Summary:
In the fascinating world of entrepreneurial business, organizations seek the achievement of objectives, which on many occasions, require transactions involving several parties with different goals.
The tools provided by studies in Effective Negotiations are often useful for achieving a common benefit, where the goals of the organizations involved are combined together.
The following case study reflects a particular situation where two companies must reach an agreement on the negotiation of a product in a foreign market. Through the Roles Play didactic method, you can take advantage of the situation and propose solutions, some of which, as support, are exposed at the end of the case.
Role: Export Specialist of Frutas Tropicales del Caribe SA
The Cuban company Frutas Tropicales del Caribe SA is dedicated to the production and wholesale marketing of tropical fruit juices and nectars. The company was created in 1994 as a result of the economic opening that took place in the country, to face the effects of the fall of the socialist camp and the tightening of the economic blockade of the United States of America on the island.
The association took the legal form of a public limited company, with the Cuban State as the majority shareholder and European investors. The national party offered the facilities, labor and raw materials, while the foreign party provided financing and innovative technology for the processing and packaging of the final product.
Since its creation and until today, Frutas Tropicales del Caribe SA has satisfied the national demand for juices and nectars of the sector that operates in foreign currency, of which it has a market share of 70%, and has also ventured into exports, achieving economic results. favorable relations, the establishment of close relationships with foreign suppliers and the acceptance and preference of the Cuban product in segments of the European market.
The company's competitive advantage lies in the achievement of exquisite flavored juices and nectars, through high demands and rigor in the processes of selecting the fruit and preparing the final product, which is not difficult for the organization, as its workers They have a long tradition in this craft in a traditional way. The costs of these process activities are relatively low compared to those of other similar companies in the area, which would increase the value for the customer by offering a product of excellent quality at very competitive market prices.
However, the foregoing cannot be fully used, because the material used in the packaging of the product (tetrabrik) is not made on the island, but Frutas Tropicales del Caribe SA must have it produced abroad and imported, which inevitably increases the cost of the final product. The foregoing has not constituted an impediment for exports to the old continent, since the sale prices of competing products in this market are high, and the importing companies consider Cuban juices and nectars in an adequate quality-price ratio.
Notwithstanding the good acceptance of the products, in order to penetrate new markets with competitive prices, Frutas Tropicales del Caribe SA must increase its production volumes in order to reduce the increase in packaging costs.
In September 2005, Mr. Zhuo Yheng, general manager of Touxin Import - Export Ltda., Visited the Cuban nation for the first time, on a business trip. Until now, his company had commercial ties with several Cuban importing companies. However, the knowledge and tasting of the juices and nectars produced by Frutas Tropicales del Caribe SA, specifically mango juice, awakened the manager's desire and intention to market this specific product in China.
Knowing the tastes and preferences of his countrymen, he envisioned a good market opportunity in the launch of Cuban Mango Juice in the northern part of the People's Republic of China. Until now, only in the southern part of the country was the juice of this fruit marketed. For this reason, before returning to his country, he established a first contact with the head of exports of Frutas Tropicales del Caribe SA, who was very interested in the market extension that this circumstance caused and gave Mr. Zhou Yheng the List of Organization prices.
The manager's first impression was that the prices of the Cuban product were extremely expensive for the Chinese market, to the point that the cost price that the Cuban company offered in the sale was very close to the sale price of Chinese retailers, which which made the Cuban product very expensive to enter that market.
The Cuban specialist recommended that the quality of the national product be taken into account and the possibility of reducing the cost of the product through high-volume contracts. For his part, Mr. Zhou Yheng did not want to continue the dialogue until he had more knowledge about the purchase potential, for which he would carry out a market study in the region where he intended to introduce the product. In this way, they decided to continue the negotiation when they had more information, for which they would keep in contact.
In January 2006, both parties agreed to resume negotiations and agreed to meet in Havana in February of that year.
By that date, the export specialist of Frutas Tropicales del Caribe SA has a detailed study of possible production levels that would allow it to adjust the sale price of mango juice.
| PRODUCTION LEVEL | PRODUCTION COST | PACKAGING COST | TOTAL COST | PRICE AT 90% |
| 1 TO 2 MILLION | 0.110 | 0.020 | 0.130 | 0.247 |
| 2 TO 5 MILLION | 0.097 | 0.015 | 0.112 | 0.213 |
| 5 TO 8 MILLION | 0.110 | 0.010 | 0.120 | 0.228 |
| 8 TO 12 MILLION | 0.090 | 0.008 | 0.098 | 0.186 |
The table shows the price that can be offered for each of the three possible levels of production, taking into account in each case obtaining a profit on the cost of production of 90%, which is the usual margin of the company in its exports.
It is interesting to note that in the first increase in production, the cost of producing decreases, however when production increases again, the costs, far from decreasing, increase, because it is necessary to increase work shifts and consequently, salary costs.
Based on the information presented, it is requested:
a) Identify the need, object, objective and options to bear in mind when designing a negotiation strategy.
b) Identify the MAAN of this negotiation.
c) Go to the negotiating table with the counterpart and reach an agreement on the sale of mango juice in China.
Role: Mr. Zhou Yheng, General Manager of Touxin Import - Export Ltda.
Touxin Import - Export Ltda. Is a Chinese company dedicated to the import and export of goods in the People's Republic of China. The company arose in 2001 after the discovery by its founders of the opportunity to commercialize the productions of national industries in the rest of the world, providing the client with the main value of presenting a range of products from different lines and families in minors quantities and greater variety than when contracted directly to the factories.
Most of the exporting companies do not offer this facility and their commercial margin is 5%, so Touxin Import - Export Ltda. Reserves the right to work with margins between 15 and 20%. However, the increase in the company's profit share is not justified only by the value it brings to the customer, but the costs of generating its offer are higher than those of any exporter.
A common Chinese exporting company incurs minimal expenses for the execution of its transactions, while exporters of the Touxin type necessarily have to allocate part of their budget to the management and management of inventories for the conformation of the mixed orders that characterize it.
Mr. Zhou Yheng, general manager of the company was very clear from the beginning of operations that this was the way in which his company should differentiate itself from the rest of the competition.
In 2003, the company entered the Cuban market, due to the fact that the buyers of the main national store chains knew how to value the advantages that Touxin offered as a concentrator of products, for the purchase conditions that the senior management of the chains established, by the own needs that the national limitations imposed on the activity.
In September 2005, Mr. Zhou Yheng visited the Cuban nation, in order to register his company in the Chamber of Commerce of the Republic of Cuba, as an initial step for the establishment of offices on the island, which would allow better negotiations with his Cuban clients.
His trip was the opportunity to learn about and taste the juices and nectars produced by the Cuban company Frutas Tropicales del Caribe SA Specifically, mango juice, aroused in the manager the desire and intention to commercialize this product in China.
Knowing the tastes and preferences of his countrymen, he envisioned a good market opportunity in the launch of Cuban Mango Juice in the northern part of the People's Republic of China. Until now, only in the southern part of the country were juices of this fruit marketed. For this reason, before returning to his country, he established a first contact with the head of exports of Frutas Tropicales del Caribe SA, who was very interested in the market extension that this circumstance caused and gave Mr. Zhou Yheng the List of Organization prices.
The manager's first impression was that the prices of the Cuban product were extremely expensive for the Chinese market, to the point that the cost price that the Cuban company offered in the sale was very close to the sale price of Chinese retailers, which which made the Cuban product very expensive to enter that market.
The Cuban specialist recommended that the quality of the national product be taken into account and the possibility of reducing the cost of the product through high-volume contracts. For his part, Mr. Zhou Yheng did not want to continue the dialogue until he had more knowledge about the purchase potential, for which he would carry out a market study in the region where he intended to introduce the product. In this way, they decided to continue the negotiation when they had more information, for which they would keep in contact.
In January 2006, both parties agreed to resume negotiations and agreed to meet in Havana in February of that year.
By that date, Mr. Zhou Yheng had conducted a market research on the purchasing potential of the region in question and had calculated the approximate costs of marketing the mango juice for each achievable level of sale.
As can be seen in the table, as the level of sale of the product increases, it is necessary for the cost price to be lower, since it is necessary to invest more in storage, distribution and communication to reach the sales levels desired.
Based on the information presented to you, you are asked to:
a) Identify the need, object, objective and options to bear in mind when designing a negotiation strategy.
b) Identify the MAAN of this negotiation.
c) Go to the negotiating table with the counterpart and reach an agreement on the sale of mango juice in China.
Solution Proposal for the Company "Frutas Tropicales del Caribe SA":
Answer part (a):
Need: Increase in production volume to decrease packaging cost.
Object: Mango Juice.
Objective: Increase sales volume through exports to China.
Options:
Maintain the current sale price.
Offer prices lower than the current one but conditioning higher purchase volumes.
Maintain the current sale price but propose to develop and support communication and marketing for the introduction of the product.
Answer part (b):
In the event that an agreement is not reached with the Touxin Import - Export Ltda. Company, the Frutas Tropicales del Caribe SA company may choose to:
Establish contact with a food and beverage marketing company in the People's Republic of China that maintains operations within the Island and is interested in introducing Mango Juice in said market.
Establish contact with a food and beverage marketing company in the northern part of the People's Republic of China that is interested in introducing Mango Juice in said market.
Establish a branch in Chinese territory that is responsible for the marketing of the product in the area of interest.
Of the three possible options, the third would allow the introduction of the product at a lower cost due to the narrowing of the distribution channel and the disappearance of the intermediary, however it is the most costly option in financial, human and time resources for the establishment of the branch in China.
The first is an intermediate solution, but one that would compromise a lot of time due to the distance between the two nations and would maintain the increase in costs due to the presence of the intermediary.
The second option would be the Best Negotiated Agreement Alternative, because despite the fact that the intermediary costs remain, it is easier to access it in the national territory without having to commit high resources.
Solution Proposal for the Company "Touxin Import - Export Ltda.":
Answer part (a):
Need: Increase of the participation quota in the Chinese market.
Object: Mango Juice.
Objective: To commercialize Mango juice in the northern part of China.
Options:
Propose purchase prices lower than those proposed depending on the achievable sales volumes.
Accept a purchase price slightly lower than the current price conditional on the Cuban side assuming the communication and marketing of the product introduction.
To exert downward pressure on the purchase price "proposing" to establish contact with the Company Producer de Conservas de Cuba, which sells the famous brand TEORO.
Answer part (b):
In the event that an agreement is not reached with the Empresa Frutas Tropicales del Caribe SA, the Compañía Touxin Import - Export Ltda., Can choose to:
Establish contact with the Company Producer de Conservas de Cuba marketer of the TEORO brand.
Establish contact with a tropical juice producer company located in the Caribbean and Florida, USA.
Establish contact with Chinese producing companies that market Mango Juice in the southern part of the People's Republic of China.
Of the three possible options; the first allows access to a Cuban product, and with the ease of already having commercial relations with the island and being close to the establishment of offices there. However, the Company Producer de Conservas de Cuba does not pack its products in tetrabrik, but in cans, which must be subjected to an evaluation of the preferences of the market in which it wishes to penetrate, as well as a comparative study of the profitability of the capacity underemployed by the container.
Through the second option, a product similar to the Cuban one can be obtained whose cost prices do not suffer the increase of the Cuban, since the companies of these nations have access to packaging in their own country, however, it is necessary to invest human and financial resources and time in the establishment of commercial relations between the two nations, a factor that Cuba has already won.
The third option is the Best Negotiated Agreement Alternative, as it would be much cheaper to market the national product, however, this option has the disadvantage of not being able to offer a product of the quality and different flavor that Cuban mango juice offers. however, the alternative responds to the objectives pursued by the company.
Solution proposal for negotiation:
Taking into account the "Exchange Mechanics", both companies must calculate the profit and the Profit over Sales index with the information provided, obtaining the following:
Company "Frutas Tropicales del Caribe SA"
Company "Touxin Import - Export Ltda."
The tables of both companies show both the optimal price, the point of abandonment where the intervention of the MAAN found in the previous paragraph is feasible and the exchange band, which is the area for which it can be negotiated.
As can be seen, the best solution that both companies must reach through negotiation is the sale of 3 million units at a sale price of $ 0.213. At this level, the maximization of profits for both companies is guaranteed, where the commercial margins of both are respected and therefore neither incurs losses.
The names of the people and companies used in this case study are fictitious, however, the situation presented was based on real events.
