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The Panama Canal Negotiations

This case study reveals how different negotiation tactics can be employed to negotiate and
conclude a better international agreement.

The completion of the Panama Canal is one of the world’s great engineering feats. The negotiations to
complete and build this vital connector between two oceans spans decades. The cost in human lives,
suffering, and capital staggers the imagination. It all began in 1847 when the United States entered in
a treaty with New Granada (later to be know as Colombia), and which allowed the U.S. a transit
passage over the Isthmus of Panama. The treaty guaranteed Panama’s neutrality and recognized that
Colombia would have sovereignty over the region.

Nothing really occurred with this development and ultimately, a French company called the Compagnie
Nouvelle du Canal de Panama acquired the contract to build the canal in 1881. By 1889, the
Compagnie had gone bankrupt and had lost roughly around $287 million U.S. along with
approximately 20,000 lives in the process. It is also in 1889 that the U.S. has become convinced that
the canal passage was absolutely vital to their interests. They appointed Rear Admiral John Walker to
head the Commission and to choose the most viable route.

Naturally, the U.S. was interested in the Panama route already started by the French. The French
company which had been heading for bankruptcy, and seeing the writing on the wall before their
bankruptcy in 1889, had entered into negotiations with the U.S. The French company was eager to
extricate themselves from the project. At the time, their holdings were extensive and included land,
the Panama Railroad, 2,000 buildings, and an extensive amount of equipment. They felt their total
holdings should be valued around 109 million U.S., but Rear Admiral Walker estimated them to be not
greater than about 40 million U.S., a significant difference.

As negotiations progressed, the Americans began to hint that they were also interested in the
possibility of building an alternative canal in Nicaragua. The French countered with the ploy by
claiming that both Great Britain and Russia were looking at picking up the financing to complete the
canal’s construction. It was subsequently leaked to the U.S. press, much to the French company’s
pique, that the Walker Commission concluded that the cost to buy out the French company was too
excessive and recommended the Nicaraguan route.

A couple days later after this news, the president of Compagnie Nouvelle resigned. The resulting
furore caused the stockholders to demand that the company be sold to the U.S. at any price they
could get. The Americans became aware that they could now pick up all the French holdings for 40
million dollars. However, the Walker Commission had not just been a ploy by the Americans because
the Nicaraguan route was actually a serious proposal that had a lot of backing in the U.S. Senate.
President Roosevelt had to engage in some serious political manoeuvrings to get everybody on board
of the Panama passage. The Walker Commission changed its recommendation to favour Panama as
the canal route.

But the story doesn’t end there. Next, the U.S. signed a new treaty with Colombia’s charge d’affairs
which gave the U.S. a six mile area across the Isthmus and agreed to financial remuneration that was
to be paid to Colombia. The Colombian charge d’affairs had signed the treaty without communicating
with his government. The treaty was rejected by Colombia. In the meantime, revolution against
Colombian authority was afoot in Panama. Since they believed they had signed a legitimate treaty,
Roosevelt sent warships to the area to negate the Colombians, and thus secured U.S. interests, and
offered aid to the Panamanians in their quest to separate from Colombia. Panama succeeded in their
revolt and became a republic. In 1914, the Panama Canal was opened.
Business Expansion Woven From Trust
by Dr Bob March

This negotiation case is published with permission from Dr Bob March's excellent book
"Chinese Negotiator".

Another example of someone who fitted in completely with the Chinese is the China trader Paul
Winestock, who had been dealing with the Chinese since the 1960s. As a trader of textiles in China
during the 1960s and 1970s, Winestock built up a large network of customers and friendly officials.
One of the latter, who had known him since he was a young man living in drafty provincial hotels with
no dining room, was Li Haoran, who had first appointed Winestock as a selling agent for the Textile
Import-Export Corporation. When Li moved on to become managing director of the Animal By-
Products Import-Export Corporation, Winestock approached him and asked to be appointed the
exclusive distributor and wholesaler of Chinese leather shoes in Australia. Eventually, he was given
control of twenty-five percent of China’s shoe exports, with agreements for the regions where the best
shoes were made, namely, Beijing and Shanghai.

In 1982, Winestock sold his business to the multinational corporation Pacific Dunlop and was asked to
train George Preston, one of its senior managers. Preston had this to say about Winestock:

“Winestock’s reasoning was this: When you made money in the good days, you had to remember that,
if the Chinese needed to sell at a higher price, you had to be able to give it to them somehow."

“Winestock had an advantage: He ran his own private company. He didn’t have to report to a board.
He was able to take a long-term view. So he had the freedom to say, ‘Well, I don’t need to make so
much profit this year. I can live without making $2 million this year. It’s going to cost me half a
million, but I know I’m going to get it back.’ ”

Winestock’s style was blunt, but such was his acceptance by the Chinese that they are said not to be
have been offended. He says, “I can tell them off and they take it from me. But before I do, I think”
(Blackman 1993, 1997).
Negotiation Style and Frameworks
by Steven Roberts

A case study that shows how important it is to consider whether or not to accept concessions
by taking a reasonable perspective and framework.

On a scorching summer day in August,1990, the citizens of Kuwait stared in puzzlement at the
encroaching, dusty streams of what appeared to be a pending desert sandstorm, creeping ominously
towards them from across the forbidding dessert. To their dismay and horror filled eyes, the quaking
citizenry had become helpless witnesses to the advancing units of Saddam Hussein’s Iraqi army,
relentlessly engaged in the illegal invasion of their homeland. There had been no warning of this
pending disaster. Kuwaiti resistance was swept aside much like one casually brushes away a crumb
from one’s lapel.

After six days, Hussein declared that he had annexed Kuwait. The world was stunned by Hussein’s
audacity, and the Middle East became very anxious about what the future may hold for this unsettled
region. By August 30, the Arab League, called by President Mubarak of Egypt, attempted to defuse
this potentially explosive crisis through applying negotiation skills.

The Arab League proposed to Hussein that if he would withdraw his troops, they were prepared to
offer him several concessions. Through several negotiations, the Arab League eventually framed a
very generous negotiation proposal that they attempted to present to Hussein in a packaged offer.

The three major negotiation concessions offered to Iraq were as follows;.


1) Iraq would take control of the Ramilla oilfields, which Hussein claimed had been stolen from Iraq in
their ongoing border dispute with Kuwait.
2) Iraqis would take possession of Bubiyan Island, which was an island located in the Persian Gulf, and
which abutted closely to the Iraqi shoreline.
3) The third concession entailed the wiping out or renegotiating of a $14 billion war debt that Iraq held
with Kuwait since the Iran-Iraq war. This last concession was still open to considerable negotiation,
allowing plenty of latitude for pending discussions.

Hussein had two ways to view how he could frame the Arab League’s proposal. He could look at it
from the viewpoint of what he would win if he did withdraw his troops, or he could consider what he
might stand to lose if he withdrew his troops – two very different perspective frameworks of the same
situation. In the end, he chose unwisely.

Hussein chose to take the perspective of what he would lose. The princely concessions presented by
the Arab League were disdainfully refused by the arrogant Hussein with little consideration. He
decided that since he already occupied all of Kuwait, anything else would be seen as a loss to him as
he was now in possession of all of Kuwait and its incumbent resources anyway.

He could have viewed it from the alternative position of all that he would have won
for just a few weeks work, and would have received as concessions from the Arab
League’s proposal. The Iraqi leader might have been thinking about his decision as
a powerful coalition of allied forces dogged his beleaguered and battered army
which was retreating deep into the heartland of Hussein’s native Iraq, leaving its
charred carnage in its wake. It was costly lesson to learn. Is the glass half – or is it
half full? How you view it can mean everything.
Enron’s Indian Negotiation Debacle
Enron’s collapse in India was caused by the huge debt of the MSEB project, and
renegotiations that were forced by strong Indian nationalist reactions.

In the early 1990s, the US energy giant Enron, decided it needed to diversify by expanding its growth
abroad with emerging countries. In June of 1992, Enron engaged in negotiations with the government
of India. Enron had identified the state of Maharashtra, the third largest state in India with a
population of roughly 79 million, and containing India’s commercial capital of Mumbai, to negotiate a
major energy project. Maharashtra was governed by the Congress Party.

Negotiations began with both the state government and with the Maharashtra State Electricity Board
(MSEB). Enron’s mega project proposal was for the construction of a US$3 billion, 2015-megawatt
power plant. As a great deal of liquefied natural gas would be required to power the plant, Enron
decided it would import this gas from a joint venture that Enron had with Qatar which was 1200 miles
away. Being the largest project ever undertaken in India, Enron proposed that the project be broken
down into 2 phases. Initially, in phase 1 they proposed to produce 695 megawatts and would use
locally produced natural gas. Phase 2 would produce 1,320 megawatts and for this they would use the
natural gas imported from Qatar. Enron chose the town Dabhol, situated on the Indian Ocean as the
project site.

The most important element of the deal was to secure a long term purchaser of electricity to lock in
long term debt financing and to generate a sufficient return to investors in the project. In order to
realise the project, MSEB, the only potential buyer available, would have to enter into a long term
contract with the Dabhol Power Project Company. In less than five days a memorandum of agreement
was signed. It was agreed that the Dabhol project would charge no more than 2.40 rupees (7.3 cents
US) per kilowatt hour to MSEB.

Three problems immediately emerged:

1. First, the World Bank, acting as a consultant to the Indian government said that the
project would produce an excess capacity of electricity for years and would be too costly in
comparison to the more traditional sources of fuel, such as coal, already in use. Enron
responded by launching a successful campaign by promoting the positive environmental
impact of its project.
2. The second problem entailed the Enron’s projected 26.52 rate of return to its
shareholders. India’s central government and the government of Maharashtra disagreed and
countered with a 20% return as being more reasonable. Ultimately they agreed on 25.22
%.
3. The third major hurdle was mounting public opposition to the project and concerns
raised over the electricity tariff, government official bribery, and about the project not being
open to competitive bidding.

Despite this mounting opposition, negotiations continued.

Enron joined with two other US firms, General Electric and Bechtel, each holding 10% as junior
partners. In December, of 1993, MSEB signed the power purchase agreement with Enron thereby
inaugurating the Dabhol Power Project.

As the project commenced, public opposition to the project swelled as activists and an assortment of
differing organisations challenging the legitimacy of the project filed suit against the project in the
India High Court. As elections loomed in Maharashtra in March of 1995, the opposition parties, the
Shiv Sena Party and the Bharatiya Janata Party (BJP) used their opposition to the project as a primary
election issue. Focusing on a nationalistic viewpoint they alleged that the proposed electricity tariff
was excessive and would hurt the poor. As a consequence, the Shiv Sena and BJP coalition won the
elections and tossed the incumbent government. An investigation was carried out into the overall
project in May which subsequently resulted in MSEB cancelling the power purchase agreement with
the Dabhol Power Company. At this point in the project, US$300 million had already been invested
and Enron and its partners were facing a daily loss of US$250,000 each day the project was delayed.

As per the terms of the original agreement, Dabhol and its partners initiated arbitration proceeding
against MSEB and the Maharashtra government. The government in turn launched legal action to
invalidate the arbitration action alleging that illegal means had been employed to secure the contract.
Maharashtra’s government officials responsible for the investigation also stated firmly they had no
wish to consider renegotiation.

In the fall of 1995, Enron managed to persuade the government of Maharashtra to reopen
negotiations which would take place in the fall. Subsequently, Chief Minister Joshi announced that a
review panel would carry out a review of the project. The review panel not only began to discuss the
restructuring with Enron executives, they also heard the major opponents to the deal. The major
issues entailed the electricity tariff, the capital costs of the project, the payment plan and also the
environment.

In terms of the renegotiation, MSEB gained a 30% partnership with Enron and its interest reduced
from 80% to 50%. The original electricity the plant would produce was actually increased from the
initial proposed outage of 2,015 megawatts to 2,410 after the completion of phase 2. Capital cost was
reduced from US$2.85 billion to US$2.5 billion and the tariff was lowered from 7.03US cents to
6.03US cents subject to the cost of fuel and inflation.

In January of 1996, the Maharashtra government agreed to the renegotiation proposal submitted by
the review panel. After much internal debate, the Indian government gave their approval and
extended their guarantee of Maharashtra’s obligations. Enron dropped their arbitration proceedings
and Maharashtra dropped its counter suit. Despite these agreements, the project still could not
continue because a host of various groups including unions, activists and other public interest groups
filed 24 legal actions in the courts in an effort to stop the project. The courts ruled that the project
could not proceed until all these suits were heard. Eventually the courts dismissed the last suit in
December of 1996.

In May of 1999, phase 1 of the project was completed and the plant began to operate while Enron
sought and obtained financing of US$1.87 billion for phase 2 which they expected to complete toward
the end of 2001. Not long after the phase 1 of the plant began to operate however, MSEB was no
longer able to pay for the electricity it had negotiated. By 2001, MSEB had accumulated a debt of
US$45 million forcing the Dabhol Power Company to close down and file suit against MSEB, the central
government and the government of Maharashtra. That same year Enron's collapse was total. After a
string of financial setbacks, Enron declared bankruptcy.
Win-Win Negotiation Badly Executed
This case study discusses some of the critical errors that can be made in a Management and
Union Labour negotiation, where Management were trying to achieve a win-win negotiation.

In trying to create win-win negotiation agreements, one of the biggest mistakes made by negotiators
is to deal with the issues on an issue by issue basis. This often results in a breakdown in negotiations
because invariably, conflicting monetary issues arise that result in a showdown between the two
parties. Negotiating on an issue by issue agenda does not present the opportunity to make
concessionary trade-offs between the different issues.

For example, in January, 1993, management and labour of Bayou Steel in Laplace, Louisiana, sat
down to negotiate a new contract. Neither side dreamed that these talks would lead to a strike. Each
side believed that they had built a solid relationship. Management went into the negotiations thinking
and believing that if they used a win-win negotiation concept, they would increase and enhance the
relationship between the shop floor and management. Even Ron Farraro, president of United Steel
Workers of America did not conceive of the possibility that talks would collapse into a strike, and that
a negotiated contract would be reached with little or no difficulty.

Management of Bayou Steel enlisted the help of two facilitators from the FMCS (Federal Mediation and
Conciliation Services) to guide management through a win-win style negotiation with its workers. The
president of Bayou said that the facilitators helped them identify each side’s objectives and concerns,
and led him to believe that they had in effect, resolved 90% of the contract issues.

The facilitators set up an issue by issue agenda. They left the economic issues such as incentives,
base pay, overtime, and vacation time as the final issues to be discussed. Management believed that
they had correctly addressed the employees’ concerns about these pay issues.

However, union members became suspicious about management’s good intentions to take a win-win
approach. They began to believe collectively that this negotiation approach by management was a
disguised ploy meant to undermine their position, especially on the economic issues.

At first, negotiations went relatively well and as predicted. Yet, as the economic issues were placed on
the table for discussion, the situation quickly turned upside down into a hard nosed bargaining
negotiation. Management attempted to stay the course with a win-win approach, but this no longer
washed with the union. Can you guess what happened? That’s right – union members walked and
went out on strike.

By using an agenda to address the format of the contract negotiations, Bayou Steel failed to consider
that any single issue could be so divisive. As the economic issues rose to the foreground of the talks,
Bayou Steel no longer had leeway in considering trade-offs. They literally painted themselves into a
corner because of their structured of agenda items.

We need to be able to compare and contrast all the issues collectively, and by order of relative
importance. Package or multiple offers offer a greater latitude in finding creative solutions as it gives
us more to work with, as opposed to dealing with issues on a one-on-one basis through a pre-
designed agenda. Planning and using a Concession Strategy effectively can give one side a big power
advantage over the other. So be careful to plan your agenda wisely.
The Negotiation Problem
This case study shows how two parties can find a successful negotiation resolution by
tackling the issues in a creative and mutually beneficial manner.

One of the biggest stumbling blocks encountered by a negotiator is to clearly understand the real
issues as the root cause and basis for the negotiation in the first place. All too many times, negotiators
take insufficient time to clearly identify and frame the problem or issues to be resolved and
negotiated. This is the crucial first step to any negotiation. If this first phase of the negotiation process
is not addressed properly, than it is quite likely that the rest the whole negotiation process will unravel
because the core issues were not properly understood at the outset.

Let’s look at an example case study which emphasizes the need to define and identify the problem. In
this example, a substantial electronics firm face considerable difficulties in one of their subassemblies.
The root core of the problem revolved around certain types of fittings and pins that were becoming
bent and distorted by the operation of the machinery. Units which were being produced were damaged
and had to be rejected because of imperfections. These rejected components were put aside and then
re-worked later on in the month.

This duplication of effort resulted in increased costs as workers had to work overtime to meet their
quotas. These extra costs for the extra work performed had not been considered in the manufacturing
budget. The manager of this subassembly line did not want be charged with these overhead expenses
because he felt it was not their responsibility. Likewise, the manager who was the overseer of the final
assembly department also refused to accept the increased costs to his budget. He argued that the
extra costs were a direct result of the poor work of the personnel in the subassembly department as
this was where the problem originated.

The subassembly department manager countered this argument by claiming that the parts were in
good condition before they left his department and that the damage must have occurred in the final
assembly manager’s department instead. Both parties had reached am impasse.

Some time passed before a resolution to the matter was worked out that was agreeable to both
parties. What both parties were really seeking was to find a long term solution to this dilemma. It was
only when they truly understood the nature of the problem they were able to negotiate a reasonable
solution that was acceptable to both of them.

It was ascertained that the subassembly workers had some slack time available during every working
month. The damaged parts were returned in small batches form the final assembly plant so that the
subassembly personnel could work on them during these slack periods. Also, when they examined the
problem in more minute detail, the managers learned that some of the personnel in the final assembly
plant may not have been adequately trained and may have also been partially responsible for the
damaged incurred. These personnel were identified and were sent to the subassembly plant to further
their training and to learn more about what transpired in that department.

The resulting solution addressed the increased cost concerns of both departments on the one hand.
On the other hand, overtime was reduced by allocating the personnel where and when they most
needed and finally, because of the enhanced training, the number of damaged parts was considerably
reduced.

The lesson to be drawn here is that the two managers were only able to address the problem when
they were able to understand the real issues that lay beneath the problem as the cause for their cost
overruns.
Third Party Intervener
This case study shows how a third party intervener can assist two dead locked parties in a
negotiation and find a resolution.

There are occasions when the negotiating parties cannot ‘see the forest for the trees’. They are unable
to see past their own goals and interests which prevent them from arriving at a successful agreement
in their negotiations. These are the instances when a third party intervener can help both parties find
a solution to the dilemma that is plaguing their talks that have likely stalled in a stalemate with no
possible resolution in sight.

The Egyptian and Israeli conflict of the mid 1970’s posed that kind of dilemma. There were also
peripheral parties that also posed problems for the negotiators. Syria had grave concerns about the
Palestinian issue while Israel had no particular desire to sit down and negotiate with the Palestinian
Liberation Organization. Egypt had concerns about the growing influence of the Soviet Union in the
Middle East Region. This tangle of opposing interests posed quite a challenge to the negotiators to
overcome.

However, extending the olive peace branch in hand, Anwar Sadat made his memorable and historic
trip to Jerusalem to hold talks with the Israeli Prime Minister, Menachem Begin. President Sadat said
he represented all of the Arab concerns in this matter and stated that he wanted all the Israeli
occupied areas to be returned before normal peaceful relations could be established with Israel.

Begin believed that a separate peace with Egypt would offer Israel some stability and a possible
military advantage. However the issues were extensive and extremely complicated. It began to appear
there was no resolution possible in bringing some stability to the region. However, despite the ongoing
talks, the United States and in particular, President Carter and his Secretary of State, Cyrus Vance,
saw a possible opportunity to offer their services to act as third party intervener and mediate a
resolution.

In the interim, most of Sadat’s Arab allies had abandoned the peace talks leaving Israel and Egypt to
pursue their own talks. However, animosity began to build between Sadat and Begin and the whole
situation began to look hopeless. President Carter and Cyrus Vance took the initiative and invited both
Sadat and Begin to come to Washington separately where they met with both parties to discuss their
respective issues, concerns and objectives in the Middle East.

As negotiations went back and forth, it became apparent they could not resolve this on an issue by
issue basis. The U.S. negotiators, acting as third party intervener’s, began the process of presenting a
resolution package that is often described as ‘single negotiating text’, a device often used in
multiparty negotiations. Each text is revised and gradually makes both parties more comfortable with
each improvement made, thus allowing the contending parties to slowly find a middle ground upon
which they both can agree.

Finding neutral ground was crucial to this process, so the meetings between Begin and Sadat took
place at Camp David in the United States. Eventually, both parties found an effective means to resolve
their seemingly insolvable dispute when both Sadat and Begin signed the Camp David Accord. This
historic agreement resulted in that poignant moment when both leaders and President Carter shook
hands for the entire world to see
The Fixed Pie Syndrome in Union Negotiation
This case study shows how a limited fixed pie distributive negotiation style can damage
negotiations with labour unions.

The mythical fixed pie syndrome is one of those bizarre anomalies that still persistently seep stealthily
into the minds of the largest corporations. It is not unlike a virulent pestilence that paralyzes its host
into a rigid mindset, blurring the host’s vision into a fixed stare where its hapless victim can see
nothing more than what sits on the negotiation table. Many agreements fail to materialize because of
this limited vision. The resulting loss of potential trade offs forces the opposing parties to squabble
over a single bone while dozens more lay scattered about them. They are missed opportunities.

In late 1985, Frank Borman, the former renowned astronaut, was the acting president of Eastern
airlines, based in the U.S.. The airline was struggling through tough and trying economic times.
Labour costs were a critical issue that Mr. Borman sought to address.

Imperiously, Mr. Borman tossed an ultimatum at the three unions like a gauntlet. Either they were to
agree to give the airline hefty wage concessions or he would sell the airline. The union leaders were
not impressed by the threat as they all had binding contracts that were not to be renegotiated for
some time to come. They believed that the threat to sell off the airline had a hollow ring to it and
called what they perceived to be a bluff.

To add weight to his edict, Mr. Borman began to initiate talks with Frank Lorenzo, an industry heavy
weight who had previously crushed the unions at Continental airlines. Mr. Lorenzo was known as being
ruthless. This obviously made the union become jittery. What the unions didn’t know was that Mr.
Borman was bluffing as he really didn’t intend to sell the airline.

Lorenzo however, and not aware of Borman’s slight of hand tactics, submitted such a significant
proposal to the Board of Directors of Eastern Airlines, they began to seriously look at the offer with
raised eyebrows and considerable interest. The unions, in the meantime, began to re think their
position. As the negotiations progressed, Mr. Borman began to make some grudging but significant
headway with his negotiations with two of the three unions. Both the flight attendants’ and pilots’
unions agreed to a 20% wage claw back.

However, the machinists’ unions, which were run by the hard nosed Charlie Bryan, would only agree
to a 15% slash in wages. Borman didn’t accept their position. They argued voraciously over the
dispute 5%, and both of them took the position that if either side were to fail to make a concession
over the disputed amount, the airline would be ruined.

Like two drivers aiming head on at each other, eyes fixated and jaws squared, they steeled
themselves, waiting for who would blink first. Neither did and they crashed headlong into each other,
stubborn to the end as the ominous deadline for Lorenzo’s offer arrived. The Board of Directors for
Eastern Airlines accepted Lorenzo’s offer. As a result, Borman was tossed, and out of a job. In the
bitter end that followed, Lorenzo forced huge wage cuts on the hapless unions and eliminated so many
jobs that Eastern Airlines was soon to go the way of the Dodo bird – just another extinct species. It
filed for bankruptcy in March of 1989.

Contract Renegotiation with the Chilean Government


Although starting a contract renegotiation at a disadvantage, with a weak BATNA, US
company Kennecott managed to enhance and turn things around with an offer the Chilean
government couldn’t refuse.

In the 1960’s Kennecott, a U.S. company, was about to enter into renegotiation over its contract with
the government of Chile concerning its El Teniente copper mine. At the time, Chile’s BATNA appeared
overwhelmingly strong as the government was possessed of a strong pro sovereignty stance towards
foreign management of its natural resources. Can we take some lessons for our mortgage
renegotiations? The government of Chile was politically positioned to establish their own tough
financial terms or had the option of declining to renegotiate by simply ejecting Kennecott from their
involvement altogether by expropriating the mine. Chile had its own experts who could manage and
operate the mine, perform the processing, and could readily market this very useful natural resource.
Simply put, Kennecott found itself in the position of either acceding to the contract renegotiation
terms dictated by the Chilean government or have the mine snatched out from under them.

Realising that their own BATNA was weak, Kennecott executives came up with a very creative solution
which ultimately weakened Chile’s position while leveraging their own BATNA more favourably by
creating value for both sides.

The proposal made by Kennecott entailed the following six point strategy thereby changing the rules
of the game:

1. The deal consisted of Kennecott offering to sell a majority equity interest in the mining
operation to the Chilean government.
2. Realising that Chile would not particularly care to divest the funds of the sale into U.S.
banks, Kennecott offered to use the funds, combined with an outside loan, to finance the
mine’s expansion. This allowed Chile to preserve its nationalistic interests and have greater
financial gain from future profits. They were able to renegotiate and establish a partnership
which was mutually acceptable to both parties.
3. Next, Kennecott then persuaded the Chilean government to guarantee the loan and
have this guarantee subject to the law of the state of New York.
4. Then, as many of the company's mining assets as possible were insured with U.S.
backed guarantees, against the potential expropriation threat.
5. Kennecott then negotiated that the copper output derived from the expansion would
be sold exclusively to clients in Europe and North America.
6. Lastly, the rights to collect from these new contracts would be sold to a consortium of
financial institutions based in Japan, the United States and Europe.

This allowed for a greater diversity in the customer base and additional partners. In future contract
renegotiations, this would result in a much larger multi party negotiation then just Kennecott having
to renegotiate on its own. Many of these outside interests would also be engaged in other unrelated
negotiations with the Chilean government, thereby reducing Chile’s leverage in any future contract
renegotiations. Mortgage renegotiators won't have as much flexibility to change the negotiation game
when they renegotiate their contracts.

Lastly, because of the insurance guarantees obtained by Kennecott, even if the renegotiations
collapsed, Kennecott had succeeded in protecting a good portion of its interests should Chile opt to go
ahead and appropriate the copper mine. Additionally, the company could also call in its other partners
to act as allies.

In the end, some years later, the mine was eventually expropriated by Chile, but Kennecott was in a
far much better position than it had initially been before it initially started to renegotiate the contract.
Kennecott enhanced its BATNA by making an offer the Chileans couldn’t refuse, while taking steps to
protect their interests should negotiations collapse.

The Importance of Business Communications


A case study that shows how a business relationship can fall apart when communications
between the partners are not maintained.

The importance of keeping the lines of communication with one’s business partner cannot be
overemphasized. Both our domestic partnerships and especially our foreign partnerships are premised
extensively of the degree and quality of the relationship that the parties have assumed. A relationship
can only survive if the parties involved maintain a line of communications. This concept becomes even
more relevant when the partnership entails an international agreement where the enhanced distance
between the partners will exacerbate the need to keep in touch. An executive can only keep on top of
things if they are in contact with their partners because otherwise, how are they going to know what’s
going on?

Secondly, the line of communications needs to be a two way process and should flow back and forth.
It happens that too many international negotiators do not take the time, and dismiss the need to
include some frank discussion in how the two parties will maintain contact with each other. They
assume wrongly that the communication process will evolve all in its own sweet time. The time to
discuss the line of communications is when the venture is being negotiated. They should not consider
the issue later, and after the fact, when serious problems suddenly arise and challenge the viability
and the stability of the joint venture. The other problem occurs when the two parties neglect to keep
in touch with each and simply allow their interest in their agreement to ‘wither on the vine’, while the
agreement simply falls apart due to a genuine lack of interest.

Many joint ventures have collapsed or gradually fell apart needlessly due to a lack of communications
between the parties involved. International agreements are especially prone to dissolution when the
partners fail to maintain a respectable level of contact.

Take the case that occurred between one particular U.S. company and their Japanese partner for
example. The agreement that they signed stipulated that the Japanese company would supply the
manufacturing, management, and marketing components of the deal, while the American company
would supply the technology.

The American representative, who was based in Hong Kong, met with their Japanese counterparts
only once every three months where all aspects of the operation would be discussed.

In between these quarterly visits, the two parties exchanged communications through written
correspondence and infrequent phone calls. To the Japanese partner, this periodic though infrequent
contact signalled that the American partner was not overly committed to the relationship. Needless to
say, the Japanese commitment to the partnership began to dwindle as well. As time progressed, the
U.S. company’s strategy altered as they began to concentrate on a smaller product line. The American
company never bothered to advise their Japanese partner of the change in their strategy. Also, due to
this smaller line, there was the additional fiasco in that the Japanese company was not going to be
receiving the technology it had negotiated with the American firm.

The Japanese took a dim view of what they now perceived as an agreement that was signed in ‘bad
faith’. The Japanese became bitter as the relationship soured and ended in arbitration. What was the
result the arbitration? The partnership was dissolved.

This illustrates the importance and need for communications. The American firm should have
appraised their counterpart about the change in their strategy, but the Japanese should perhaps have
communicated their displeasure earlier, rather than allowing their disgruntlement to fester. Never
dismiss the importance and impact that a good line of communications can have on your business
relationships, whether it be a domestic or a foreign relationship.

Using Mediation for Resolving Disputes


This case study shows how mediation can be more beneficial to a business relationship than
other dispute resolution mechanisms.

Companies that find themselves embroiled in a bitter feud over a contract dispute have three options
to find a solution. They can litigate their claim through the court system; go to arbitration; or use a
mediator to resolve the dispute. Many companies have invariably used one of these processes to
address a dispute. However, there are significant differences that should be considered before
deciding upon which method to take.

It probably goes without saying that litigation is likely the more expensive and is the most time
consuming. Lawyers have a knack for tying up a case in a tangle of legal knots for years. The outcome
is often uncertain and the resulting benefits can be nebulous at best.

Arbitration, as it turns may not be that much more productive than litigation, as this dispute resolution
process can also be both costly and time consuming for the participants. However, the effect and
influence of arbitrators can vary quite significantly between countries and cultures. In some countries,
arbitrators may be inclined to impose a settlement on the parties in dispute, and in other countries
they may be inclined to facilitate a more amicable agreement. Arbitration may be a more proactive
venue than litigation. One thing is clear about a dispute in a joint venture partnership though; there is
little hope that the relationship between the partners will likely survive either process.

Often, too many companies will resort to either of these first two options first. This may be a mistake.

This brings us to mediation. Mediation is the least used process to resolve disputes. So, what are the
similarities and the differences? First, a mediator is chosen by both parties, and will bring their own
applicable expertise to the dispute process and an understanding for the basis of the dispute. More
importantly, mediators are both neutral and objective. The mediator will use the resources of both
parties to help both parties resolve their conflict. In other words, a mediator, more than anyone else,
can help mend a contractual dispute and save a relationship. Let’s look at an example.

In Italy, a company called Nuovo Pignone, which manufactured heavy equipment, was being sued by
an insurance company to recoup a claim they paid out to one NP’s customers. The customer had lost
business when some of the equipment it had purchased from NP failed in contract job. NP suggested
they use a mediator. Both the insurance company and the customer who had sustained the loss
agreed. A retired Italian judge was called in to mediate. The judge focused on settlement as his
objective in the dispute.

By taking this approach, the parties were able to more realistically gauge each other’s strengths and
weaknesses. The customer was persuaded to put pressure on the insurance company as he was still a
valued customer of both parties despite his dispute with NP. As a result, the insurance company was
persuaded to settle for a reasonable amount for a reasonable and acceptable amount of money. In the
end, all parties were satisfied through the mediator’s efforts and the business relationship between the
parties was successfully maintained.

A mediator can more readily help the parties shape or restructure their agreements and is thereby
more likely to also preserve a profitable ongoing relationship than would have been achieved through
either litigation or arbitration. Next time you enter in a dispute, check out the available mediation
services before you give your lawyer a call and enter the point of no return.

Power Negotiation
This case study shows how a weaker negotiating partner can successfully use power
negotiation to win a good agreement with a stronger negotiating partner.

There are many occasions when a smaller company will want to form a partnership with a larger
organization to further their business objectives. There are two hurdles that the smaller company
might have to overcome to succeed in the negotiation process. The first problem is to get the larger
organization’s attention as they may express little or no interest in the partnership. The second
problem revolves around the prickly issue of negotiating from a much weaker power base. There
exists the danger that the smaller party’s business goals aren’t overwhelmed by the more powerful
negotiating partner during the negotiation process.

Although the following case study entails a similar problem faced by two countries, the lessons learned
can be applied to any similar business negotiation model. On October 3, 1987, The Free Trade
Agreement (FTA) was signed by representatives of Canada and the United States after two strenuous
years of intense negotiations.

Canada could be described as a medium sized economy. Its population is 1/10th the size of the U.S.
which is considered an economic superpower in comparison. Canada is economically dependent on the
United States. The reason is mainly due to its small domestic market, scattered over a vast
geographical locale. More than 75% of its exports go to the U.S. making the U.S. Canada’s prime
trading partner. By contrast, the U.S. was exporting less than 20% of its products to Canada.

In the 1970’s, Canada’s economic health rose and fell like the proverbial yo-yo. It was too resource
based and needed to add some meat to its manufacturing industry to stabilize the economy. A Royal
Commission concluded that Canada’s only means to achieve this stability was to engage in an open
free trade partnership with the United States.

The problem was that the United States wasn’t especially interested in such a free trade partnership
agreement. The U.S. was in addition also becoming increasingly protectionist during this same time
period. The result was that Canada was facing a whole host of penalties and countervailing actions
against Canadian goods. Canada clearly needed a plan.

The first step that Canada took was in the form of preparation by developing a succinct plan. A chief
negotiator, Simon Reisman, was appointed by the Canadian Prime Minister himself. He established an
ad hoc organization called the trade negotiations office (TNO) which reported directly to the Canadian
Government Cabinet and had access to highest levels of bureaucracy. It established in no uncertain
terms their negotiation goals and objectives which included a strong dispute resolution mechanism
that the Canadians felt were vitally important to their success.

In contrast, the United States did not consider the FTA to be especially important and let Canada do
all the initial work. The only reason why the U.S. Congress even considered the FTA proposal was that
they liked the idea of a bilateral approach to trade and were tired of the previous mechanism that
failed to settle a host of trade dispute irritants between the two countries known as GATT. It would
also allow freer access to other segments of the Canadian economy. President Ronald Reagan decided
to fast track the negotiations and appointed Peter Murphy to represent their interests. The U.S. was
also concerned about the growing hegemony of the European economy.

Strong differences in interests and approach dogged the negotiations. The Canadians used every
advantage available including the use of Summit meetings between the leaders of both countries to
emphasize their concerns at every opportunity. Yet, the political powers in the U.S. dragged their feet
to such an extent that the Canadian negotiators walked away from the talks to express their
displeasure. This put some heat on the U.S. administrators to the extent that U.S. Treasury Secretary
Baker took over the negotiations.

As a consequence, the talks between the two countries were successfully concluded. Several
concessions were made by both countries. The U.S. opened up a larger investment segment in the
Canadian economy and removed some of the more time consuming trade irritants. The Canadians
achieved their main goals of getting freer access to the U.S. economy, while implementing a strong
trade dispute resolution method.

The Free Trade Agreement between the two countries created the largest bilateral trade relationship in
the world. Canada achieved its objectives because of its detailed planning and the intense focus of its
negotiating team despite the asymmetry in power between the two nations.
Negotiation Alliances
This case study shows the importance and power of forming alliances within a multi party
negotiation.

In multiparty negotiations, the negotiation power, or the position of one negotiating party, can be
enhanced or weakened by making alliances. The use of alliances is a powerful means whereby any
member in a multiparty negotiation can strengthen their own BATNA (Best Alternative to a Negotiated
Agreement), or weaken the BATNA of an opponent.

The advantage of forming an alliance allows two or more parties to come together on one more issues
where they share a common interest. This allows the alliance to present a common front on positions
of mutual interest in opposing the position of another party at the negotiation table.

The drawback to forming an alliance is that if a side agreement is reached which addresses some
other issue of importance to a member of the alliance; they may simply withdraw their support and
thereby weaken the alliance at any given moment. It is important to keep in mind that everybody
involved in an alliance be fully aware of all the aims and goals of the parties with whom they are about
to form an alliance. It is especially important to keep in mind the most important aims of the
perspective partners, and be cognizant of any weak areas that can be exploited by their partners.
Otherwise, you end up getting caught in their counterpart’s gambit to divide and successfully exploit
your weakened position in return.

Conocco, an American company, had developed plans to commence operations to drill for oil in a
national park located in the rain forest of Ecuador. The government of Ecuador agreed to the
Conocco’s plans because it was in great need of the oil revenue that the drilling operations would
produce. However, the plan was fiercely opposed by a number of human rights groups, and also by
various environmental groups. These groups formed an alliance in a common cause to stop the drilling
as this was their main intent.

The alliance of the environmental and human rights groups initiated a very powerful and public
campaign against the oil drilling plan. As a result, public opposition had swelled against Conocco and
the government. To counter what the opposing groups were doing to block their drilling in the rain
forest, Conocco sought to break up the alliance formed against them.

Conocco began to hold secret negotiations with some of the more moderate members of the
environmental groups by presenting them with what Conocco believed to be a very responsible and
environmentally management plan. They were using a divide and conquer tactic in other words. Not to
be outdone and perhaps realizing what Conocco was trying to achieve, the remaining environmental
and human rights groups applied the same kind of divide and conquer tactic on their own. They took a
different approach and applied pressure directly against the government of Ecuador to withdraw their
support for the project.

Conocco’s tactics were ultimately and successfully nullified because in the end, Conocco withdrew from
the drilling project.

This is a clear lesson in how effective an alliance can be in achieving a compatible objective. It also
reveals how such tactics can be countered, and that the alliance members always had to be on guard
for these diversionary manoeuvres by the opponent.
Group Negotiations Style
This case study show what happens when management fails to use group negotiations to
resolve their competing interests.

Many people tend to believe that the people in charge of the companies or the organizations with
whom we are employed are always working as a team and are united in achieving and working for the
same goals and objectives. We like to believe that our management team has our company’s best
interests at heart. Well, sorry to stick a pin in this cozy balloon and burst your illusions, but this is not
always the case.

It occurs more often than one might think. Department heads and executive management sometimes
succumb to the ‘empire building’ delusion or ‘Napoleon complex’ instead. They come to believe that
their department is more integral and important to the success of the company than the other
departments. They become like amnesiacs who suddenly forget the team concept notion, ignore or
neglect group negotiations, and become full of their own self aggrandizement instead.

This attitude can seep into the mentality of larger corporations like a mould silently spreads behind the
drywall of your house. One day your family seems fine and healthy, and the next day, everyone is
feeling ill and out of sorts without knowing why. The unseen corruption has spread and infected your
entire household, and the only way to fix your once happy little home is to literally gut the entire
insides.

Back in the 1850’s, Lehman Brothers was formed and became a vital and affluent trading house on
Wall Street. Unfortunately, some 134 years later, the company fell afoul of misfortune and had to be
sold to avoid bankruptcy. Part of the downfall occurred because of the intense enmity between Peter
Peterson, chairperson of the banking department, and Lewis Gluckman who was the head of the
trading department. This rivalry between the two departments had become deeply rooted over time
and is said to permeate many other trading houses on Wall Street. It is quipped that traders are often
described by the investment bankers as ‘poorly educated drones…thinking of the moment, not the
long term’. On the other hand, it is said that the traders describe the bankers as ‘elitist Ivy League
preppies who rise late [and] take leisurely lunches.’

One can now foresee some of the basis for the hostile rivalry that was taking place in Lehman
Brothers. Interestingly enough, the bankers and the traders worked in different buildings as well.
Generally speaking, it was an unspoken belief in the firm that the traders were considered subordinate
to the bankers, but it was the traders who were generating the greater amount of income at Lehman
Brothers.

As the rivalry intensified, both Gluckman and Peterson struggled for supremacy within the company.
They both began to seek out alliances to enhance their respective positions. As the power coalitions
built, Gluckman and his coalition prevailed and won the turf war. The trading department under
Gluckman’s control began to act unilaterally. They bypassed the board of directors and made their
decisions by majority rule, refusing to negotiate their decisions with Peterson and the banking
department.

When market conditions deteriorated, Lehman Brothers was sucked into the whirlpool because
the traders were making decisions that were in their best interests and not the
Creative Problem Solving in Negotiations
A study that shows how effective creative problem solving can benefit any negotiation.

All too often, negotiators can become tied up and bound as they commit to taking a competitive
approach to their negotiation. As a result, they don't allow themselves to be flexible nor consider a
creative approach to derive more value from the negotiations. On the other hand, a common error
committed by those who believe they are taking the win-win approach to their talks is to
overcompensate their need to find agreement by making unwise compromises. A compromise
invariably means that both resources and money will likely be left on the table, unclaimed by either
party.

Here’s how two west coast energy producers, Southern California Edison Co. and Bonneville Power
Administration created a joint partnership through creative problem solving whereby each party met
their objectives.

In 1991, the two parties conceived of a way to help the Columbia River salmon in the Pacific
Northwest, while improving the polluted air of southern California, and they managed this feat without
spending any money in the process!

Here’s a précis of this very unique and imaginative problem solving that illustrates the powerful
benefits of the create process at work. During the summer months, Bonneville Power would increase
the flow of water into the Columbia River. This would automatically increase the amount of
hydroelectric power generated by California Edison. The increased flow of water allowed the young
salmon to swim through the channels more easily. It also increased their survival rate because a
weaker current made them more prey to becoming lost or more vulnerable to being devoured by
predators.

Later, in the fall and winter months, California Edison returned the power back to Bonneville Power
Administration that it had borrowed during the preceding summer months. As a result, Bonneville had
very little need to run its coal-fired and oil plants during the summer months.

This was truly a win-win agreement. The exchange of power, roughly equivalent to about 100,000
households improved the migration of the salmon, thereby increasing their survival rates and
expanding the fish population. Additionally, air pollution was reduced significantly as Bonneville didn’t
have to resort to smog producing plants during the stifling and oft smoggy summer months that
normally occur. What kind of impact? It's been estimated the saving was about equivalent to taking
about 5,000 cars off the highways. The best part of all was that absolutely no money exchanged
hands in the entire process. Pretty smart, eh?
Competitive Conflict Escalation
Discusses irrational competition and the damage caused by conflict escalation between
competing businesses.

Competition is clearly a healthy means to increase sales for any business. It is essential because it
provides a stimulus for our company or organization to prosper and grow. However, does this mean
that a company should compete at all costs? The answer is no! There comes a point when excessive
competition may cause serious harm when the losses exceed the gains. Sounds like simple
commonsense, doesn’t it? Yet, there are many examples of escalated competition that are unsound.
Even the big players can be drawn in this irrational escalation.

We all use frequent flyer miles in our travels. We know what they are, and the benefits that can be
had from these types of programs. Back in1981, American Airlines introduced the first frequent-flyer
program. It was truly a unique marketing plan. Anyone who flew regularly could redeem their travel
miles for rewards. Great stuff!

Taking American Airlines’ lead, all their competitors jumped on the bandwagon and provided a similar
frequent-flyers program. To get a leg up on American’s initial advantage, several competitors
enhanced what they offered by doubling the air miles. They also offered points for car rentals, hotel
accommodations and other innovative tactics.

The airlines continued this escalating competition through the early 1980’s as each airline tried to
outdo their competitors. In 1987, Delta Airlines offered triple miles to any passenger who charged
their tickets on their American Express card for all of the year of 1988. Analysts took a hard look what
this would actually mean as a cost to the airline industry. They estimated that the airlines combined
would end up owing their passengers somewhere between $1.5 and $3 BILLION dollars in free trips.
Whew! This was not small change to say the least.

The airlines industry was in quite a quandary now. How could the industry get out of this marketing
war that had spiraled so out of control? It finally occurred to them that somebody had to step forward
and draw a line, but nobody did at first. The total airline debt continued to increase with estimates
placing it as high as $12 billion dollars towards the end of the 1980’s. The airline companies couldn’t
stop competing and had to keep matching whichever one of them raised the stakes. and clear. They
also announced the cancellation of their rebate programs.

The same thing had happened in the U.S. auto industry who engaged in rebate programs. The other
players quickly escalated their rebate offers to potential customers accordingly. It actually reached a
point where the major car manufacturers were selling every single car at a loss. Finally, the CEO of
Chrysler, Lee Iacocca held a press announcement. He stated that Chrysler would not renew its rebate
program when it expired at the end of the year if the other companies followed suit. He also stated
that if they didn’t, he would match or exceed their rebate programs otherwise. Iacocca drew a line in
the sand and sent out a strong message to his competitors. The other manufacturers got the message
loud.

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