INTERNATIONAL NEGOTIATIONS

TYPES OF AGREEMENTS

Range of interfirm links• Contractual deals

– Distribution agency (Sansung)

– Export/import (Acme)

– Licensing/cross-licensing/franchising– Etc etc and so forth …….

• Property development (German developer in Zanir)

• Strategic alliances– Joint venture (McDonalds in Russia)

– Etc……• Joint manufacturing (Co-production with China)

• Mergers & acquisitions (DaimlerChysler)

Numerous other issues of negotiations

• Pay / employment contract (Smirnov)

• Union contract (American Auto)

• Claim for compensation (Chemi Suisse)

• Etc …… (what we disregard)– International diplomatic negotiations– Other legal settlements (marriage, divorce, …)

– ……

STRATEGIC ALLIANCES

• 3 necessary and sufficient conditions:– Partners remain independent beyond the alliance

– Partners share control and benefits.

– Partners contribute on continuing basis.

• Thus, there is both cooperation and competition.• Thus, the need to prioritize strategic objectives.

typology of alliances (Rangan & Yoshino)

Pre-competitive– new technology both partners

may produce

• Low interaction and high competition

• Priorities: strategic flexibility

Competitive– direct competitors

• High interaction and high competition

• Priorities: protecting core competencies, value added, learning

Pro-competitive– usually interindustry,

vertical integration

• Low interaction and low competition

• Priorities: value added and strategic flexibility

Noncompetitive– intraindustry

• High interaction and low competition

• Priorities: value added and learning

Extent of organizations’ interaction: In terms of frequency, intensity, information, level, functional areas covered, routinized

Extent of organizations’ interaction: In terms of frequency, intensity, information, level, functional areas covered, routinized

Conflict

Organizations’ interactionlow

low

high

high

Road map to forging a competitive alliance

Strategic analysis of the business(including the role of alliances)

Crafting an alliance strategy(disaggregate the value chain)

Structuring an alliance(equity participation for control purposes)

Evaluating alliances(coming full circle)

Source: Rangan & Yoshino

The Firm as a Value Chain(Michael Porter, Competitive Advantage,

1985)

Organizational infrastructure

Information systems

Human resources

Research and development

Materials management

Manufacturing Marketing

Primary activities

Supportactivities

Figure 10.1 in CWL Hill, Global Business

MARKET ENTRY IN THE FORMER SOVIET UNION

(How to enter emerging markets)

• Historical background– “The outcome of the republics’ challenge to Soviet

federal jurisdiction is not certain.” page 82 (article published in January 1991!)

– outdated:The Soviet Industrial Failure– New Laws, New Balance of Power– Incentives for Joint Ventures– Still Missing: The Foundations of Commerce

• Anomalies (see windows, pages 83, 88)• Excellent research institutes, biased against commercial application• Consortiums of western firms on an aggregate business plan

Advantages of equity joint venture

• Both partners benefit from growth– The assumption: the market has vast potential which will be

realized. (It hasn’t happened yet in Russia!)– “Joint ventures insinuate themselves into civil life.”– First mover advantage with consumers and partners; jumping

on experience curve in unique environment

• The other key element of the strategy:– Vertical integration in-country can allow operational self-

sufficiency – “new commercial infrastructure”. Thus the venture avoids, where possible, dependence on periodic new investment from abroad.

– Suppliers, managers, markets, etc have to be developed.

McStrategy vs Old Strategies

• Initial joint venture partner: City of Moscow• Vertical integration: raw materials, food

processing plant, distribution, packaging, …Other investments: real estate, textiles, cookware, computer technology, …

• Other strategies: (lacking equity participation)– Value-added chains (aka: foreign buyer specs,

contract manufacturing, licensing, etc)– Countertrade (aka: barter)

MERGERS & ACQUISITIONS

Disadvantages of hostile takeover1. Knowledge of the target limited to assessments of

professional outsiders2. Bidder unaware of target’s will/capacity to resist

a. Defenses by law (disregard Table 14.1)

b. Defenses by Articles of Associationc. Defenses by imaginative target managers

• Capital increase• Reverse takeover bid• Acquire assets of subsidiaries to get too “fat”• Dispose of the most desired assets• Negotiate with another bidder

3. After acquisition, the “principal/agent problem” may occur: coalitions of discontent

Advantages of negotiated takeover1. Access to inside information2. Reciprocal, win-win negotiations

a. Target owners and managers must view the M&A as their success --acquirer doesn’t win alone. Various tactics suggested: (“rules of Cartesian methods”)

• Acquirer avoids pre-cooked plan• Two-way questions/answers; often using brainstorming• Reinforce responsibilities of target managers• Look at human issues, not only commercial/financial• Forecast the integration process• Exchange personnel, methods, technologies

b. Negotiations must satisfy both sides in distributive issues of price, autonomy, whose systems, changes.

Cartesian method: (source: Internet)

1. accepting only what is so clear in one's own mind as to exclude any doubt (i.e., begin with "self-evident truths") ….then question everything  

2. splitting large problems into several smaller ones  

3. arguing from the simple to the complex  

4. checking carefully at the end to ensure that no errors have been made

Managing mergers(after the deal)

• Agreed (negotiated) deals work better.– The price is less likely to require a premium. Share swaps

only exchange one over-valued stock for another.– “But there is still plenty of scope for failure.”

• Interesting facts:– 1998: $2400 billion in merger deals

• 50% more than 1997• 100% more than 1996• 25% were cross-border.

– In medium term, less than half add value– 2/3 of the deals have not worked.

“Plenty of mergers begin with sheer executive boredom.”

• Obstacles of success– Employee apprehension– Customers, suppliers, etc may be sacrificed.– Antitrust– Corporate culture clash

• Intangible assets may not merge• Cross-border differences

– National cultural difference– Corporate cultural difference, eg: Management philosophy – Executive pay

– Meshing systems• Information technology• Accounting, distribution, etc• Corporate cultures

How to make it work?

• Look for similarities in outlook

• Concentrate on the marriage, not the wedding.

• Agree on a clear strategy and management structure in advance.

• Put a heavyweight in charge (internal champion).

• “Trust is essential.”

How to make it work?The DaimlerChrysler case study

• Solutions to time differences• Little attempt to address Corporate Culture clash

– German engineers vs American hunch-inspired risk-takers– Pay differentials; German profligacy over expenses

• Departures of talent– Solutions: Don’t take worker loyalty for granted– Clarify management slots in advance.

• Executive council to which all integration projects report periodically

• Solutions to strategic shortcomings– Component sharing requires product-launch coordination.– (Neither company had a presence in Asia.)