The Manila company has been in charge of 90% of citrus production (orange and grapefruit in fruit or juice) for the exportation of its country for many years, which has allowed it to achieve great prestige not only at the national level, but also internationally. Citrus harvesting is done in September and October for later shipment. The company needs to store its products in the harvest period, prior to shipment for export.
Manila, for the conservation of its products requires an Ammonia refrigerator with a capacity of X tons, between –12 degrees and +8 degrees. However, the company does not have its own refrigerator, so it always has to lease those from other companies. This implies very high costs, both for transportation, the lack of concentration of the product, the lease itself, surcharge for delay in shipment, among other concepts.
For all the aforementioned, it is evident that the citrus producing company urgently needs to have its own refrigerator, since in this way they would have savings of up to 15 thousand dollars. However, the production of citrus fruits demanded full attention from the company, which limited the possibility of them engaging in such a project. On the other hand, the construction of the refrigerator had to be completed before October (duration of no more than 10 months) to ensure storage for that year, which was vital for them. In this situation they had to go to third parties to achieve their mission.
Coincidentally, the company has land (warehouses at the port of departure) with sufficient capacity for its storage purposes. An agricultural company was willing to pay up to $ 20,000 a year for the lease of its land, which allowed Manila to cover a large part of its costs. However, Manila preferred the idea of its own refrigerator for reasons of independence. So they started investigating about it.
Analyzing their situation, they realized that they faced a first problem: they did not have the financing for the project. In addition, the country had established, as a credit policy standard, guidelines for credit management where investments with slow recovery should be made with external financing.
The company, for some years, had a Management contract with a foreign partner, for financing the purchase of the product, consulting and production of citrus for export. This partner was a participant in the situation they were going through and agreed to be the financier of the project, since he liked the work he did there feeling committed to it. Therefore, they established another contract between both parties for financing or guarantor and in which the external partner received a tender process.
At this point they dedicated themselves to contacting some construction companies in the country to see who would be in charge of carrying out the work, guaranteeing to do so on the deadline.
After analyzing the situation of the possible national experience companies, they realized that they could not do the work alone, since they did not have the necessary technology or financial resources, therefore it was essential to partner with a foreign company that guaranteed the supply of the required materials, as well as acting as monetary support. Given the limitations of national companies, the possibility of hiring only one foreign company was seen, which was immediately discarded due to existing legal restrictions for them to operate in the country. It was decided, in this way, to contract a national-foreign binomial, which would ultimately lead to a "four-hand contract".
In a short time three counterparts appeared. But after a thorough debugging process and taking into account that approximately everyone offered the same price ($ 20,000) for the work and also, taking into account that the characteristics of the refrigerator, working conditions and the technology required, did not Given many differences between the offers, the decision to prioritize one or the other offeror was based on the experience of working in the country with similar offers that the foreign party had. On the other hand, the foreign partner had previously had business with the other foreign party, being very satisfied, that is, there was a mature relationship between the two.
In the negotiation planning period, the citrus company identified, with respect to the national company that would carry out the work, that it had high expectations in the project since they had been in a kind of recession for some time due to lack of jobs of this magnitude, and that it wouldn't rob you of excess time. His interest was directed, fundamentally, to obtain the greatest possible profit margin and, incidentally, to gain prestige by carrying out this work with a recognized company. The group that would work had great domain of the sector and vast experience in these works.
Regarding the foreign company, it had a branch in the country and other (minor) work contracts. He largely dominated the laws and management in the economic sector of the country in question, in addition to the already known relationship he had with the other foreign party, where he put a particular interest in making them durable because he had other successful businesses in the country's hotel sector. Due to his experience in this type of work, the foreigner had secured the bank's suppliers and credit possibilities.
After obtaining all the relevant information to carry out the negotiation. The Manila company prepared its offer, which was made up as follows:
1- Pure turnkey contract: construction and assembly, guarantee. (The citrus company was not going to be involved in the process.)
2- They would hire a project company to accompany the process (they protect themselves from errors).
3- Price they would pay: 12 thousand dollars.
4- The construction time of the refrigerator would be no more than 10 months, and would incorporate its design, all supplies, more equipment and technology. (Includes the assembly of the equipment)
5- Proof of start-up until optimal operation
6- The obligations of the Investor and contractor are fully guaranteed by the guarantor (foreign) and a penal clause for delay of work and compensation system for defects.
Way to pay:
- Advance payment of 25% of the total investment against a bank guarantee. On the final delivery date of the work another 10% and the rest would be distributed in 8 quarterly payments.
As for the counterparty, it offered:
The Cuban side only had to provide a contract to third parties for the construction and design of the refrigerator and some other minor currency issues. The foreign party provided the financial guarantee for the project and made sure to establish future relationships with the other foreign party. They asked for $ 20,000 for the work, demanding an advance to be agreed.
During the negotiation process, Manila realized that there were disagreements between the other parties involved in the negotiation, which did not suit him, so he decided to intervene.
These discrepancies were given in the interests of each one in relation to the offer that Manila made to them. The national company was not interested in issues of payment or obligations because with the advance they already had a favorable profit margin (it covers their costs and makes a profit). However, precisely that aspect for foreigners was not sure, due to the amount of money that was put into play and the time and complication of the work (Limitation in environmental tenders), that is, it was rather issues of fear of non-compliance. Both partners would not accept a price below $ 12,000 because they did not obtain the desired minimum margin, and they had other better options.
Thus, and taking into account that the negotiation was at stake due to the foreign party, it was proposed that the guarantee be given to him and that he be in charge of administering it to the national contractor as he understood. Of course, he must guarantee the utility and money for payments in due course. The payment would be deferred by two years, but it was shown that he had the possibility to adjust with his provider. On the other hand, they would pay him an interest of libor +1 for the financing, this would cover him for any need to ask for a loan. And value was given to the fact that he had a branch in the country that would allow him to be close to operations (as long as it did not take away power from the national part).
Finally, a beneficial agreement was reached by both parties, where the terms offered by the citrus company were accepted, with the adjustments made during the negotiation and the refrigerator is currently being built.
A negotiation process consists of three fundamental stages: Planning, Face-to-face negotiation and After. This case study asks you to:
1- Analyze each phase present within the planning stage as follows
a) Diagnosis
- What type of negotiation is present: competitive or collaborative? Justify: Who are the bidders? Perform the SWOT Matrix analysis
b) Strategy
- What is the need that led to this negotiation? What is the object or instrument through which the negotiators try to solve that need? What are the objectives that they intend to achieve with the negotiation? What do you consider to be the NAFTA? (best negotiated settlement alternative) in this negotiation? What options does the negotiator have?
c) Tactics
- Initial value of the negotiation Value of abandonment of the negotiationWho makes the first offer? What attitude they follow in the negotiation: closed or open; soft or hard. Are trade-offs made? What roles are evident in this negotiation?
Answers:
1- Planning Phase
- Type of negotiation: Collaborative (win-win) Work was done to satisfy the interests of both parties, adding value in the process and to maintain future relationships. (looking to create value in the negotiation process) Possible bidder s: 3 national-foreign pairs. It focuses on one for reasons of experience, past work together and dominance (by the foreign part) of the sector where the country will operate. SWOT analysis (see annex)
2- Phase Strategies
- Need: Decrease in storage costs. Object: Construction of the Refrigerator Objective: Obtain the refrigerator in less than 10 months, without intervening in the process. MAAN: $ 20,000 Options:
1- Build a fridge on the ground
2- Rent the land and dedicate the money to storage costs.
3- Tactical Phase
- Start: $ 12,000 Abandon: $ 20,000 First Offer: Made by the citrus company. (I have the power) Open: I have confidence and I want to reach a win-win agreement because it is the option that I like the most. Soft: collaborative negotiation Concessions are made in the form of payment and the final price. Roles of the negotiation:
1- Allies: My foreign partner
2- Supporters: National construction company
(Counterparty)
3- Opponent: Foreign company (counterparty)
Annex: SWOT matrix
- Strengths:
1. It is responsible for 90% of citrus production (orange and grapefruit in fruit or juice) for export
2. Work experience in the sector
3. National and international recognition
4. They have secure financing (administration contract with a foreign company)
5. They have adequate land for the construction of the refrigerator.
- Opportunities:
1. Contract with a strong foreign company that has investments in other sectors of the country
2. Few jobs of this nature currently on offer (attractive offers)
3. Foreign counterparty with a desire to consolidate in the country.
4. Agricultural company interested in my land
- Weaknesses:
1. They do not have a refrigerator, so they incur high costs
2. They don't have money for such an investment
3. They need the work to be done in a period not exceeding 10 months
4. They cannot spend time on that project, not be aware of it.
- Threats:
1. The country had established, as a credit policy standard, guidelines for credit management where investments with slow recovery should be made with external financing.
2. National experience companies could not do the work alone, because they did not have the necessary technology or financial resources
3. It was not possible to contract only a foreign company due to existing legal restrictions for them to operate in the country.
I. Quadrant (strengths and opportunities)
Take advantage of my experience, domain and international recognition to strengthen and use the contacts of the foreign partner. F1 + F2 + F3 + O1
Use the land and financial support to achieve advantages in the negotiation. F4 + F5 + O2 + O3
II. Quadrant (Strengths and Threats)
Use foreign financing to comply with national laws. F1 + F3 + F4 + A1
Take advantage of the prestige and recognition of my company and my foreign partner to encourage the union of national and foreign companies. F2 + F3 + F4 + F5 + A2 + A3
III. Quadrant (Weaknesses and Opportunities)
Use business with the foreign partner to finance the project, which benefits both. D1 + D2 + O1
Rent land to the agricultural company to ensure cover storage costs. D1 + D2 + O4
Exploit the national conjuncture of labor shortages and foreign companies with the desire to consolidate in the country so that the project can be carried out in the required time.
D3 + D4 + O2 + O3
