Advise to Rig Repair & Parts Limited in its International Business Expansion - Coursework Example

ADVISE TO RIG REPAIR & PARTS LIMITED ON ITS INTERNATIONAL BUSINESS EXPANSION TO SOUTH AFRICA Executive Summary This paper provides advise to Rig Repair & Parts Limited, a Scotland based rig repair/maintenance company that also provides parts and components of similar hardware to companies. This paper provides advice on contract related issues between the company and some partners in South Africa in an international business expansion context. It advises the client on the appointment of an agent and the content of a contract with other partners for the creation of a joint venture. Introduction Rig Repair & Parts Limited (referred to as RRP in this article) is now considering a territorial expansion drive through the appointment of an agent in South Africa. It is also seeking to enter an international joint venture with SAPumps to repair and/or produce components and parts. This paper examines these major events in-dept and gives RRP advice on how to proceed with its international expansion drive. In the first part of the paper, we examine the risks involved in the contract RRP has with its existing sole agent , Agent B and the consequences it will bring to the company if it signs a contract with the new agent, A. It goes further to examine how the company can use commission rates, flexibility and agency arrangements to control A’s performance. In the second part, the research examines the foundations and structures of the new international joint venture that is on the verge of entering with SAPumps. It looks at how inventory will be treated, customer relations and the contract structure as well as marketing and distribution of the final products. PART 1 The Risks in the Current Territorial Expansion Agreements The issue with Agency B is a very complicated one. Agency B has the sole agency rights for RRP in South Africa. This makes them the only agency that can source for projects in South Africa for RPR. If care is not taken by RPR, it could get involved in a breach of contract with Agency B if it goes ahead to sign this contract with Agency A. If this happens, Agency B will be entitled to claims for damages. Secondly, if RRP goes ahead to sign this contract with Agency A, granting it exclusive rights without proper care with regards to the agreement with Agency B, Agency A will not get access to the exclusivity it desires. This could also pose legal problems for Agency A and B in their operations in South Africa. This arrangement is a principal-agency arrangement in an international context. A principal-agent relationship exists when a party pursues to direct the actions of the opposite party to his own ends for mutual benefits like shareholder-manager and employer-employee relationships (Jager, 2008). This therefore means that the principal-agent arrangement is one where the principal allows the agent to further his interest and in that process, there is a symbiotic relationship whereby the agent also benefits from some consideration from the principal. The principal gives out a duty to the agent and as the agent goes about it, he gets some benefits and rewards for his efforts. This therefore makes it a mutual relationship for both parties. The Default Legal Position Under international law, the UN convention on Agency in the International Sale of Goods offers a very broad and comprehensive framework for principal-agent relationships between parties from different parts of the world (Cheng, 1990). South Africa is a signatory to the convention. Under the convention, there are three main elements that are crucial and must be honored by both parties. First of all, an agent has the capacity to begin and conclude contracts on behalf of the principal in another country. In other words, if the agent signs a contract in the name of the principal it is binding and is treated as though the principal was the one who signed it, although the principal might be in a different country. Secondly, the scope of the arrangements between the agent and the principal is dictated by the kind of agreement they both signed. This therefore means that the kind of agreement is very important and determines what both parties can do at any point in time. The extent of powers delegated to the agent by the principal determines the extent the principal can go in matters pertaining to business in the nation within which the agreement stipulates. The contract gives rise to some indemnities, which are major clauses that guarantees certain rights to the principal and agents in important situations (Bunnett & Bath, 1998), Finally, the contract between agent and principal in the international context is binding until it is officially terminated. This therefore means that there should be a conscious effort to end an international agency agreement and this must be done in a way that all indemnities and major clauses are adhered to. A sole agency means an agreement between a principal and an agent where no other agent or distributors have the right to act as agents for the principal in a given geographical area (Zeller, 1999). As a sole agent, Agency B is the only agent with the right to represent RPR in South Africa. No other agency can be appointed whilst this contract is in force. RRP & Agency A & B It therefore implies that RRP cannot appoint any other agent in the region aside Agency B. Since the contract is still in force, Agency B is still the only legal agent for RRP. This is an indemnity and major clause that RRP needs to adhere to in this contract. Breach of this major term will lead to claims for damages by B. The fact that Agency B has been dormant for some time now does not mean that RRP can go ahead to terminate the contract without informing Agency B. It has to make an effort to terminate the contract with B before it can go ahead to appoint another agent. However, this does not mean that RRP cannot go ahead to work with Agency A. This is because a sole agency agreement does not prevent a principal from operating in the area the contract covers (Zeller, 1999: Bunnet & Bath, 1998). This therefore means that RRP can enter this contract with a legal arrangement that does not present Agency A as an agent but as a mere casual broker or casual employees. Also, RRP can seek action to terminate the contract with Agency B on the grounds of non-performance. If for a long time Agency B has not contacted RRP, it implies that they are not performing. It can therefore request for a termination of the contract and consider contracting Agency A. The main indemnity that applies in most of these cases is related to commission issues on jobs that Agent A brought (Bennett & Blythe, 2002). RRP therefore needs to make efforts to assure Agent A that it will always get its commission on jobs it brought to them. On the other hand, Agency A’s contract that makes it an exclusive agent cannot be signed immediately and it can be logically inferred that it will be inappropriate for it to be signed before the commencement of this contract. Exclusive agents are the only agents for a principal in a region (Zeller, 1999). In other words, it is only through the agent that a principal can operate. However, after the termination of the contract with Agency B, RRP can consider entering an exclusive agency arrangement with Agency A. Territorial Expansion & Performance Matters The advantage of RRP hiring Agency A as its exclusive agent in Africa and the Middle East is that Agency A can specialize in finding customers for RRP and this will keep giving it international contracts and jobs. This is because Agency A will be spend all its time finding and monitoring client relations overseas. This will give RRP the time to concentrate on its core competencies and build them for better results and returns. In this sense, 7% of profits from these arrangements are quite reasonable. This will also act as a motivator for Agency A to get it to work hard. On the other hand, the exclusive agency contract will prevent RRP from using other partners or even finding jobs on its own in the region. This therefore means that it has to get Agency A to follow up all leads it would get and this would be quite problematic in terms of living up to expectation and getting RRP the desired volume of work. Also, 7% of profits can be very high in that it will reduce the volume of profits that the company is entitled to. However, the rate of commission could be flexed by RRP in this negotiation to get the performance of Agency A to improve. RRP can decide to set a lower rate of commission for Agency A to begin with, say 5%. If Agency A is able to give them a certain volume of jobs in Africa and the Middle East after a given period of time, the commission rate would increase proportionately. This will ensure that Agency A will work hard and meet all relevant performance targets. On the other hand, after terminating its contract with Agency B, RRP can decide to give only non-exclusivity to its agents. This means that it can have more than one agent in the region and this will make Agency A and other Agents, including Agent B to work hard to bring more contracts to RRP (Peroni et al, 2008). However, judging from the specialized nature of this sector, it might not be very beneficial for a business to use this approach as there are few agents and few principals (Swanpoel, 2007). This has confidentiality and loyalty challenges that can be negative. RRP can also keep Agency A as a sole agent because it has shown promise of delivering more international business. This therefore means that if Agency A is a sole trader and its performance diminishes, RRP can always find ways of getting jobs in the region as and where possible. This will perpetually keep Agency A on its toes, working hard. PART 2 Relationship with SAPumps The proposition from SAPumps can be seen as a kind of arrangement where RRP will provide funding for the purchase of inventory and then get SA Pumps to process the inventory for sale. This can be managed as a mere international arrangement or as an international joint venture. “A joint venture is where two or more parent companies agree to pool defined capital, technology, human resource, risks and rewards in the formation of a distinct entity under shared control… this is quite complicated if it is done over two or more different countries” (Campbell, 2009) As a joint venture, RRP and SA Pumps need to set up a full branch in South Africa that will be a different entity for their operations. However, as an international arrangement, RRP can get SAPumps to only provide labor for the arrangements and this will be less expensive but have so many management and control difficulties from the side of RRP. SAPumps is proposing an agreement that will bring mutual benefits to the Scottish company and the South African one. It will give RRP, Scotland access to the local South African and nearby markets and this can lead to higher returns and profits to RRP and also SAPumps. As a company, RRP needs to ensure that the arrangement does not bring reputational problems and also delivers its purposes without preventing the smooth operation of SAPumps and RRP Ltd. The things RRP needs to be mindful of include: 1. Quality Control and uniformity in the things to be produced by the venture. 2. Control of stocks and produced pumps 3. Contract structure 4. Dispute resolution and 5. Marketing and distribution of the produced pumps. Quality Control In managing performance and promoting standardization in an international arrangement there are four things that need to be done (Walker et al, 1998). First of all, a business needs to design the liaison clearly and reasonably. This encompasses the formation of a design team, that will include members of both SAPumps and RRP Ltd. The team should agree on standards that the production system will follow. RRP should ensure that its international standards are met because if it fails in South Africa, it could affect its reputation worldwide. They also need to be attentive to the demands and views of their South African counterparts since the local market is at the heart of this venture. Secondly, the branding must be agreed upon. If RRP is in charge of the branding, it should settle on an appropriate brand that is reminiscent of its local Scottish brands and other international brands it has. They should agree on the kind of brand they would produce under and then make arrangements to ensure that the brand has elements of both organizations. Thirdly, the training of the technical staff involved in the production should be done. This should include members from the RRP team that will come over to South Africa to train the locals to ensure that they can produce at the international/world-class standard of RRP. Finally, after the new system of production is set up, RRP staff members should supervise operations and use systems of quality control to ensure that whatever pump they produce will be up to international standards and customers satisfied with their performance. The principle of total quality management can also be applied to this contract to ensure quality standards are upheld (Neelankavil & Rai, 2009). The participants in this arrangement need to identify internal and external needs and demands for pumps and rigs. Management must incorporate this into the operations and supervise it by creating matrices and standards and seek continuous improvement in systems. The production team can use the principles of six-sigma to ensure that defects are reduced to the barest minimum (Neelankavil & Rai, 2009). This therefore means that the principles of six-sigma can be applied to ensure that the new production system produces 99.99966% of goods that are without defects. Inventory Inventory is important in a venture like this because it will mark the most important single thing that the venture will spend money on (Czinkota et al, 2009). First of all, the ownership of inventory will be a major subject for discussion. Depending on the kind of contract that RRP enters into with SAPumps, the ownership of the inventory of this venture cannot be clearly identified (Monye, 1997). In the case where RRP decides to only purchase the stocks, then they will be the owner of the raw materials or scraps and will have shared ownership with SAPumps, once SAPumps provides labour for the processing of the products. This therefore means they will be solely responsible for the raw materials when they are purchased but once value is added to it in the form of processing, the ownership will be shared and both RRP and SA Pumps will have to part with consideration to keep custody of the work-in-progress. In choosing the location to store the raw materials or work-in-progress or completed products, the partners need to examine the nature of the goods, government policies and regulations as well as social and political factors (Cherunilam, 2000). They therefore need to find out who is responsible for ownership at any of the three stages of the product. As a raw material, RRP has to find a good warehouse for that and as work-in-progress, both parties and possibly SAPumps will have be responsible for custody. RRP should be responsible for the end product’s custody and location. Social factors like pilferage, weather conditions, South African government policies in relation to things like insurance and national health and safety should be taken into account. Risks Also, there should be a detailed risk assessment of the processes that the venture will go through in South Africa. First of all, RRP needs to identify its risks for going into the venture and the risks it will share with its international partner, SAPumps (Skipper & Kwon, 2007). RRP should examine the payment and credit risks, delivery risks, pilferage risks, currency risks and political risks (Schaeffer et al, 2009) in operating in South Africa and examine how it affects the arrangement it is making in the country. Secondly, RRP should match the risks in the arrangement in South Africa with its objectives, capabilities and willingness to assume the risks (Campbell, 2009). Where the risks are too high and/or there are government regulations towards insurance, RRP should transfer the risks to a third party insurance company (Skipper & Kwon, 2007). This therefore means that RRP needs to insure some portions of its operations to ensure that the venture succeeds and there problems like theft, fire, destruction, vandalism, natural disasters are taken care of any time inventory is affected by them. They should also find clauses in the contract that will force SAPumps to also insure its share of stocks as and when they have custody of inventory. Price Regulation RRP should first ensure that the venture has a functioning accounting system. This accounting system will be concerned with fixing prices and also ensure that all transaction systems are documented. Ideally, an accounting firm should be consulted to handle this function, with a bookkeeper and storekeeper kept at the warehouse that goods are dispatched for sale. This way, RRP will always have updated information about sales at every point in time. Pricing should be determined by agreed standards and metrics that will be set jointly and monitored by the accountants and management of the venture from both sides. If it is based on a mark-up on cost, there is likely to be fluctuations because the raw materials will be purchased at different prices. It is therefore more prudent for prices to be set based on some pre-determined standards that will determine the range for certain products. Contract Structure For the sake of financial efficacy, RRP should employ SAPumps as a partner for the processing of its raw materials. The contract must clearly state the actual contribution that RRP is making to the venture. It must state that RRP will be responsible for purchasing old and worn-out pumps and SAPumps will be in charge of hiring and employment of labor in South Africa to repair and add value to the pumps. Afterwards, the end products will be owned jointly by RRP and SAPumps. RRP will be responsible for marketing and sales and SA Pumps will be responsible for a percentage of the profits. The contract must be explicit about the following : 1. How much RRP is contributing as capital for commencement of operations 2. If it is a joint venture that brings a new company together, the share structure should be specified. 3. Ownership systems and structure 4. Percentage of profits that SA Pumps will be entitled to if it is an arrangement not an international joint venture. 5. It must state the rights and obligations of both parties 6. Termination procedure 7. The law under which the contract is being formed (this is South African Law) 8. Dispute resolution system (Nayler, 2006) Dispute Resolution Systems Disputes typically result in cases of ambiguity, clash between national and international law, grey areas of the arrangements, adaptations to changes and others (Ajami & Goddard, 2006). It is therefore important for the law to state the dispute resolution system that will be used in case any of these come up. Ajami & Goddard (2006) prescribe three main systems for the adaptation of contracts to change. First of all, there should be a clause for the renegotiation of the contract in case there are changes in the realities of the contract. Secondly, there should be the use of arbitration and mediation where renegotiation fails. The use of the South African law court should be the last resort. Marketing & Distribution To cut down costs, marketing and distribution could be outsourced to third party South African or Southern Hemisphere nations (like Australia, South Korea or India) where necessary. This will enable RRP to get the best of results from marketers and logistics companies that have expertise and knowledge of the region. They are likely to be more productive because they are specialized and they will be more cost efficient to work with (Jansson, 2007). Conclusion In conclusion, the agency arrangement between RRP and Agent B is still active and they cannot appoint Agency A until it is terminated fully. In the meantime though, they can work with Agency A as a casual broker or employee to gain the contract and terminate the contract with Agency B. Afterwards, they can use a mix of commission rates, flexibility in exclusivity/non-exclusivity or sole agency to control A’s performance. Also, the arrangement with SAPumps comes with several benefits. However, there are complications with ownership, contract structure, risk management and dispute resolution that need to be dealt with. References Ajami, Riad, A. 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