effective which helps in maintain a joint venture.

Recommendations

Energy sector plays an important role in the life of human being. Some of the examples of the joint venture show that they can perform their duties for long run, this joint venture include SBJBC, TOPCON, etc. the companies got the benefit of being in the joint venture but apart from being in joint venture company also faced challenges. Challenges include restricted flexibility, lack of coordination, etc. these challenges should be taken into considerations. These issues should be resolved so that company can easily achieve the goal of the company. By following proper techniques and strategies joint venture company can resolve the challenges. Company should try to convert these challenges into the strength of the company.  Both the company involved in the joint venture should clearly share or communicate their strategies and plans for the business. This creates clarity for the team who is working and also for both the partners. This will help in preventing any kind of conflict among the companies.

Conclusion

The report shows the motivation behind forming joint venture, in which all the activities of the company are going to be performed by the both the partners with mutual understanding. There are some of the resources which motivate the company to form a joint venture. Generally, joint venture took place in long business where the motive is achievement of the common goal. Joint venture also provides benefits to the company, which helps the company for the smooth running of the business. Each and every business formed by two or more companies such as joint venture, partnership, entrepreneurship etc. face challenges. This report shows the in-depth analysis on NNPC and Mobil Company.  Similarly in the joint venture there are some of the challenges which are faced by the company. However, companies should take corrective measures to get prevented from those challenges. With the prevention in the challenges company can increase their effectiveness which provides company a way to earn profit. The profitability of the companies will increase and joint venture agreement work smoothly between the two companies (Adewuyi & Oyejide 2012).

References

Adewuyi, A.O. & Oyejide, T.A., 2012, “Determinants of backward linkages of oil and gas industry in the Nigerian economy”, Resources Policy, vol. 37 (4), pp.452-460.

Al-Olimat, M., et.al., 2010. Dancing with the dragon: China's emergence in the developing world. Lexington Books.

Chima, C.M., 2011, “Supply-chain management issues in the oil and gas industry”, Journal of Business & Economics Research (JBER), vol. 5 (6).

Christen, 2010, 11 Reasons Why Companies Form Joint Ventures, viewed on 4^th July 2017, https://www.christianfea.com/11-reasons-why-companies-form-joint-ventures.html

D'Alimonte, D., 2017, 6 Reasons for forming strategic global business alliances, viewed on 4^th July 2017, https://www.tradeready.ca/2014/fittskills-refresher/8-reasons-forming-strategic-global-business-alliances/

Douglas, O., 2016, Funding Challenges for Joint Ventures, viewed on 4^th July 2017, https://nigeriaoilgas.com.ng/?p=1502

Exarheas, A, 2015, The Strengths & Challenges of Investing in Nigeria, viewed on 4^th July 2017, https://www.rigzone.com/news/oil_gas/a/140046/the_strengths_challenges_of_investing_in_nigeria

Forbes, 2017, Making Joint Ventures A Strategic Success, viewed on 4^th July 2017, https://www.forbes.com/sites/lbsbusinessstrategyreview/2013/11/26/making-joint-ventures-a-strategic-success/#2881de5e7d9a

Harjoto, M.A. & Jo, H., 2015, “Legal vs. normative CSR: Differential impact on analyst dispersion, stock return volatility, cost of capital, and firm value”, Journal of Business Ethics, vol. 128 (1), pp.1-20.

Hu, D. & Xu, S., 2013, “Opportunity, challenges and policy choices for China on the development of shale gas”, Energy Policy, vol. 60, pp.21-26.

Info Entrepreneurs, 2017, JOINT VENTURES AND PARTNERING, viewed on 4^th July 2017, https://www.infoentrepreneurs.org/en/guides/joint-ventures-and-partnering/

Kelland, M.A., 2014, “CRC press”, Production chemicals for the oil and gas industry.

Kong, X. & Ohadi, M., 2010, “Applications of micro and nano technologies in the oil and gas industry-overview of the recent progress”, Abu Dhabi international petroleum exhibition and conference.

Merrow, E.W., 2012, “Oil and gas industry megaprojects: Our recent track record”, Oil and Gas Facilities, vol. 1 (02), pp.38-42.

NIBUSINESS INFO.CO.UK, 2017, Joint ventures and business partnerships, viewed on 4^th July 2017, https://www.nibusinessinfo.co.uk/content/joint-venture-benefits-and-risks

Nigerian National Petroleum Corporation, 2017, Joint Venture operations, viewed on 4^th July 2017, https://nnpcgroup.com/NNPCBusiness/UpstreamVentures.aspx

Oh, T.H., Pang, S.Y. & Chua, S.C., 2010, “Energy policy and alternative energy in Malaysia: issues and challenges for sustainable growth”, Renewable and Sustainable Energy Reviews, vol. 14 (4), pp.1241-1252.

Onyeaso, N., 2017, Production Sharing Contract in the Nigerian Oil and Gas Sector, viewed on 4^th July 2017, https://www.hg.org/article.asp?id=21398

Primeast, 2014, Top 5 challenges facing oil and gas companies, viewed on 4^th July 2017, https://www.primeast.com/top-5-challenges-facing-oil-and-gas-companies/

Reza Akhondi, M., Talevski, A., Carlsen, S. & Petersen, S., 2010, “Applications of wireless sensor networks in the oil, gas and resources industries”, Advanced Information Networking and Applications (AINA), 2010 24th IEEE International Conference on, pp. 941-948.