In the current economic scenarios of the world, economists have assumptions that joint venture essential factor for the company to grow in the energy sector continuously. Taking up the process of joint venture is not only providing the ways to deal with the current issues in the business but also it is very effective for the companies in gaining competitive advantage in long term basis. There are many studies on the theory of joint venture which reveal that efficient as well as well structured joint ventures are helpful in bringing the business related success by focusing on the mutual interest (Beamish, 2013). The studies have revealed that the alliances such as joint ventures create new opportunities for both the companies. Along with this, to achieve the success from the joint ventures, both the participants need to ensure that they have conformity in the place. This report provides the important information related to the tendency of the joint venture including proper analysis for the collaboration of two companies. For the discussion, two energy companies Texaco and Chevron Corporation have taken. Both of the companies have the joint venture in their business and this report assesses the trend of the industry (Gutterman, 2009).
Motivation behind joint venture
The merger of Texaco and Chevron Corporation has made their business more strong in terms of producing more power and energy. This joint venture was a crucial step for producing natural energy forces. There are some reasons or motivations for the joint venture of both the companies.
Leading the energy business-
Due to entry of new and international energy companies, both the companies Texaco and Chevron Corporation were losing its strong hold over the industry of energy. So, this joint venture has brought the opportunity for both the companies to capture the energy market. Along with this, it leads the underwater exploration in the Gulf of Mexico, Brazil and many other places in all over the world. The power and gas business of Texaco and Chevron Corporation is expected to gain profit by this joint venture. It is observed that the Texaco was suffering from the debt in the power industry so the business position of the Texaco was in very weak position. So, it was predictable that the joint venture will be helpful in improving the performance of the company in the industry (Hiribarren, 2013).
It is observed that the company Texaco has very low technical capabilities rather than other international companies. By this joint venture, there will be technical development on advanced level for both the companies. Along with this, the broader advantage in terms of technology is expected to get the best results from this joint venture. To achieve the reserve resources in terms of achieving the competencies in the industry, joint venture is very helpful for the companies (ChoiChangBeom, 2011).
The relationship of both the companies, Texaco and Chevron Corporation with the stakeholders were not in very good position. This was problematic for both the companies as bad relations with the stakeholders can be the cause of loss in the business. By this merger, the legitimacy of the company can be expected to be retained by the companies. By following the rules of US Federal Trade commission, this merger has brought relief for the stakeholders at that time (Polley, 2013).
The motivation or reason behind joint venture is to cut the cost. The joint venture impacts on the savings of around $700 million which can be very beneficial for the companies who are engaged in this process. By combining the workforce, companies can cut the cost in the business operations. Combining the workforce is very important to bring more hold in the business. It is observed that both the companies Texaco and Chevron Corporation were suffering from the big financial problems which may come to end by the joint venture. The merger can reduce the costs to the $1.2 billion which is very beneficial for the companies. It is expected that there will be the technical development for both the companies. After the completion of the process of joint venture, the new merged company reserved $77 billion assets, $11.2 billion, and $2.7 million daily productions (Killing, 2013).
Challenges and benefits of joint venture
Challenges and issues
Although joint venture creates many benefits for the companies such as resources, costs, financial treatment, technology, expertise and experiences but it creates some potential issues within the business. Those challenges are as follows:
Figure 1: Issues of Joint Venture
(Source: ChoiChangBeom, 2011, pp- 169)
Lack of experience- Law of Murphy is the useful method which is used by the companies at the time of joint venture. Due to lack of knowledge in joint venture may create many difficulties and risks in operating the business. Based on the joint venture of Texaco and Chevron Corporation, they have clear knowledge about the structure and profit margin properly. Further, both the companies have to build trust with each other (Wu et al, 2013).
Endless way of joint venture- It is key risk of joint venture in the corporate sector. The structure of joint venture develops the creative way to improve the performance of the business. So, after the joint venture, the companies have to share their resources and profits for long time. Joint venture not only affects the profit of the company and improves the businesses of the company. Once the company adopts joint venture, it commits for the long term process. In other words, joint venture is the endless process. So, this is not an easy process. If both the companies adopt joint venture then Chevron Corporation has to share the managerial skills, experience and technological aspects with the Texaco. On the other hand, Texaco has to share the resources with the Chevron Corporation.
Fail to recognize the things- In terms of changing the fees, one party gets the more rather than the other party. For instance, if the Chevron joint venture with the Texaco, then they have to share most profits more according to their earning and they will be liable for the Texaco. It is not only affect profitability for Texaco but also make liable to Chevron (De hek and Mukherjee, 2011).
Unable to get regular financial update- When both the companies participate in the joint venture then they have responsibility to manage the financial statements of the companies. To run the business successfully, it is very important to for the company to have updates and important aspects to measure the growth of the business. There is the issue that when the companies do joint venture, they cannot get regular updates. The companies receive the financial updates on monthly basis. This issue may affect the growth and success of the business.
Both the companies in joint venture, Texaco and Chevron Corporation need some factors to protect the business from challenges which are faced by the companies. Basically, joint venture one of the successful and useful strategies which allow the companies or partners to achieve the success in the specific project. There are some benefits of the joint venture which will be gained by Texaco and Chevron Corporation (Reuvid, 2008).
Figure 2: Benefits of joint venture
(Source: De hek and Mukherjee, 2011)
Sharing cost- This will be the main benefit of the joint venture when Texaco and Chevron Corporation will be involved in the process of joint venture. In the closing stock, Chevron Corporation’s share is $84.25 and Texaco share is $64.87. Joint Venture basically allows the companies in undertaking or taking participate in the venture without individuals. Based on the business aspects of Texaco and Chevron Corporation, the trend of joint venture allows the companies to share the revenues in terms of research and development, administrative cost, supply cots, distribution and management, and labor and management cost etc. so, both the companies will be able to reduce the large investments in the projects. Along with this, sharing cost allows Texaco and Chevron Corporation in reaching with per unit costs to increase the efficiency in terms of large production level (Futter & Mo, 2009).
Sharing business risks- To improve the business in the energy sector, joint venture allows the companies to share the risks mutually. For developing new products and distribution system of the existing products, sharing business risks is the crucial part of joint venture. There are many risks for the companies while they are trying to expand the business in new market. Joint venture allows the companies to share the risks and decrease the potential challenges related to the business. On the basis of the business of Texaco and Chevron Corporation, there were various risks in achieving the important resources such as hydrocarbons and technology etc. Due to the trend of joint venture in the business, both the companies are able to reduce the possibilities of risks with the new investments. Joint venture creates enough revenue in the business to make the development costs for the companies (Killing, 2013).
Sharing assets- To get success in the energy sector, there is the requirement of technological resources in the Texaco for producing and selling the oil and gas as well as capturing high market share. Texaco share $77 billion with the company Chevron Corporation after the process of joint venture. On the other hand, there is the requirement of hydrocarbon resources in Chevron Corporation to deal with the competitive market. So, by the joint venture, Texaco and Chevron Corporation are sharing their tangible and intangible assets to achieve the common goals and objectives in the industry. For instance, Chevron Corporation takes the hydrocarbons from Texaco and increases the resource level and Texaco is getting support from the Chevron Corporation and improving the production system as well as sales (Mar Benavides-Espinosa, 2012).
Sharing critical experience- The trend of joint venture allows the companies to share the critical experience of the management with each other. Apart from this, by the joint venture both the companies are able to share their technological capabilities, industry knowledge and other important information in the business sector. The joint venture of Chevron Corporation and Texaco allows the companies to share the management expertise and their technical aspects. After the joint venture, Texaco is able to get strategies and information for crossing the border and improving the customer base in the market. On the other hand, Chevron Corporation gets information about the suppliers and raw material of hydrocarbon which is required for protecting from the competition (Twum, 2013).
Flexibility- Joint Venture offers maximum flexibilities in the business operations by developing and creating the work relationships with the partners. If both the companies enter into the trend of joint venture then they will be able to improve its business performance in the operating market. Along with this, the structure of the joint venture allows the companies to grasp the growth opportunities during the maintenance of business.
The joint venture between Chevron Corporation and Texaco has taken into consideration as an enterprise approach. By the joint venture, both the organization should shift quickly with their culture without any disturbance. In the energy sector, Chevron Corporation has to decrease the rate of resources related to production and sales of the oil and gas. After the process of merger, the company Texaco got 77% share in the common stock of the Chevron Corporation. Chevron Corporation has provided the technical resources to modify or improve the activities of the business. To accomplish the project of extraction of oil, Texaco needs the technological resources and Chevron Corporation needs the resources of hydrocarbon (Prescott and Swartz, 2010). By the joint venture, both the companies can share their resources and management experiences for completing the project successfully. The management control system of the joint venture is also effective method in managing the resources and share value in the substantial format. Texaco has exchanged the 18% of its premium ratios of closing price of share. The approach of joint venture allows both the companies to divide the profits in terms of costs. The alliance of joint venture allows the partners to identify the conditions and efficiency in the business. The exchange ratio shows that there is $64.87 share of Texaco and $84.25 for the Chevron Corporation. So, the joint venture improves the quality of relationship between both of the companies when they merger and acquisition in the business.
There are some recommendations for Chevron Corporation and Texaco to make the joint venture victorious. Both the companies should follow the provided recommendations for the success of the joint venture in the energy industry.
Make simple agreement-
Both the companies Chevron Corporation and Texaco should make simple agreement because both the companies are entering in the joint venture first time. So, before starting the work, there is the need the copyright to be fixed. It will be helpful in making the business process easier. By making simple agreements, Chevron Corporation and Texaco are able to increase the flexibility in the working process. There should be simple agreement to understand the copyrights rules and regulations. So, simple agreements create for the new joint venture may protect the business from the loss and competition in the industry.
Establishing clear protocols-
The second recommendation is important for the companies who are entering in the joint venture. After the simple agreements, the process of protocols comes. In case of joint venture of Chevron Corporation and Texaco, there is the need to establish the clear protocols such as specific activity related to the role, aim, business, activities in terms of adequate agreements and success etc. Both the parties should talk about the actions of the joint venture. In the board meeting, both the parties should submit the formal agreement of the joint venture. So, Chevron Corporation and Texaco should establish the relationship with each other and maintain the financial profitability, and long lasting relationship etc (Tang, 2013).
This report provides the proper information regarding the procedure of joint venture. From the above discussion, it is observed that joint venture is very useful method for the companies to get success in the particular industry. In this report, two famous companies in the energy sector, Texaco and Chevron Corporation have taken for the discussion. This report provides the exact reasons for the joint venture between Texaco and Chevron Corporation in the energy sector. Along with this, the report provides the potential issues and benefits by the joint venture for both the companies. There are some important advantages of the joint venture such as resource sharing, cost sharing, and expertise and experience sharing etc. Joint venture can be considered as most effective and efficient strategy for starting new business and promoting the existing business. By the joint venture, both the companies are able to strengthen their resources and value chain to provide more quality services in low cost to their customers. Further, there are some potential issues about the procedure of joint venture which are identified by the analysis of this report. After identifying the issues, there are two recommendations provided in report. The recommendations are helpful for the companies to get top ranking in the energy industry.
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