MM 5010 Strategic Decision Making and Negotiation

MAKING CASE OF COOPERATIVE NEGOTIATION USING INTEGRATIVE APPROACH

29111311 Haidir Afesina (FEZI) MBA Executive 46

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS MANAGAMENT INSTITUTE TECHNOLOGY BANDUNG 2013

Cooperative Negotiation between FEZ NUTRITION and FERindo *This is for class discussion only, not a real condition* Role of FEZ NUTRITION FEZ Nutrition, Australian Company, is one of the biggest healthy food producers in Indonesia. It focuses on healthy food for athletes. The company has grown and develops into becoming the only sports nutrition company to manufacture items in every product category. Whether it's nutritional bars, protein powders, ready-to-drink sports beverages, or vitamins, essential minerals, and herbs. FEZ Nutrition is able to control the integrity of all products through in-house manufacturing. Probiotic food and beverage has becoming very popular in sport industries. There are certain brands that produce and compete within the market. FEZ Nutrition Probiotic Series is becoming the latest bestseller in Australia and New Zealand. It is the latest revolutionary protein formulation with a highly potent blend of six amino acid packed sources of protein. It also claimed to be the best for those who had tried other probiotic food and beverage in the market. FEZ Nutrition only uses the absolute best sources of protein, which is why each serving contains 24g of muscle building protein. To further enhance the revolutionary formula is the durable and patent protected Ganeden BC30 (Bacillus coagulants GBI-30, 6086) probiotic to help support digestive and immune health. This advanced probiotic is strong enough to survive manufacturing, doesnt require refrigeration, is shelf stable, and survives stomach acids to deliver beneficial bacteria to digestive system all the while having real clinical research to back up those claims. Real athletes not only need support for recovery and fueling their muscles, but must also consider facts to support their healthy lifestyles. Therefore the product has set the new standard for high quality and great tasting proteins for all elite athletes and health enthusiasts around the world. FEZ Nutrition committed to delivering cutting edge innovation with the highest quality standards in the world. FEZ Nutrition obtained the technology of producing PROBIOTIC SERIES through technology transfer from Japan. The price of FEZ Nutritions PROBIOTIC SERIES is known to be the lowest price in the world. For export supply it is not easy to go directly as FEZ Nutrition does not have a representative office or license for marketing in related countries. Over the past 5 years FEZ Nutrition collaborates with several International agents to export 2

its products. One of international agents to collaborate is FERindo, an international agent located in Indonesia that has become a distributor for about 7 years, and the biggest in Indonesia. They propose to enter the Indonesian market with the product of Probiotic Series. The Indonesian food regulation reason is refer to BPOM and MUI, (Halal certification) which are different with ANZFA (Australian New Zealand Food Authority) or US FDA. It is believed that by entering Indonesia could become an opening to the South East Asia market. Therefore the sales department has agreed on the proposal with FERindo to distribute in Indonesia as its exclusive agent with the following activities: a. Registration and marketing authorization b. Promotion, sales and distribution within Indonesia c. Selection of a local network of agents or distributors as subagents in Indonesia On preliminary negotiation, the five issues that being discussed are sales commission, minimum-binding quantity of sales, term of payment, product registration cost and governing law and dispute resolution. The negotiation has to find solutions that give the highest benefit for both of parties. Sales Commission Agents will receive a sales commission for each purchase and supply with the percentage agreed by both parties. The commission fee is 20% per dozen. However, the sales team questioned if FERindo is going for higher percentage of commission. The main reason is that the accessibility to the Indonesian market is not easy compare to other country in South East Asia, especially for international product. Therefore, the sales team is set the percentage of commission fee with range given by the stakeholder maximum of 25%. But, the team wishes to lower commission fee to less than 25%. Thus, the options are: a. Below 20% sales commission to FERindo b. 20% sales commission to FERindo c. Above 20% sales commission to FERindo Minimum Binding Quantity of Sales To achieve active sales in Indonesia, the sales team consider a minimum binding quantity of sales to be set annually by FEZ Nutrition to FERindo. If FERindo did not achieve the minimum binding quantity, it could result to withdrawal of Probiotic Series marketing
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license. Also could be an early termination of contract. It is estimated that a minimum quantity to gain minimum profit if registration cost is borne by FEZ Nutrition will be 450 pieces for the first year and 10% increment for the upcoming years. In addition the sales team confident that FERindo will not be keen on having a minimum binding quantity regarding to the awareness of probiotic food in the country. Therefore, the options are: a. No minimum binding quantity of sales b. Minimum binding quantity of sales i.e. 500 pieces/year for 3 years c. Minimum binding quantity i.e. 450 pieces for the first year, with increment of 10 % for the second year and third year. Term of Payment As a public company, FEZ Nutrition is always being audited by independent financial advisory. The management policy is not to have a telegraphic transfer term of payment with customer, which means after FEZ Nutrition sent the goods; the payment will be paid 30 to 60 days later. However, this condition is acceptable under Marketing Directors disposition or if the goods are supplied for government tender purposes. The Finance director would like the payment to be in Letter of Credit or Advance Payment. Therefore the sales team has to convince every agents or customer to pay using letter of credit or advance payment. On the other side, the team see an obstacle by the agents as the market for sales in Indonesia is individual who buys in smaller quantities. Thus, the options are: a. Letter of Credit or Advance Payment b. 30 days from shipment date with Letter of Credit or Telegraphic Transfer c. 30 days from shipment date with Telegraphic Transfer Governing Law and Dispute Resolution Governing Law and Dispute Resolution is important to be stated in order to anticipate the dispute in the further. Since FEZ Nutrition is the manufacturer and has a bigger bargaining power, thus the law will be Australia. However, in the case of dispute, the resolution that both parties have previously agreed is to use arbitration. The rule of country to conduct the arbitration process would be preferred with the arbitration rules of Australia. However, since it categorized as an International business, FERindo will likely insist to, arbitration rule of Singapore or other neutral country. From previous negotiation, it proposed neutral country is Singapore. Thus, the options are: a. Arbitration rules of Australia
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b. Arbitration rules of Singapore c. Arbitration rules of Indonesia Product registration cost For every product entering a country, registration process to register product in the National Regulatory Authority of Food of the related country is a must i.e. BPOM and MUI. A local agent appointed by FERindo shall do this part of entering the country. The cost of registration can be borne by the manufacturer or the marketing agent i.e. FERindo. FEZ Nutrition would prefer if the cost of registration were borne by FERindo, thus it would trigger FERindo to perform more actively as they already invest for registration cost in the country. Yet, the export sales team is sure that FERindo will wish for FEZ Nutrition to pay the cost of registration, as it is FEZ Nutritions product being registered. This issue is not considering as a big issue by FEZ Nutrition. It is not possible to have FEZ Nutrition and FERindo pay 50/50 due to financial policy in FEZ Nutrition. Thus, the options are: a. Cost of registration fee borne by FEZ Nutrition b. Cost of registration fee borne by FERindo

Role of FERindo FERindo is a food company based in Indonesia, focusing on sport nutrition products. It has started to build up over the years. FERindo is a major business partner of Sport nutrition Manufacturers in South East Asia countries by supporting rapid expansion into international markets and in proposing new growth opportunities. It is now leveraging its expertise and networking to become a leading sport nutrition company and partner in the supply of healthy food for athletes to the emerging countries. FERindo offers expert regulatory, marketing and logistic support, which facilitates a rapid expansion into new international markets thanks to its global network of distribution specialized in sport nutrition. It has over the year continuously expanding geographical presence and product portfolio. One of the product that FERindo sees as a big potential market for athlete is the Probiotic Series. This advanced probiotic, Ganeden BC30 (Bacillus coagulants GBI-30, 6086) probiotic, help to support digestive and immune health. It is strong enough to deliver beneficial bacteria to digestive system all the while having real clinical research to back up those claims. Over the past 3 years, FERindo has started to expand its business by searching manufacturer of developing countries as well as buyer in developing countries. After studying the market potential in Indonesia for over a year and obtaining a local partner for registration and distribution in Indonesia, FERindo is sure that there is a potential market and wish to seek a manufacturer with low price and international qualification. After further selections, FERindo chose FEZ Nutrition Australia as partner to supply Probiotic Series to Indonesia. FERindo consideration is that FEZ nutritions probiotic series is known to have the lowest price compare to others brands but also international prequalified with big capacity of production. After further meetings between marketing division of FERindo and the sales representative from FEZ Nutrition, it is agreed by both parties to have a collaboration of marketing. FEZ NUTRITION appoints FERindo with certain activities to distribute in Indonesia as its exclusive agent: a. Registration and marketing authorization b. Promotion, sales and distribution within Indonesia c. Selection of a local network of agents or distributors as subagents in Indonesia FERindo has to do its best efforts to market the product manufactured by FEZ Nutrition with
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intensive communication to FEZ Nutrition. On preliminary negotiation, the five issues that being discussed are sales commission, minimum-binding quantity of sales, term of payment, product registration cost and governing law and dispute resolution. The negotiation has to find solutions that give the highest benefit for both of parties. Sales Commission As common practice, agents will receive a sales commission for each purchase and supply with the percentage agreed by both parties. The commission fee is range between 20-25% per dozen. The marketing team believed that FEZ Nutrition would insist on a lower percentage of commission. The Sales commission is the biggest issue for negotiation as it will be the income for FERindo. In addition, from previous experiences, they will only give maximum of 20%. Therefore marketing team wishes to negotiate to gain higher commission fee than 20%. Thus, the options are: a. Below 20% sales commission to FERindo b. 20% sales commission to FERindo c. Above 20% sales commission to FERindo Minimum Binding Quantity of Sales FEZ Nutrition`s sales team considers that there should be a minimum binding quantity of sales annually set by FEZ Nutrition to FERindo. If FERindo did not achieve the minimum binding quantity, it could result to withdrawal of marketing license or early termination of contract. Therefore, marketing team feels that there should not be any minimum binding quantity of sales as the demand in Indonesia for Probiotic Series is still rarely. The marketing team prefers to erase the possibility of minimum binding quantity of sales in the contract. However, if the manufacturer insists to have binding sales, the registration cost must be borne by FEZ Nutrition. From preliminary negotiation, the options are: a. Letter of Credit or Advance Payment b. 30 days from shipment date with Letter of Credit or Telegraphic Transfer c. 30 days from shipment date with Telegraphic Transfer Term of Payment FEZ Nutrition has a unique policy that the term of payment for export sales will have to be made in Letter of credit or advance Payment, not telegraphic transfer. Telegraphic transfer means that the goods can be paid 30 to 60 days after the goods are shipped without a
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guarantee letter. As the customer in Indonesia varies, thus the term of payment will depend on the customer demand. If FEZ Nutrition insists to use Letter of Credit or Advance Payment, therefore FERindo will act as a distributor and has to pay for the customer in advance if the customer wish to pay in Telegraphic transfer. Therefore, the options are a. Letter of Credit or Advance Payment b. 30 days from shipment date with Letter of Credit or Telegraphic Transfer c. 30 days from shipment date with Telegraphic Transfer Governing Law and Dispute Resolution To anticipate the dispute in the further, in the contract there must be a clause Governing Law and Dispute Resolution. It is agreed that the governing law will be Australian. However, in the case of dispute, the resolution that both parties have previously agreed is to use arbitration. The rule of country to conduct the arbitration process would be preferred with the arbitration rules of Australia. However, since it categorized as an International business, FEZ Nutrition will likely insist to, arbitration rule of Indonesia or other neutral country. From previous negotiation, it proposed neutral country is Singapore. Thus, the options are: a. Arbitration rules of Australia b. Arbitration rules of Singapore c. Arbitration rules of Indonesia Product registration cost For every product entering Indonesia, registration process to register product in BPOM and MUI as National Regulatory Authority of Food. A local agent appointed by FERindo shall do this part of entering the country. The cost of registration can be borne by the manufacturer or the marketing agent i.e. FERindo. FERindo would prefer if the cost of registration is borne by FEZ Nutrition, as it is the product they manufacture and the name of manufacturer will be stated in the certificate not the name of the agent. Thus, the options are: a. Cost of registration fee borne by FEZ Nutrition b. Cost of registration fee borne by FERindo

RESULTS FEZ Nutrition Position Country Experience Distribution Channel Target market Athletes Sport nutrition supplier / seller Australia 7 years Europe, USA FERindo Sport nutrition distributor / buyer Indonesia 5 years Malaysia, Singapore, Indonesia, Thailand Retailer

Objective and limits of each party: a. FEZ Nutrition To increase the profits earned by selling Probiotic Series to Indonesia through international marketing agent with limitation: a) Sales commission should not exceed 25% b) Letter of Credit or Advance Payment as term of payment b. FERindo To increase the profits through commission from Probiotic Series that sell in Indonesia with limitation: a) No clause of minimum sales quantity The results: a. <25% to FERindo (A) b. No minimum binding quantity of sales (A) c. Letter of credit or Advance Payment (A) d. Arbitration in Australia (A) e. Cost of registration fee borne by FEZ Nutrition (A)

B. Gaps based on theory The dynamic of organization negotiation are far more complex than those of individual party negotiations. It has multiple perceptions of fairness to consider. Therefore, an equity allocation rule divides the available resources in proportion to each group member`s input (Bazerman and Neale, 1992). It is because they are either cooperative or competitive. Fact is that no one strategy is perfect for all situations. A common mistake is to acknowledge and respond to an unreasonable initial offer (Bazerman and Maholtra, 2008). Thus, it is essential to exchange information during negotiation. Thompson (2005) stated that negotiator has to constantly update his information base, think about the others side`s decision and formulate negotiation strategy dynamically. However, it is often difficult for executives to determine what types of feedback they need to evaluate the accuracy of their decision. It is highly important that both party to understand the integrative and distributive components, in order to enlarge the pie of available resources and increase his share. Fish and Ury (1992) therefore encourage to party to determine Best Alternative To a Negotiated Agreement (BATNA). This is critical because BATNA will determine the lowest value acceptable for the party in a negotiated agreement. Objective of the case is to demonstrate how to deal with and recognize the types of cases using integrative negotiation skills. Bazerman (1994) stated that integrative negotiation is possible when the parties have some shared interests or opportunities to realize mutual gains through trades across multiple. It brings participants to determine how to strategize in enhancing the value of which may be obtained by the two parties. The main issues raise in this case is how to raise the value of which may be obtained by both parties. For each issue, each party is looking for ways to work together with each other to get higher values being offered by other alternatives. The situation expected is the emergence of cooperation between FEZ Nutrition and FERindo in order to increase the net value obtained from the negotiation. Thus, giving the highest value combined by both parties is important for both of them to discover any information that will bring a value either to counter or to agree. However, fact is that many negotiations in a real world based on the Author experiences are either lose-lose or win-lose. Negotiation seems to be the preferred decision-making mechanism when each party is seeking individually tailored solutions, such as adjustments. Nevertheless, it is possible that negotiation in which there is a potential for the parties interests to be integrated in ways that create joint value or enlarge the pie using integrative scenarios.

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C. Proposal Improvement 1. FEZ Nutrition Assume that you have 100 percentage points to allocate the 5 issues. Distribute the 100 percentage points, according to the importance of the issues. The distribution of allocation that the author prefers to be the best solution for FEZ Nutrition is using intuitive.

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2. FERindo Assume that you have 100 percentage points to allocate the 5 issues. Distribute the 100 percentage points, according to the importance of the issues. The distribution of allocation that the author prefers to be the best solution for FERindo is using intuitive.

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From the above weight and value from each party, it will create 384 possible scenarios. Please refer to the excel worksheet for detailed of all possible scenarios. The highest total combination is from scenario 194 with the total value of 11730.

From the table above, it concluded that the best possible solutions for both parties regarding the five issues are: 1. Sales Commission Above 20% sales commission for FERindo (C) The weight by FERindo is higher than FEZ Nutrition because of FERindo`s goal of collaboration. Compare to FEZ Nutrition that has lower weight with consideration that the Probiotic Series can be sold to other country not just Indonesia to gain its main objective of profits. Since the limitation from FEZ Nutrition is 25%, it therefore can be concluded that best value of negotiated sales commission will be 25%.

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2. Minimum Binding quantity of Sales No minimum binding quantity of Sales (A) It is a win-win solution because FERindo will not have minimum binding quantity of sales but the registration cost is being borne. 3. Term of Payment Letter of Credit or Advance Payment It is a winwin solution for both of FEZ Nutrition and FERindo. FERindo can negotiate with their customer to purchase probiotic series either using Letter of Credit or Advance Payment. 4. Governing Law and Dispute Resolution Arbitration rules of Australia (A) Using arbitration rules of Australia is the best alternative solution, because FEZ Nutrition as the manufacturer with higher bargaining power is located in Australia. Therefore, in case of dispute, FERindo has to follow the governing law and arbitration rule of Australia 5. Cost of Registration Product Cost of registration fee borne by FERindo (B) This issue is in accordance with the issue of no. 2 i.e. minimum binding quantity of sales. Since there is no minimum binding quantity of sales, thus it is a winwin solution for FERindo to pay the registration cost in Indonesia BATNA of FEZ nutrition 1. Looking for other distribution channel that is cheaper even though is smaller 2. Enter other country in South East Asia e.g. Thailand or Malaysia 3. Build factory in South East Asia e.g. Thailand or Vietnam BATNA of FERindo 1. Looking for other supplier of Probiotic 2. Monopolize sport nutrition distributor in Indonesia 3. Join venture

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REFERENCES Bazerman, M.H. (1994) Judgment In Managerial Decision Making, 3rd Edition, New York: Wiley Bazerman, M.H. and Neale, M.A. (1992) Negotiating Rationally, New York: Free Press Fisher, R., and W. Ury (1991) Getting to Yes, 2nd Edition, New York: Penguin Books Malhotra, D. and Bazerman, M.H. (2008) Negotiation Genius, New York: HBS-Bantam Books. Thompson, L. (2005) The Mind and Heart of the Negotiator, 3rd Edition. Upper Saddle River, New Jersey: Pearson Education Inc

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