.MM5010 - SDMN Class.Integrative Negotiation Case:

THE MINORITY GAME TENDER

M B A - I T B | E X E C U T I V E 4 4S T E P H E N H E N D R A G U N A W A N - 2 9 1 1 0 3 3 0

• CHAPTER 1 •

One day, a Dad come to his son and say...

Dad: I want you to marry a girl of my choice.

Son: No, i don’t want to.

Dad: The girl is Bill Gates’ daughter.

Son: Then OK.

Dad goes to Bill Gates...

Dad: I want your daughter to marry my son.

Bill Gates: No, why i would wanna do that?!

Dad: My son is the CEO of the World Bank.

Bill Gates: Then OK.

Dad goes to the President of the World Bank...

Dad: Appoint my son as the CEO of your Bank.

President: No!!

Dad: He is the son-in-law of Bill Gates.

President: Then OK!!

This is BUSINESS NEGOTIATION.

PREFACE

Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy various interests of two people/parties involved in negotiation process.

Negotiation took places in our everyday life, from business, social relationships, and even our private life. Anyone of us can

experience two or three negotiation each day, from a simple issue to a big complex issue.

Sometimes, negotiation can be hot, stressful, and even put a relationship at a stake. But if we put a little more empathy, focus on each parties interest, and with a creative mind, a negotiation can produce more satisfying results. The case below will illustrate an example of a condition in which integrative negotiation can be applied. Enjoy!

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Negotiation

• CHAPTER 2 •

THE MINORITY GAME TENDER

PT Garuda Genit (PT GG - the name is disguised) is one of the few companies who specialize their business in underwater construction in Indonesia. There are only a few players in this industry, and most of their business comes from the governmental contract or multinational infrastructure companies. PT GG direct competitors are PT Beruang Nuklir (PT BN), PT Gurita Sakti (PT GS), and PT Ayam Abadi (PT AA).

Recently, after a fierce competition for the governmental project in Sumatra, PT GG emerged as the winner of underwater construction for gas lines, fiber optics, and electrical lines connecting the Sumatra, Java, and Borneo. The project value is more than $5 billion (the real number is disguised) that will generate profit of more than 10% for PT GG.

The construction works is divided into ten major sections. Each section generate various profit level for the company. One part of the project is underwater welding. PT GG’s focus-group for underwater welding is currently engaged at another project for another 6 months, and PT GG is forced to invest in new equipment if they want to honor the contract and to finish it on schedule. The violation of the contract will result in penalty, the ruin of PT GG’s reputation, and without fail put them out of the competition for the next projects ahead.

The new investment will cost them $160 million, a pretty significant part of their profit in this project.

Another option is to cooperate with another companies in underwater welding project. PT GG found that this option will not violate the contract. After several consideration, PT GG tried to explore this option and decide to put another tender for this project. At the initial stage of the tender, PT GG found that they can give up $100 million of their profit to solve this problem. This option is deemed as a better option because they can save $60 million with this scenario. PT GG decide to pursue this option.

The participants of the tender are:

PT Beruang Nuklir (PT BN). Have most experiences and skills in underwater welding. Their price is the highest among the other participants.

PT Gurita Sakti (PT GS). Has a reputation and excellent track record in underwater welding. The price is at the second highest.

PT Ayam Abadi (PT AA). Is the new players from China. Have the expertise and cutting-edge technology. Willing to give the lowest price to gain a reputation.

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• Section 1 •

The Case Background

PT XXX is indifferent as to which company will get the project, because each of them has their own advantages and disadvantages. They all proficient in technique and skill needed, reliable contractors, professionals, and the prices are not too far apart. PT GG still have to give up approximately $100 million to the project-winner, no matter who win the project. PT GG will only give this project to one of the participants to simplify control. If the winner wants to collaborate with other participants, it is up to them. But PT GG will only ask the project-winner for accountability.

The problem is, if only one participant receive $100 million, PT GG afraid that the money will only strengthen the project-winner and be used against PT GG in the next governmental tender. PT GG’s CEO think it would be for the best that they devise a strategy to divide this winning money to several participants. The objective is to undetectably arrange the rules of the tender, so players are willing to cooperate with each other and divide the winning prize (so they can pose less threats in the next governmental tender).

Stephen, the senior consultant from “The MBAITBX44 Consultant Firm“ (The MCF) - the company’s main business consultant - are given the task to handle this tender. Stephen devised a game to determine the winner of the tender. The game is called “The Minority Game”. The rules of this game are:

1. Only one player will win.

2. Each player will be given two card, the Apple card and the Orange card.

3. Each player will choose one between these two card, and put their choice on the ballot box. The other card will have to be submitted latter to confirm that they only put one card on the ballot box. The violation of this rule will result in disqualification.

4. The voting will only take place one time. The player who become the minority will win the project. The payment will take place 2 months after the welding done.

Why the minority game? On the opposite side, the majority game will obviously need the players to collaborate, thus will give up PT GG’s true intention (to divide the winning prize) to be spotted by the participants. The minority game state only one participant will win, while to ensure the victory, participants should collaborate with each other. This way, PT GG’s image still uphold and their objective will be accomplished.

The tender schedule has been disseminate to the three participants. Each participants has received their cards and game-rule. The voting will take place in three days. Now, PT GG is only have to wait to receive the result.

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PT Beruang Nuklir (PT BN)

Is one the senior player in the industry. Have most experiences and skills in underwater welding. Their price is the highest among the other participants.

PT BN last semester financial report was somewhat disappointing. Even though the company condition is very safe with little liabilities and huge current assets (especially Cash), but the company almost make no-profit at all last term. The condition was worsened by their defeat in Sumatra tender. Their stocks plummeted and stockholders are very upset with this performance. The CEO starts to feel the pressure from the stockholders to give his resignation if he couldn’t fix company’s performance in the next term.

The end of current term is near and the condition is no different than last term. The CEO has prepare himself for the worst when he learn about the underwater-welding project tender hosted by PT GG. PT BN was surprised by this tender. The CEO sees this tender as his last chance to turn around their bad financial performance before next shareholders meeting. To satisfy the target from shareholders, PT BN need at least $60 million to generate in this project.

PT Gurita Sakti (PT GS).

Has a reputation and excellent track record in underwater welding. The price is at the second highest among other participants.

More fortunate than PT BN, PT GS has successfully secure several projects in the future. The only downside of abundant projects is the financing. PT GS has used all the bank facilities, but they still need an additional quick cash flow to financing their newest project that will generate $15 million profit. If PT GS can’t secure a quick cash flow, they will need to issue a short-term bonds (at least 1 year term). The bonds issuing fee and the interest expense for one year bonds will approximately set back PT GS for another $10 million.

According to the schedule, this new project will start one week after the completion of PT GG’s project. This project and the underwater-welding project from PT GG will be the last projects for PT GS this term. To satisfy its shareholders, PT GS requires at least an additional $45 million profit this term.

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• Section 2 •

From The Players’ Point of View

PT Ayam Abadi (PT AA).

PT AA is the new player from China. They have the expertise and cutting-edge technology. Since PT AA is a new player in Indonesia, they are willing to give the lowest price to gain a reputation and to extend its network.

Currently, PT AA is involved in a negotiation process for underwater construction with one of the telecommunication company. Knowing that PT AA is a new player seeking for reputation, the telco company tried to pressing PT AA to reduce its price by $15 million.

After several thought, for the sake to gain reputation, PT AA had no other choice but to accept the telco company offer. The CEO is about to make a deal when PT AA heard about PT GG welding project. If PT AA could become the winner of this project, their reputation will increase and they only have to reduce its price by $5 million.

PT AA financial condition is moderate with enough cash for CAPEX, but can’t give any loan to other. PT AA shareholder requires at least additional $20 million profit this term.

The Questions:

1. How much the best Total Value that can be emerged in this deal, and what kind of collaboration will generate it?

2. If each company aiming to maximize their own profit, which companies that most likely will make collaboration?

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To ensure the winning at the minority game, the players need to collaborate with each other. If the players not collaborate with each other, it means that they will be relying on pure luck - something that big companies like these three will not ever do. There’s too much at stake here, and relying on pure luck won’t be a good reason to be accountable in front of the shareholders.

The very first step to solve this case is to identify the strategies that can be used to ensure the winning in the Minority Game. The key is to collaborate. There are two kinds of collaboration that can be used:

T h e S t e p s :

1. The first step to answer the questions is to first understand the available strategies that can be used to ensure a winning in the Minority Game.

2. The second step is to identify each company Reservation Point.

3. The third step is to calculate the Total Value for each of the strategies and to identify the best one.

4. The next step is to identify the BATNA and ZOPA (or money at stake) for each various collaboration.

5. The final step is to identify which companies that most likely will form a collaboration.

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• Section 3 •

The Answers

Three Parties Collaboration:

It’s the easiest collaboration to ensure the winning in the Minority Game. After negotiating the profit portion attributed for each players, they only need to appoint the winner by letting the winner to choose the different card. Example:

PT Beruang Nuklir

PT Ayam Abadi

PT Gurita Sakti

PT Ayam Abadi will be the winner.

Two Parties Collaboration:

The trick is to form a two-companies collaboration. One player will choose Apple, and the other will choose Orange. One of them will surely become a winner. Example:

Collaboration between PT AA with PT GS:

PT Ayam Abadi

PT Gurita Sakti

If PT BN choose Apple card, PT GS will be the winner. If PT BN choose Orange card, PT AA will be the winner.

Having understand the strategies, the second step to solve the case is to identify each company Reservation Point:

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PT Beruang Nuklir Reservation Point

The case stated that to satisfy the target from shareholders, PT BN need at least $60 million to generate in this project. So, PT BN Reservation Point is $60 million.

PT Gurita Sakti Reservation Point

The case stated that to satisfy its shareholders, PT GS requires at least an additional $45 million profit this term. The case also stated that PT GS need a quick cash flow to financing their newest project that will generate $15 million profit. If PT GS can’t secure a quick cash flow, they will need to issue a short-term bonds (at least 1 year term). The bonds issuing fee and the interest expense for one year bonds will approximately set back PT GS for another $10 million.

If PT GS were to collaborate with the cash-rich PT BN, PT GS can ask the payment ahead of time from PT BN, so the additional $15 million could be captured completely. The Reservation Point for PT GS if they form a collaboration with PT BN is:

$45 million - $15 million = $30 million

But if PT GS form a collaboration with PT AA, PT BN could only capture $5 million of additional profit. So the Reservation Point if PT GS collaborating with PT AA is:

$45 million - $5 million = $40 million

PT Ayam Abadi Reservation Point

The case stated that PT AA shareholder requires at least additional $20 million profit this term. It’s also stated that if PT AA become a winner of this tender, their reputation will arise and PT AA will save another $10 million from telco project. So, the Reservation Point for PT AA is:

$20 million - $10 million = $10 million

The next step after we know the reservation point is to focus to each company’s interest that will be the base for the collaboration, and to calculate the Total Value generate from each scenario.

Three Parties Collaboration

PT BN need “The MONEY” --> the Nominal.

PT GS need “Fast Money” --> the Cash-Flow Timing.

PT AA need “Fame & Reputation”.

After exploring each company’s interest and priorities, the collaboration can be made. The result would be:

PT AA could be the winner, while PT BN received the biggest portion of profit, and PT GS could settle for less money provided that the cash-rich PT BN give the payment upfront.

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According to each Reservation Point, the $100 million profit will be distributed likewise:

PT BN: $60 million.

PT GS: $30 million + $10 million bonds interest savings.

PT AA: $10 million + $10 million telco project savings.

The Total Value: $100 million + $20 million = $120 million.

The Total Value for three parties collaboration is $120 million. Next is the total value for two parties collaboration.

Two Parties Collaboration

PT Beruang Nuklir + PT Gurita Sakti

PT BN need “The MONEY” --> the Nominal.

PT GS need “Fast Money” --> the Cash-Flow Timing.

The project winner could be PT BN or PT GS; the works could be divided proportionally; but for to form the collaboration between PT BN & PT GS, the cash-rich PT BN have to give the payment upfront to PT GS. That way PT GS will save $10 million that were supposedly paid to be bonds interest expense. Total Value:

$100 million + $10 million additional value = $110 million

PT Beruang Nuklir + PT Ayam Abadi

PT BN need “The MONEY” --> the Nominal.

PT AA need “Fame & Reputation”.

For this collaboration to be formed, PT AA have to be a winner. That way, PT AA will save $10 million from the discount for the telco company project. The Total Value will be calculated as follow:

$100 million + $10 million additional value = $110 million

PT Gurita Sakti + PT Ayam Abadi

PT GS need “Fast Money” --> the Cash-Flow Timing.

PT AA need “Fame & Reputation”.

The only thing that can be gained from this collaboration is when PT AA become a tender-winner, so PT AA could save $10 million from telco company project. And since PT AA don’t have enough money to cover PT GS payment upfront, PT GS get no additional value from this collaboration. The Total Value is:

$100 million + $10 million additional value = $110 million

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The best Total Value is generated by three-parties-collaboration with $120 million total value.

PT BN vs PT GS ZOPA

Total money prize : $100 million

PT BN Reservation Point : ($60 million)

PT GS Reservation Point : ($30 million)

The money at stake : $ 10 million

The maximum profit possible in this collaboration are:

PT BN: $60 million + $10 million = $70 million

PT GS: $30 million + $10 million = $40 million

PT BN vs PT AA ZOPA

Total money prize : $100 million

PT BN Reservation Point : ($60 million)

PT AA Reservation Point : ($10 million)

The money at stake : $ 30 million

The maximum profit possible in this collaboration are:

PT BN: $60 million + $30 million = $90 million

PT AA: $10 million + $30 million = $40 million

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Even if the three parties collaboration generate the biggest total value ($120 million), but the important

things for the companies is not the total value. The main objective for each of the company is to maximize the

profit. To maximize the profit, it would be more feasible to form a two parties collaboration. The results from three parties collaboration will serve as BATNA (Best

Alternative To a Negotiated Agreement) for each company:

PT BN BATNA is $60 million.PT GS BATNA is $30 + $10 = $40 million.PT AA BATNA is $10 + $10 = $20 million.

The results under this nominal will not be entertained anymore, since three way parties collaboration has been

their BATNA.

To know which company that most likely will form a collaboration, the next step is to identify each

companies combination’s ZOPA (Zone Of Possible Agreement) or “The Money at Stake”.

PT GS vs PT AA ZOPA

Total money prize : $100 million

PT GS Reservation Point : ($40 million)

PT AA Reservation Point : ($10 million)

The money at stake : $ 50 million

The maximum profit possible in this collaboration are:

PT GS: $40 million + $50 million = $90 million

PT AA: $10 million + $50 million = $60 million

SUMMARY:

PT BN will incline to make a collaboration with PT AA.

PT GS will incline to make a collaboration with PT AA.

PT AA will incline to make a collaboration with PT GS.

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CONCLUSIONS:

If each company intend to maximize their own profit, they will choose two parties collaboration method. It is because all the possible profit generated by two parties

collaborations are well above the profit generated by three parties collaboration.

Even if the real negotiation to form a two parties collaboration among PT BN, PT GS, and PT AA is more

complex and will depend on the offer from each participant, but scientifically, the most likely two parties collaboration will be reached between PT GS and PT AA.

It’s because, even if PT BN gives all the-money-at-stake to PT AA, the maximum nominal will only reached $40 million - the number that will easily beaten by PT GS

offers (PT GS still have a lot of room to beat PT BN offer).

And, even if PT BN gives all the-money-at-stake to PT GS, the maximum number will only reached $40 million - the

number that will easily beaten by PT AA offers (PT AA still have a lot of room to beat PT BN offer).

So, the most likely two-parties-collaboration that will be formed is a collaboration between PT GS & PT AA.

© Stephen Hendra Gunawan - X44 - 29110330Made exclusively for Strategic Decision Making and Negotiation ClassMBA-ITB 2012

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MM5010 - Strategic Decision Making and Negotiation

End of Term Exams | MBA-ITB Executive 44