Past Examination Papers – Negotiation A
Examination
Case Questions
Case Question 1 – Cold Comfort
Eight weeks ago Iceberg Limited opened its newly built food retail store on a prestige site it acquired at a premium price from Papete Investments Plc. It has invested a great deal in marketing its frozen food operations around the theme of ‘customer confidence’. The refrigerator system was manufactured and installed by Keep–it–Cold Limited for £250000, who also have the maintenance contract costed at 7.5% of the contract value per year – £18750 – (though for the next 12 months the equipment remains under warranty) with a 2 hour call-out commitment. Keep–it–Cold is sited in a nearby city, 130 miles to the north of Iceberg's new store and it services clients up to a radius of 150 miles from its depot.
On Friday of last week at 2 p.m., the visual alarm on one of the refrigerated display cabinets in the delicatessen section became active, indicating that the temperature had risen slightly above the regulation 3 to 5 degrees range. A member of staff called Keep–it–Cold to request a visit by their service engineer. She agreed that the alarm was not of sufficient seriousness to require an immediate response and also agreed that the service visit could be postponed until the next day. This suited Keep–it–Cold because that afternoon all of their service engineers had been assigned to calls to the north of their depot and were furthest away from Iceberg's store.
When the store was opened by the deputy manager next morning at 8 a.m., he discovered that the entire refrigeration system for the whole store had gone down during the night and that all of the display cabinets and the storage rooms were close to room temperature. There was no way that any of the contents of the store could be saved and every unit had to be emptied and their contents disposed of in sealed bins. This represented a stock loss of £40000.
To compound the problem, the service engineer arrived at 11 a.m. instead of 8 a.m. when she was expected. She explained that she had been working up to 2 a.m. that morning on a major emergency 200 miles away. She had ‘signed on’ for duty at 9.00 a.m. and had gotten to Iceberg as fast as she could.
Meanwhile, at Iceberg, the deputy manager had been on the telephone several times to Keep–it–Cold, exhibiting various degrees of rage about what had happened on Friday and had become increasingly angry about the non-appearance of an engineer. He was told that on the basis of the conversation with his colleague on the previous day it had been agreed that the alarm did not indicate a major emergency and that they had not received any calls between 2 p.m. and when the store had closed at 8 p.m. to indicate that the alarm had gone from an initial indicator warning through the subsequent warning levels to ‘critical’. As far as they understood, the initial warning stage had remained static and they had no reason to revise their non-emergency grading of the problem.
The deputy manager stated that his member of staff did not have the authority to agree anything with Keep–it–Cold about service responses and that she had clearly been ‘persuaded’ (later described as ‘intimidated’) by whoever had answered her call to accept a lower and ‘wholly unacceptable’ response. His case was weakened by being unable to explain why she had not reported to him or another manager their response to her call. That week the Store Manager was on holiday and his deputy had taken his ‘half day’ that Friday afternoon.
When Iceberg's security monitoring service had rung Iceberg's Regional Office to report the initial alarm in one of the stores, they were told that Iceberg ‘was aware of the situation’ (because the employee had reported to them at 2.30 p.m. that she had requested a service call from Keep–it–Cold – though not, unfortunately that the engineer was not coming until the next day). They had received the same response when, throughout the night, their electronic monitors picked up the other alarms. Iceberg's Night Unit assumed that Keep–it–Cold engineers were on the premises dealing with the problem. They had not rung the store nor Keep–it–Cold to check their assumption.
The initial phone calls between Iceberg and Keep–it–Cold were argumentative and blame seeking. Whatever had happened the previous day, Iceberg insisted that Keep–it–Cold's engineers should have been on their premises at 8 a.m. Keep–it–Cold insisted that they were in no way responsible as they were not informed of the worsening situation either by Iceberg's local staff, or its Regional Office, and they had no direct link to Iceberg's monitoring service.
Iceberg calculated that it had lost £56000 as a result (£40000 stock, £14000 net profit and £2000 in labour costs) on what would normally have been a busy week-end. This was apart from the inestimable damage to their reputation with their customers, especially as the store was brand new in the area and the equipment was only eight weeks old. They demanded compensation from Keep–it–Cold and warned them that their reputation was at risk too because, once this incident was reported to Iceberg's head office, it could put in jeopardy their maintenance contracts and their role as a major supplier of refrigeration equipment to the whole group (256 stores across the country, with one new store a month scheduled for the next two years).
How serious the implications were for Keep–it–Cold is a matter of conjecture but the business relationship was at risk to some extent. They had a good reputation generally but were convinced that they were not solely to blame and that the local store management had much to answer for because of their absence that afternoon, as did Iceberg's regional office for how they had responded to the calls from their monitoring service that night.
A meeting has been called to discuss the problem.
- What is the main common interest of Iceberg and Keep–it–Cold in this dispute?
(8 marks)
- How far should Iceberg push for compensation?
(8 marks)
- Should Keep–it–Cold resist or pay compensation?
(8 marks)
- What proposal might Iceberg make to resolve the dispute?
(8 marks)
- What would jeopardize Iceberg's and Keep–it–Cold's chances of resolving the immediate problem?
(8 marks)
Total of 40 marks
Essay Questions
Essay Question 1
How might a local business negotiate to manufacture and distribute software under licence from a foreign company?
(20 marks)
Essay Question 2
If win–win negotiating is so beneficial to the parties why do so few negotiations avoid win–lose and lose–lose outcomes?
(20 marks)
Essay Question 3
To what extent do the strengths of principled negotiation outweigh its weaknesses?
(20 marks)
(Total 60 marks)
END OF PAPER
Solutions
Note from the Examiner: These answers are skeletal guidelines only. Though they contain the major points sought, the student's response should provide further insight into many of the points. Simply repeating the major bullet points does not necessarily demonstrate the required level of understanding of the subject.
Solutions to Case Questions
Case Solution 1 – Cold Comfort
- What is the main common interest of Iceberg and Keep–it–Cold in this dispute?
(8 marks)
Define an interest: the reason(s) why a party prefers a solution – their fears, hopes and concerns, etc. Interests may be common or incompatible
2 marks
It is in Iceberg's interest as a profitable retailer that its customers can rely on the safety of the food products they sell and therefore that the refrigeration system operates to the standards set by the food storage and hygiene regulations.
If the refrigeration system fails for any reason, it jeopardises Iceberg's reputation and disrupts its customers expectations of safe, hygienic and reliable food supplies.
3 marks
Keep–it–Cold has a common interest with Iceberg in the reliability of its systems and that they work within the food storage and hygiene regulations. It is in the business of profitably supplying and maintaining refrigeration units to stores like the Iceberg group. Any failure of its systems endangers the interests of its customers and damages the reputation of Keep–it–Cold in one of its key markets and ultimately damages its business interests of profitability. Both Iceberg and Keep–it–Cold have a common interest in preventing a system failure happening a second time.
3 marks
- How far should Iceberg push for compensation?
(8 marks)
Compensation is not a high priority issue for Iceberg. Negotiating as if it is a priority issue will divert the Iceberg team from its main interest which is to ensure that the system does not fail again. Everything should be subordinated to achieving that goal.
2 marks
Compensation is a lower priority issue. There is no benefit in receiving compensation if the system continually breaks down because compensation for losses does not address the awesome damage to its reputation.
Stores will not be patronised if its customers cannot rely on the quality and safety of its food.
2 marks
Having sorted out the technical problem in the system that caused the breakdown and the failures or weaknesses in the response by its own staff and the staff of Keep–it–Cold once the failure was notified, it might conclude that there were contributory failures to some degree on both sides.
2 marks
The system is under warranty (8 weeks old) and therefore there is no charge for the repairs and parts. The stock losses can be dealt with by insurance.
1 mark
It might be feasible, in the interests of customer satisfaction and loyalty, for Keep–it –Cold to offer an ‘ex gratia’ amount for a promotion effort to benefit Iceberg's customers.
1 mark
- Should Keep–it–Cold resist or pay compensation?
(8 marks)
Keep–it–Cold has to make a policy decision on requests for compensation.
Its system is only 8 weeks into a 1 year warranty and depending on how the warranty is defined it could regard compensation as a condition of doing business with Iceberg, for which it is insured.
1 mark
It could, on the basis of the facts of the case, consider that Iceberg contributed to the problem becoming worse and, therefore, that Keep–it–Cold is not solely to blame and cannot be expected to pay for all of the losses suffered by Iceberg. It could consider that compensation should be borne by both parties in proportion to their contribution to the problem.
2 marks
It could take an extreme red position that it was no way to blame for the problem becoming critical and therefore resist all claims to compensation. It might prefer to consider that such a stance would severely damage its relationships with Iceberg and jeopardise its chances of new business from Iceberg's expansion programme of one new store per month.
2 marks
Once the source of the problem is identified and dealt with – including the administrative weaknesses in Iceberg's internal arrangements and its own response times – it might consider some sort of ex gratia payment to mollify Iceberg's disappointed customers.
In general Keep–it–Cold should not resist too strongly nor pay too willingly compensation for the breakdown and should judge its stance on the basis of its interests in future business. However, it should be careful to avoid giving the impression that threats to future business would be enough to force it to give in to unfair demands.
3 marks
- What proposal might Iceberg make to resolve the dispute?
(8 marks)
Define a proposal: a proposal is a tentative solution to a problem that is best presented conditionally in the IF–THEN format and in which the condition is either vague or specific and the offer is always vague.
2 marks
Iceberg should consider making proposals that address its interest in avoiding a similar situation recurring.
1 mark
Iceberg is in a relatively strong bargaining position in view of the store expansion programme in which Keep–it–Cold is keen to remain involved. The temptation to ‘throw its weight around’ is obviously present but Iceberg might do better to keep its common interests aligned by exchanging commitment to resolving and sorting the problem and linking this to a positive future. Its all a question of tone. ‘Do what we want or else’ is too negative and threatening. ‘Do this for me and I will consider doing that (benefit) for you’ is much more likely to achieve Iceberg's interests.
3 marks
It could suggest something like:
‘If Keep–it–Cold’ speedily identify and correct the problem and guarantee that it will not recur, then Iceberg will consider under what terms Keep–it–Cold might remain a preferred supplier of equipment to Iceberg's expansion programme.’
Or some such similar proposal in the correct format.
2 marks
- What would jeopardize Iceberg's and Keep–it–Cold's chances of resolving the immediate problem?
(8 marks)
The problem could escalate from an argumentative and blaming cycle into a mutually threatening and sanction cycle.
As each party seeks to pass the blame to the other, a red style of argument will predominate.
2 marks
There is always a temptation in disputes that the ‘facts’ could lead one or both to prefer litigation or at least the threat of it. This leads to defensive behaviour – neither will admit to anything in case it frustrates their version of the facts or forces them to reveal new facts that the other party was unaware of and which undermines their legal case.
This is not conducive to finding a negotiated solution where some minimum degree of openness is required.
2 marks
Iceberg is initially concerned, at least at store level, with when Keep–it–Cold's engineers arrived on the premises and who was to pay for the day's losses. These are tactical concerns rather than strategic. If they remain focused on these issues they will certainly jeopardise the chances of resolving the immediate problem, which is to solve the breakdown and get the store back in business.
2 marks
All the behaviours that follow from attacking, blaming, defending and justifying get in the way of signalling and proposing tentative solutions and bargaining specific solutions. Attitudes towards each other will harden and each will view all solutions in the light of how they affect their case against the other and not by how they affect the need to get the store back to business. Iceberg is in the profitable retailing business and not the litigation business.
2 marks
Solutions to Essay Questions
Essay Solution 1
How might a local business negotiate to manufacture and distribute software under licence from a foreign company?
(20 marks)
This question is covered in detail in Module 2, pp. 2/12–18 of the text. It is about the details of a distributive bargain. The student is expected to recognise this and provide sufficient evidence that he has understood the model of distributive bargaining (ranges, entry, exit points, gaps and overlaps).
The negotiating problem is symmetrical from both parties' point of view. The licensor (the foreign company) wishes to exploit its commercial interests in its intellectual property; the licensee wishes to exploit somebody else's intellectual property. Both require to protect themselves from being exploited by the other.
2 marks
Clearly the share of the income from the commercial exploitation of the licensor's product is the main bone of contention (a classic zero sum game).
1 mark
Each has costs. The licensor from developing the product (and foregoing income from manufacturing and distributing it in the licensee's territory) known as its transfer costs and the licensee from manufacturing and selling the product in its territory. The total revenue from selling the product in the licensee's territory is available for distribution between them.
2 marks
From total revenue, the party's costs must be deducted, leaving a profit for distribution. The negotiators could expect some dispute over the estimation of their costs – clearly both would wish to recover as much real cost as possible (how much of the licensor's R & D can be recovered from the income from the licensee's territory; how quickly can the licensee depreciate its capital costs for manufacturing locally?) and each might be tempted to pad their alleged costs above their real costs.
2 marks
Once these costs are settled, the net profit is available for distribution. In a new market with a new product, the net profit might be difficult to estimate in advance. If it is underestimated, the agreed share could give windfall profits to the licensee, which the licensor may wish to adjust. The licensor's best protection here is from a fixed (short) term licensing agreement, or one with review clauses at regular intervals. Likewise if it is overestimated, the licensee may not make sufficient income to generate a profitable business. It would want to review the profit shares as soon as this is evident. Hence, it too might want a short term contract, with regular reviews.
2 marks
Incidents of revisions of licensing contracts can lead to acrimony, even litigation (examples would help here: Sony, Guinness, Rank Xerox, etc.). Also, once a market is established disputes can arise if the licensor also exports direct into the territory, or if it licenses local competitors, hence the licensee will seek exclusivity.
2 marks
The licensor will seek protection of its Intellectual Property Rights (IPRs), possibly guaranteed minimum sales revenues and sales targets over time. These are often used as ‘triggers’ to take back the license, if the business is doing well but not well enough.