What did the sales team give?
A large discount.
Why?
They probably felt this would restart the negotiations in a positive light. It was a poor way to change the framing of the negotiation.
What did the buyers give?
Nothing in return.
Why?
They had no reason to give a concession in exchange for an unexpected concession with no agreement.
What do you think happened to the sales team after this?
Various answers possible, including demotion and firing (in fact the head of the team was fired).
Write a sentence or two for the sales team to correctly offer this discount:
The sales team should offer the discount incrementally in exchange for a specific concession by the other side. “If you are willing to . . . we can improve our price a little . . .”
Appendix VI
Are the lists complete? If not, please identify stakeholders not included above.
The lists are close to complete – but students may identify a key administrator within the department or numerous peripheral stakeholders.
The stakeholder table for the Sensitive Foreign Investment case might look like this when partially completed:
Table Stakeholder analysis example
Stakeholder
(person, organization, group)
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Rights
(What they should receive without doubt)
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Responsibilities
(What they should or must do)
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Wants
(What they want but do not absolutely need)
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Needs
(What they must get in order to be satisfied)
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How to handle
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Huawei
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Fair treatment under UK law
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Must clearly show that the UK’s IP laws will be respected
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Strong market position
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Fair opportunities
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Jointly develop plan to separate UK operations from foreign operations.
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XMOS
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Opportunity to gain investment
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Must demonstrate that they can protect the IP of Xilinx, Bosch, and others.
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High investment and high freedom of action.
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Must retain investment of current foreign partners.
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Xilinx
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Bosch
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Must get return on their investment without losing control to competitors.
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UK Government
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Must maintain a credible threat of prosecution in case of wrongdoing
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Prime Minister
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Must not be embarrassed
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Japanese companies in UK
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Notes for OVD
Teaching notes
Case concept – OVD can offer only intangible value in exchange for tangible value. Smart negotiators from the private company sides should see that and block them. Conversely, OVD should work to keep themselves in the game.
It would be best to keep the state partner (OVD) out or minimize them in the final deal, as they have little tangible to offer. If they are kept in, it should be low percentage granted based on performance (or clawed back based on missed performance). The state partner would be glad to get as much as possible, offering cheaper land lease and smooth sailing legally and political impact, all of which is intangible. Essentially they are offering something that cannot be easily measured, defined or policed in exchange for cash.
Scenario: The private companies GlobalDesign and LCM are holding a first meeting facilitated by the government agency Office for Venture Development (OVD). OVD is ostensibly aiming only to get the two parties to talk. But OVD is legally able to take an equity position in private companies. It can do so in exchange for cash, services or good will.
In this scenario, OVD is interested in gaining a share of both companies in exchange for smoothing their pathways to government contracts. OVD will propose taking 20% but will be satisfied with anything including no equity, just pay for performance (nearly a bribe). In fact, getting cash out of the deal is the real reason OVD has brought the companies together, not merely to fulfill their mandate of “making business happen.” The two private companies would do best to block OVD as much as possible.
Strategies for OVD include:
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offering to help get government permits without bribes and in half the normal time because other government agencies will react positively to OVD
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threatening to block and slow permits needed from other government agencies
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offering to help get government contracts
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offering to bring more “good” foreign business opportunities to the new JV
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helping the JV (and LCM) to find new space (factory and office) as they grow
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helping the JV (and LCM) get government finding for training, R&D, etc.
Strategies for GD and LCM include:
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allowing OVD a small share in exchange for never paying bribes and minimizing the risk that your JV will experience those problems
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requiring OVD through strict agreement writing to support you in a variety of active ways
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blocking OVD out of the deal entirely while somehow ensuring that they will not aggressively pursue you, make trouble and block your future deals
Wrap up:
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Ask students to explain how OVD made itself strong (offering nothing tangible in exchange for something tangible)
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Ask students to explain how they limited OVD
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Ask students to explain why they blocked OVD
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Write out a few key agreement clauses: gain x share if . . . number of meetings of specified quality, claw back if OVD does not perform, and precisely what OVD should perform when and at what quality
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A key point of this simulation is that OVD offers no tangible value and is attempting to gain a long-term share of profits when it should provide any intangible benefits for free. Negotiators on the other side should identify this and offer OVD only a fee or a share for a limited term only. This way they can placate OVD but not give away value. OVD’s position is fundamentally unethical, but this sort of proposal may be encountered from government agencies and consultants.
Table OVD case
GlobalDesign Confidential
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LCM, Corp. Confidential
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OVD Confidential
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Scoring:
The private companies should be graded on their ability to cut OVD out entirely while coming to an agreement with each other. If OVD is kept in, it should be tied to milestones, contingent performance clauses and even claw back clauses.
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Scoring:
OVD should be graded on their ability to stay in the deal, or on their process and efforts at persuasion to stay should they get cut out.
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Best result: MOU without OVD (maybe pay small fee).
Middle: OVD gets 1–5% share with some requirements.
Poor: OVD gets 20%.
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Best result: 20% share of JV with few requirements.
Middle: 1–5% share with some requirements.
Poor: 0% with small or no fee paid.
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Confidential information for GD
GD is a design company that used to have its manufacturing in its home country (Canada). As costs increased locally, it began to outsource manufacturing and has not manufactured in Canada since 2003. Most manufacturing work has been done in China where relationships have developed pretty well.
The difficulty and risk of doing business in China was increased by the need to cooperate with bribery. Recently, bribery has changed from low risk to high risk as the Chinese government has begun to charge officials and foreign workers with bribery-related crimes.
You hope to develop a relationship with LCM that will slowly lead to more and more business. If LCM has the right technology, skills and attitude, you will propose a JV with them and draft a non-binding Memorandum of Understanding (MOU) right now.
You are happy that OVD has prepared these meetings, but you do not really expect them to participate in this boring technical meeting.
You need this kind of partner:
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Manage CAD/CAM data preferably from SolidWorks or possibly MasterCam
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They must be able to handle large data files easily
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The engineers must speak English well
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There must be an ISO quality control system in place
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They must be willing to work with you on quality control improvement
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Their attitude must be constructive and flexible
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Must be willing to spend at least $500,000 in cash, more “in kind”
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Must be willing to give you at least 40% share of a JV or the maximum legal share (50%)
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You need to be confident that LCM will respect the secrecy and value of your IP by not selling the designs, extra product, or low quality product to third parties
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You hope that LCM can manage local permits without getting GD (or LCM or JV) employees in trouble
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You hope that LCM can help get contracts for the JV from other companies (not only GD)
Confidential information for LCM
A manufacturing company (plastics and light metal assemblies) in the suburbs of Hanoi.
You have been supplying assembly and sub-assembly contract manufacturing to local branches of foreign manufacturers for eight years. Most of your customers are subsidiaries of Japanese companies in Ruritania.
As a partner, you can provide the following:
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CAD / CAM data (engineering files) from MasterCam, SolidWorks or IsoCAM
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Files up to half a gigabyte are okay, larger files will require installation of faster internet connection (cost is less than $1000 and can be done within one month)
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You have two engineers who speak English pretty well
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You currently follow ISO 9001-2008
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You have good quality control in place, but are interested in improving this
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You feel the Canadian side should offer expertise and know-how to the JV for improving quality control
Further:
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You are excited and willing to consider alternatives – you hope the Canadian side has the same attitude
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They must be willing to spend at least $500,000 in cash, more “in kind” (especially sending an engineer for a few months)
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You can contribute up to $600,000 in cash (but only $200,000 per month over three months)
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You can also contribute two engineers, equipment and software, one support staff, poor office space, a share of your existing manufacturing machines, and 164 square feet of safe warehouse space. You hope that GD will help the JV to expand this in the coming six months or year
You expect a 50/50 share in the JV but you can be flexible – of course they may not take more than 50% according to the law
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You think that you can manage permits without bribery, but the permits process may be slow (6–12 months instead of a few weeks). In the past you have had to pay small bribes to local (city level) government of up to $1000. You have never had to pay a bribe to the national government, but you have heard of situations where other companies had to pay a lot.
Your experience so far includes three contracts for around $200,000 with a local subsidiary of a Japanese company; regular contracts every 4–5 months of around $50,000 with a local subsidiary of an American company, and a single $250,000 contract with a local subsidiary of a Japanese company (you hope this will continue as the relationship seems okay). You are happy that OVD has prepared this meeting, but you do not really expect them to participate in this boring technical meeting.
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