Negotiations for a Joint Venture - Virgin Airlines vs. Singapore Airlines - Coursework Example

Negotiations for a Joint Venture Name: Tutor: Course: Date: Executive summary The negotiations to a joint venture are centered on scope-related synergies, pool capital, share risk, markets, and capabilities. Teamwork in negotiations based on mutual trust and cooperation. The nature of work involved required expert knowledge in handling technical and computer systems. Virgin-Singapore airlines case, the parties to the negotiations took a tough stance and defended their proposals instead of seeking a compromised position to reach an agreement. The companies are separated by greater cultural distance and require necessary adjustments to counter ambiguous initial contracts. The Asian airline company grew ‘cold feet’ over what they termed as an ‘unfair collective agreement’ and did not accept the joint agreement even after agreeing to take a compromise position is important when negotiating for a joint venture. This report involves the phases as; Definition of the scope of negotiations, Discussion on the factors to be considered, quality of alternatives and their practical implications Discussions on the negotiation script for each party and other options available Lastly, it provides lessons learned from the negotiation Table of Contents Table of Contents 3 1.0 Introduction 4 1.1 Joint venture negotiations: Virgin airlines vs. Singapore airlines 4 1.1.1 Scope of negotiations 4 1.1.2 Factors, alternatives and practical implications 5 1.1.3 The negotiation script 6 1.1.4 Options to successful or failed negotiations 7 1.1.5 Important lessons in joint venture negotiations 8 1.2 Conclusion 9 References 11 1.0 Introduction The aim of this report is to analyze a past unsuccessful joint venture negotiation between Virgin Airlines and Singapore Airlines. The top leadership of both airlines had met and decided to work on a joint venture in the provision of airline maintenance systems in the vibrant Chinese market. However, the negotiations failed to take off and was rendered ‘grounded for good’ based on a number of issues that were not considered during initiation, planning and implementation of the negotiation process (Alvarez & Kennedy, 2015). This report explores the scope of negotiations between the airlines and discusses the factors that needed to have been taken into considerations as well as the quality of alternatives and practical implications. It also discusses what should have been included in the negotiation script of the parties and other options available during negotiations. Lastly, it examines the lessons learned from this negotiation to build a good platform for future negotiations. 1.1 Joint venture negotiations: Virgin airlines vs. Singapore airlines 1.1.1 Scope of negotiations The proposed joint venture between Virgin airlines and Singapore airless involved making negotiations before reaching into an agreement. The two firms made commitments to develop a proposed joint venture and set up project teams. The top leadership had earlier met and realized that they have common interest in the Asian airline market particularly in the provision of maintenance facilities. The scope of negotiations involved mid-ranking executives from both parties held up in informal or formal setting. The negotiators develop their platforms based on good working relationships, interpersonal trust and a clear joint understanding of the benefits and the nature of the joint venture proposed (Bamford & Ernst, 2014). A memorandum of understanding was endorsed by the project team negotiators by signing the confidentiality agreement that allowed for continuation of further negotiations. First, the MOU served as a cushion to the joint venture in the event of exchanging sensitive financial and technical information. Second, the agreement indicated an expression of mutual trust meaning that each party was convinced on the level of trustworthiness of the other party. The negotiations were centered on scope-related synergies, pool capital, share risk, markets, and capabilities. Favorable outcomes were reported by the teams returning to their companies that the joint was going to be a success. The European team brought in competencies on systems while the Asian team made proposals connected to operating systems. The common platform was safety standards of the aircrafts. 1.1.2 Factors, alternatives and practical implications Joint ventures provide the freedom among the players to structure and negotiate in creative ways. Yet, compared to licensing agreements and acquisitions, are more challenging to structure and negotiate. In the case of Virgin and Singapore airlines joint venture, a number of factors come into play. First, the role of teamwork in negotiations based on mutual trust is critical. The nature of work involved required expert knowledge in handling technical and computer systems relating to airline security (Bamford & Ernst, 2014). The two parties found that it was more complex and tedious working on their respective proposals which went into much detail to the detriment of the negotiations. Second, taking a compromise position is essential to the negotiating parties. In the Virgin-Singapore airlines case, the parties to the negotiations took a tough stance and defended their proposals instead of seeking a compromised position to reach an agreement. The negotiations were headed for a breakdown because one party was not willing to cede ground and wanted to gain more at the expense of the other partner. According to Yan and Luo (2014), successful joint ventures require dealmakers with multiple dimensions and design choices. The Virgin-Singapore JV seemed more of a punitive agreement not based on mutual trust and cooperation. While the difference was on the nature of airline maintenance systems to be adopted, the relationship was already compromised. Joint ventures are demanding tasks that require comprehensive formulation of a document that addresses Intellectual Property (IP) rights, branding, contributions, operating model, value chain scope and assets (Campbell & Netzer, 2009). In addition, it should point out issues related to staffing, management, exit, financial arrangements and governance. Most planners of joint ventures take more time on phases that create less value. For example, the value at risk of a business model is 40 percent yet planners spend 20 percent of their time on it. As a result, they give about half of their negotiating time on structuring and deal terms which has a value of 10 percent at risk (Rinaudo & Roswig, 2013). The practical implication is that parties to a joint venture should tend to misunderstand the objectives of the deal and always rush to high-stake discussions regarding intellectual property discussions, nomination of key leaders and division of ownership. Failure of negotiations, as indicated in the case, results from strained interpersonal relationships at the beginning on the negotiations. Issues become more narrowed and defined when negotiators trust and respect their counterparts which allow the minds to meet at the negotiating table (Selmer, 2012). Parties with high interests and responsiveness based on variations in behavior have high interpersonal orientations. On the other hand, uninvolved or non-responsive aspects of a relationship lead to low interpersonal orientations. For countries with strong relational cultures like Middle East and Asia, the trait is more critical. 1.1.3 The negotiation script In the negotiations for a joint venture between Singapore airlines and Virgin Airlines, a number of factors need to be put under consideration. Each negotiation party should have a script on basic understanding, terms of contract, and clauses on material inputs, provisions relating to manpower, decisions on management control and provisions relating to business operations. Although the two parties were interested in having a joint understanding, the understanding of quality of aircraft maintenance was different (Campbell & Netzer, 2009). As one team made proposals on systems, another was interested in operating systems with common ground being compliance to safety standards of aircrafts. The thoroughness of joint venture document relies heavily on matching the interests of parties in the contract and ensuring that they are communicated to the top management. Selmer (2012) argues that parties will be forced to break-off negotiations where the bargaining process involves unreasonable demands for concessions. In the Virgin vs. Singapore airlines case, the alternative was to change the negotiation team from both sides and involve the services of international lawyers and consultants in the joint venture. The relationship broke down as a result of hard line positions and when the Asian airline conceded, the technical and engineering departments raised a lot of concerns and issues. Companies in countries like Middle East and Asia always require a warm-up period to exchange information before the start of contract negotiations. This period is crucial for the negotiators to construct interpersonal relationships and know each other. Doing this will not only nourish cooperative culture but also facilitate focal recognition. This is because future senior managers of the joint venture are the individuals who participating in founding the joint investment. Furthermore, the negotiation script should include cultural training and awareness of diverse cultures that the parties represent (Fells, 2009). Joint venture negotiations are influenced by the cultural background of the negotiators. Virgin airlines staff are more likely to be westernized staff while Singapore airlines are Asian. Accurate interpretation of conditions and terms are more likely because of fewer cultural barriers. While a narrow cultural distance is conducive for negotiation, it promotes information exchange. However, companies separated by greater cultural distance require necessary adjustments to counter ambiguous initial contracts (Terjesen, 2014). This will require prior planning which may take some time to ensure that the negotiators familiarize with each other. The outcomes of a joint venture are affected by the knowledge and loyalty of the negotiator. Negotiators who are committed and trust their employers take more initiative and zeal leading to possible positive consequences to negotiations and increased dedication to the process. To enhance negotiator loyalty, it is advisable to offer personal favors or strengthen personal relationships. This can be a reward upon their return, quick response to their instructions or delegating them with enough power. In addition, the negotiators should be familiar with the host market, partner organization and knowledge on the transactions to stimulate their bargaining power. 1.1.4 Options to successful or failed negotiations The joint ventures needed to have involved an expert consultant services on airline maintenance systems. Similarly, it is always cheaper to seek legal advice in drawing up comprehensive legal agreements (Tezuka et al., 2013). This would help end endless frustrations and delays. As a result, willingness and mutual trust to take risk is needed. While funds are limited, it is important that the two parties should have hired an experienced international law firms to handle joint venture negotiations, especially one with experience on Asian business operations. Germs of conflict resulting from understanding of terms among parties may not be avoidable but use of precision time elements and precise and clear phraseology is important (Gallardo et al., 2012). Other issues that need to be taken into consideration are; regulations and specific terms. Regulations involve governance structures on the magnitude of managerial power, choice of appointees, and the process of updating and approving business budget and plans. Similarly, some actions will require the consent of co-venturers or the management board and this should be clearly stated. On the other hand, joint ventures will need to lay out ways of resolving disputes within the applicable law. This can include arbitration, litigation or mediation. As well, the mandate of the arbitrators should be defined and whether there are prohibitions with regard to the arbitrators granting punitive damages or amending the joint venture agreement. The business of the joint venture is vividly outlined with clarity on the scope of business, distributions, financing such as debt or co-venturer shares, technology and corporate responsibility. Expectations can be high in a negotiation to an extent that one party feels strained (Fells, 2009). For example, in the second round of negotiations between Virgin airlines and Singapore airlines, the parties had high expectations on the deal. This regarded cooperation, mutual trust and commitment which may have been affected by regionalism and differences in the modus operandi as seen in the cultural interplay of international companies. While the cultural context of Singapore may reflect more of Western culture and influence, they were staking their operations on China which has a different culture. In the second round of negotiations between Virgin airlines and Singapore airlines, the negotiators agreed that they should bring the talks to a close before they got any worse. This implied that the parties were working on the options of discontinuing or avoiding negotiations which influenced their dedication to the negotiation. As a result, they became less motivated to work towards an agreement. On the contrary, if the two parties had perceived that cessation of negotiations would affect their interests, and then they would have been more committed and willing to compromise. Virgin Airlines may have had an alternative partner candidate who operates directly from China or complementary competencies and that explains why they took a dominant joint venture negotiation. On the other hand, Singapore Airlines may have felt that they have the strongest organizational skills or technology which would see them go alone in China. 1.1.5 Important lessons in joint venture negotiations Companies involved in joint ventures should invest more time on preparing and planning for negotiations in the early phases. The business objectives should always come to the fore with joint venture structures and business model being given higher priority (Fells, 2009). In the Virgin-Singapore case, the negotiation parties were interested on deal terms and whose systems should be adopted. Instead, the total value at risk was the business model and internal alignment which should have addressed how to approach the issue of cultural diversity. Moreover, the two parties overlooked the element of value and time. The damaged relationships could not be resuscitated because one party had lost trust and commitment to the joint venture. Without a clear articulation of the broader issues, it was difficult for the negotiations to resume even after the CEOs of the two companies had met for the second time. Deal terms in most occasions are difficult to perceive since the business venture pursued walk-away points, market considerations and deal objectives (Selmer, 2012). It showed that the negotiators were poorly prepared to discuss deal terms including the financing of the joint venture. By attempting to have their proposals adopted, either party became fixated on familiar systems instead of giving possible considerations to new airline security systems. The cost of the ‘no go’ decision is far reaching to both parties because of distrust and their inability to reach a common ground in future. The length and process of negotiations affect the nature and complexity of a transaction. Complex transactions demand specificity in the contract and longer negotiations (Fells, 2009). When it came to the financials, the Singapore team felt that the European team was not realistic in terms of capital investment and start-up costs. Singapore airlines with the knowledge of China may have perceived vigorous government interference or substantial operational uncertainties. The aspect of teamwork in a joint venture is important. With the presence of a common business objective and goal, team spirit was lacking from the beginning. This showed that the parties did not trust each other and had reservations regarding a win-win situation. Even in the second round of talks, it was evident that the Asian airline company had grown ‘cold feet’ over what they termed as an ‘unfair collective agreement’. Agreeing to take a compromise position is important when negotiating for a joint venture. For example, both parties could as well adopt the American agenda and negotiation style to make significant concessions. Nonetheless, collaboration is required for firms in different countries to increase the length of trust, inter-partner relationships and interactions. At the negotiating table, a climate of openness is enhanced by collaboration to facilitate joint problem solving (Yan & Luo, 2014). In many successful joint ventures, one-shot transactions involve parties who are honest, cooperative and more accommodating. Lastly, it is now evident that the goal congruence between partners is very critical. From the perspective of game theory, partners share the interests in a venture and parties envision in each other’s tactics and strategies less uncertainty (Yan & Luo, 2014). This facilitates an environment of joint problem-solving. On the contrary, ‘the dilemma of openness and honesty’ as seen in the case reflects divergence in strategic goals. Instead of negotiator using cooperative strategies, they went for distributive strategies leading to a negotiation dilemma. 1.2 Conclusion The report has found that the negotiations between Virgin Airlines and Singapore Airlines failed to materialize because of hard line positions that the negotiating parties took. It was observed that cultural barriers and financial involvement in a new market may have led to a negotiation dilemma where parties resolved to use distributive strategies rather than cooperative strategies. Furthermore, the negotiation script should include basic understanding, terms of contract, and clauses on material inputs. The report observed that the MOU was important in the joint venture as a document to protect the exchange sensitive financial and technical information. Although it involved the technical and financial interests, the negotiations could not proceed because the parties had major differences than similarities. It was found that complex transactions, such as that of the airlines, demand specificity in the contract and longer negotiations. Expectations in the negotiations were high to an extent that one party felt strained. Future negotiations require common business objectives and goals, and team spirit. References Alvarez, M. & Kennedy, J.M. (2015). Negotiation Theory and Practice. Morrison and Foerster Press. Bamford, J. & Ernst, D. (2014). How to structure a joint venture: The five essential elements of JV dealmaking. Water Street Partners. Campbell, D. & Netzer, A. (2009). International Joint Ventures. Kluwer Law International. Fells, R. (2009). Effective Negotiation: From Research to Results. Cambridge University Press. Gallardo, E., Dunn, G. & Crutcher, L. (2012). Defining a joint venture’s scope of business: Key issues. Harvard Law School. Rinaudo, E.K. & Roswig, J. (2013). Negotiating a better joint venture. McKinsey and Company. Selmer, J. (2012). International Management in China: Cross-Cultural Issues. Routledge Press. Terjesen, S. (2014). Joint Ventures: Synergies and Benefits. QFinance. Tezuka, Y., Kadobayashi, W., Aoshima, M. & Kumar, A. (2013). Issues related to the negotiation and establishment of Joint Ventures with Indian Companies. Nomura Research Institute. Yan, A. & Luo, Y. (2014). International Joint Ventures: Theory and Practice. M.E. Sharpe Publishers. Read More