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Delgado Case Studies and Essay Questions

Solutions to Case Questions

Case Solution

1.  Where is Delgado vulnerable in the proposal from Nothing Ventured Fund? (8 marks)

Delgado is in the weaker negotiating position because he has fewer options than the venture fund managers. He has a potential winner but has insufficient capital to develop and produce it; the Fund has capital and numerous options to place them in viable ventures. Therefore, the Fund proposes to secure its investment by a significant minority shareholding of Delgado’s company. True, it claims only to have limited objectives, largely confined to making a profit, and not to maintaining their holdings, but the performance and financial conditions of their investment give them pre-emption rights to acquire all of Delgado’s company should he default on his covenants to meet their targets.

Delgado is vulnerable because under the default conditions he does not have an assured control of his company (markets could change); and he cannot enforce a limited duration for the Fund’s involvement. The Fund could change its mind and stay with its shareholding and perhaps engineer the circumstances in which they seize control, thus taking a larger share of future profits.

With a ‘say’ in the appointment of specific Vice Presidents, they could insist in interfering in the marketing and future developments of Delgado’s product, such as turning to profit churning through licensing – with the attendant risks of technological leakage’s to rivals – or they could gain control and enforce a decision to sell Delgado’s technology and patents to a major player for short-term cash, cutting out any longer term intentions that Delgado might have about staying in the business.

The Fund could weary of the technology and sell out their shares to a (hostile) third party without considering Delgado’s interests. The third party could fall out with Delgado and marginalise his future involvement.

In summary, Delgado needs to maintain control of his company or have in place a mechanism for ensuring that he can take control back from the Fund should circumstances arise to force his default.

2.  What are Delgado’s longer term interests? (8 marks)

Interests are the reasons why a negotiator wants something. They are the motivators, the concerns or the benefits and drawbacks that arise from agreeing to certain positions on the negotiable issues.

Delgado’s longer-term interests are to ensure his ownership of future income streams arising from the commercial exploitation of his solvent, to protect his patents and rights in the product (and his other products) so that he can continue to develop them commercially, and to protect his reputation as the person who changed the technology of the solvent industry.

Whatever he agrees to now will affect the future. A careless agreement could jeopardise his longer-term interests. Hence, he should identify them in order to take account of them in the negotiations.

The solvent industry, however, is static in technological changes (it is not ‘rocket science’) and his short-term interest is to get an early agreement to establish his product before somebody else discovers and exploits the same simple technology. He needs to keep control of his company – or some mechanism for reestablishing it – to ensure his future interests, but short-term pressures could force him to compromise in this area and thus deny him his longer terms interests.

3.  What proposal could you suggest to reconcile Delgado’s and Nothing Ventured Fund’s interests? 

(8 marks)

Delgado needs to test the Fund’s intentions and his proposal should accomplish this objective. He could set out a formula that takes his and the Fund’s interests into account. How they react to it would test their intentions.

Delgado’s proposal could include the following elements:

  • A division of the equity starting with a minority (ratio to be decided) held by the Fund and gradually reducing (timetable to be decided) as the Fund’s initial investment is repaid from Delgado’s share of the profit stream from sales, royalties, and general income from the exploitation of the solvent.
  • Commitment that initial profits would be used to earn-out the Fund’s shares with an option for Delgado at any time during the agreement to buy-out the Fund for a sum, such as some multiple of the profits.
  • All development, production, licensing and joint venture decisions to be taken by Delgado.
  • Delgado to have first option to buy the Fund’s equity, at the lesser of the price established by some multiple of the profits or the price offered by a third party, should the Fund want to sell out.

4.  What are the basic elements of an agreement that he should consider when deciding whether to license his product? 

(8 marks)

Licensing is an alternative to establishing one’s own manufacturing operations in other territories or to exporting to that territory. The relative cost of each method of commercially exploiting his product needs to be considered. Exporting directly or through agents is the simplest consideration; setting up wholly owned manufacturing is more risky. Licensing a Local manufacturer is also risky if Delgado loses control but less costly to Delgado if it works. If the balance favours licensing, Delgado should consider some of the following:

  • Protection of his intellectual property rights, including local patents, in the solvent product and future derivatives.
  • Protection of his technology.
  • Strictly and exactly what he is licensing to avoid doubts about future developments.
  • The division between himself and the licensee of the net revenue from sales in the Defined Territory.
  • What share of the costs is the responsibility of each party?
  • How much of the development costs can Delgado recover from the licensee?
  • The conditions under which the license can be terminated.
  • Should exports to third countries by the licensee be permitted and if so under what conditions?

5.  What kind of BATNA could Delgado develop to strengthen him in his negotiations? (8 marks)

BATNA means the Best Alternative to a Negotiated Agreement and was introduced by Fisher & Ury in Getting to YES. Briefly it defines the negotiator’s alternative option to agreeing to the present terms for agreement offered by the other party. BATNA’s provides data on the walk-away or take it positions open to the negotiator. They strengthen the negotiator to the extent that the BATNA is credible to the other party; they underscore the weakness if there is no BATNA at least as good as the current deal on offer.

Delgado is relatively weak in negotiations with the Fund. Time spent considering – or developing – an alternative to accepting these terms could strengthen his negotiating position. For instance, if he can establish a better offer from a major player to buy up his new solvent, he might be able to improve the Fund’s offer in his favour if the Fund does not want to be cut out from profits. However, if the best alternative offer is worse than that offered by the Fund, he would have to seriously consider accepting the Fund’s offer, albeit after he makes a considerable effort to improve its terms.

In negotiating with potential licensees, Delgado can improve his position by developing a strong BATNA, such as better terms from rivals to the licensee, or fully costing the alternative of local manufacturing.

Possibilities for Delgado’s BATNA include: offers from other Venture Funds; possible joint ventures with major players or manufacturers; and selling out to somebody else.

Solutions to Essay Questions

Essay 1

Why do signals assist movement without giving in? (20 marks)

Negotiators manage their movement from initial positions on the negotiable issues towards agreement with the other party who starts with different initial positions on the same issues. Every negotiation starts with at least two initial solutions to every problem – I want higher prices than you claim you are prepared to pay; you want a larger number of small quantities delivered to more sites by earlier dates than I am offering at present. You prefer lower prices and I prefer to deliver large quantities to fewer sites. Both of us know that to reach agreement on each disputed issue there has to be some movement towards each other from where we claim to be at the start of our negotiation. It is not that we start at different positions just to go through a negotiation dance – our entry positions reflect our different preferences

The problem of movement is worsened by the usual rhetoric associated with opening statements, which can create another barrier to movement. For example, you insist that the issue is too important for you contemplate a change in your position and, by implication you consider it unthinkable to move in case it undermines the strength of your current stance. The mutual effect of our immovable stances is deadlock – we won’t do business. Each side appears determined to force the other to surrender. Indeed, where the dispute is deeply felt, it becomes intractable as evidenced in several of the world’s trouble spots.

How then to unfreeze deadlock? Signalling is one helpful device, which is common to everyday dialogue and is used by negotiators either to initiate movement through signalling or to respond to signals to follow with movement. How can signals initiate movement without giving in? The key to initiating movement lies in the use of language. Initial positions are often stated in the absolutes of ‘no’, ‘never’, ‘impossible’, ‘cannot be considered’, ‘absolutely essential’, ‘no surrender’, ‘no comprise is possible’, ‘no way’, ‘over my dead body’, ‘cannot be less than’, ‘not an inch’, ‘till hell freezes over’, and so on. This language conveys our determination and asserts the strength of our case. Conducting negotiations in the media makes it even more difficult because public stances are made to intimidate the other side and to reassure our constituency, and they are difficult to modify without serious loss of face.

Yet when the parties exchange views in support of initial positions, opportunities abound to signal. Effective listening is not normal when feelings are provoked by extreme language especially when threats are made.

Signals seek receptivity to the idea of possible movement and assurance that a signal will not be treated as if the signaller is about to ride the slippery slope to surrender. Signals carry a heavy price if they are taken as such by the receiver, who might re-double verbal pressure on the signaller. Frustrated signallers might retreat the stance of ‘no movement’ if they feel taken advantage of.

The addition of ‘as things stand’ to the sentence ‘I cannot give you a better price’ changes the message. By qualifying the absolute message, the negotiator signals that a change is possible if circumstances changed. A negotiator can choose to open up discussion on what changes in the situation would be required to secure a change in price.

Signalling by qualifying absolute language is commonplace. ‘Impossible’ becomes ‘difficult’; ‘never’ becomes ‘not normally’; ‘won’t’ becomes ‘unlikely’; ‘cannot’ becomes ‘in current circumstances’, and so on. (Similar examples are acceptable.)

The ‘no change’/‘some change’ deadlock is broken if debate shifts to the circumstances required to initiate change. Discussing these circumstances could bring possible price or other changes onto the agenda. True, the signaller may want greater changes than the other negotiator is willing to contemplate, while the listener may prefer larger changes than the signaller prefers. But the issue of no movement at all has shifted to the terms for some movement. Negotiation uncovers the terms for agreeing to trade what each wants.

Signals invite the exploration of the signalled shift or other potential shifts in emphasis. They do not expose the negotiator to a too hasty commitment to move. Its not effective to quote a price, for example, and immediately to add that if the price is unacceptable to the listener that your are ‘prepared to offer other prices’. If the listener rejects the signal outright (‘I am not changing the circumstances’), the signaller is no worse off because no commitment to move was made. Signals can become a bridge to a proposal if they are reciprocated by exploration of what has been implied by the signal (‘when you say it is difficult to make the change, to what specific difficulties are you alluding?’). The difficulties are an indication of the obstacles preventing the signaller from moving but if the listener addresses those difficulties some movement may be possible. A route out of deadlock has been indicated and it is up to the negotiators to respond to signals, at least to test the prospects for ending the deadlock, if not to follow through with proposals that embody movement.

In what ways is Principled Negotiation flawed as a negotiation method? (20 marks)

Essay 2

Principle Negotiation supports four prescriptions:

  1. Separate the people from the problem.
  2. Focus on interests, not positions.
  3. Generate options for mutual gain.
  4. Insist on objective criteria.

Separating the people from a problem is good advice because people can sometimes get in the way of a deal. They are too emotionally committed to one solution (theirs) over anybody else’s. Also, our own attitude to the negotiation can be influenced by our feelings towards the other party. However, people are important in negotiation and ignoring this truth and rigidly applying this prescription could undermine a negotiation process and the outcome. The relationship, for example, between the people can assist, as well as disrupt, the negotiation process. The tension between the substance of the negotiation – the issues – and the relationship between the parties is ever present. It is not that one is more important than the other. Which takes precedence at any one moment in a negotiation depends on the roles, positive or negative, that the people and the problem contribute towards a solution.

Similarly with the second prescription – to focus on interests and not positions – when negotiators are stuck in a positional standoff, it is good advice to park to one side the positions each are taking while we consider the interests of each side. Interests are why somebody wants something and positions are what they want. By looking at their interests – and our own – we might find another way of solving the problem. At the very least we will understand better their commitment to their position. Looking at our own interests, we will review the depth of our commitment to our own positions. It is a helpful way of coping with deadlock. The problem is that a standoff is not solved automatically by applying this prescription, particularly when our interests are in conflict to such an extent that they are mutually exclusive. This constitutes a major weakness of this prescription when applied to the real world.

Traditional (phased process) negotiators advise that we switch focus from interests to the practical application of the positions that might be negotiable while our interests are not. For example, the conflict of interests between a terrorist and his victims or the target of his terrorism may not be negotiable, but we can still negotiate over such things as communications, food, medicine, comforts and safety, and take respective positions on them, with a view to resolving these issues without intruding on the major causal interests behind the terrorists’ actions. While principles are non-negotiable, their application might be.

Searching for options for mutual gain is always good advice. It is the one prescription of Principled Negotiation that would be difficult to fault. The more options we generate the more likely we shall be able to find a mutually satisfactory solution. A joint search for options is likely to be more productive that a one-sided search. But too many options, particularly from one side, might signal (unintentionally) a weakness by one of the parties, and increase the resolve of the other party to secure its own preferred solution.

Lastly, the insistence on objective criteria to choose between the options sounds better in principle than in application. It reflects the legal training of the authors of Principled Negotiation (Roger Fisher and Bill Ury). Legal definitions of criteria are carefully crafted by legislators and scrutinised by the courts but remain controversial – the prosecution and the defence argue intensely about whether criteria for guilt has been proved, i.e., whether the objective criteria of law has been met.

In negotiation, there are no carefully determined procedures for deciding on criteria, no rules of procedure, no judge sitting as a referee on the admissibility of evidence or relevant facts, no independent jury deciding on the facts of the case, etc. The parties to the definition of criteria and to its applicability in this or that situation are highly partisan to their own preferences (we negotiate because we have different preferences). Negotiators can see the implications of a proposed set of criteria to decide the case for or against their own preferred solutions and will react accordingly. In fact, much of the justification of a position involves setting out the criteria by which their solution follows. Competing criteria leading to difference solutions are commonplace in negotiation.

Principle Negotiation as a method to improve negotiation reveals useful insights into improving the processes by which negotiated decisions are made. It does not remove all of the problems nor does it work in every, or possibly, the majority, of cases.

Why do 51 per cent of people play red in the opening round of the red–blue game? (20 marks)

Essay 3

Just over half of the players play red in round 1. They do so for two main reasons: 1 – to protect themselves against the expected red play of the other player or 2 – to take advantage of expected blue play by the other player. This arises from the nature of the interaction: you are not only dependent on what you do but also on what your partner does.

Most players appear to believe that their partners will play red – in which case it is rational to play red to minimise your losses – or that your partner will play blue and that, therefore, it is rational to play red to exploit your partner’s play and gain maximum points. Most people appear to act rationally by playing red in order to minimise losses and maximise gains.

This is only rational, however, for a one round game. Most people playing red appear to forget the consequences for red play over more that one round of the game – their partner will notice when they lose points and will likely retaliate in subsequent rounds. Blue players in round 1 who lose points from their partner’s red play will generally switch to red play thereafter, meaning that both players lose points.

Players cannot be sure what their partner will play. If it is rational for them to play red, so it will be rational for their partners, and it if is interpreted this way, it remains rational to play red oneself. But if players feel obliged to play red to protect themselves, how can they move from red–red play to blue–blue play? The opportunities to communicate after rounds 4 and 8 can help here. Each can pledge to the other to play blue in the following rounds. But how can you be sure that your partner will carry out his/her pledge? You can’t, which is why some players continue to defect and play red. They feel they cannot risk being exploited, so they play red again, contrary to his/her pledge and this induces mutual defection, lowering both total scores below what they would have been if only each had kept to his/her pledges.

Red players are said to defect ‘not because they want to, but because they must’. Hence, few players achieve blue–blue maximum scores (about 8 per cent in practice).

In the original prisoners’ dilemma game, the optimal choice for both prisoners is not to confess, but the dilemma arises because neither can be sure that his partner will not defect and confess. Hence, both confess, making it worse for both of them than if they had both not confessed.

Parties feel they have good reason not to trust their partners – both are tempted to defect and both succumb to the temptation if only because they believe their partner will succumb and they cannot risk that they won’t.

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