This exercise focuses on the problems with designing incentives and structures to promote the cooperation across divisions needed to achieve synergies. MicroDesign is a negotiation to transfer a technology between 2 divisions of a corporation in order to take advantage of a market opportunity. Sub-optimal agreements (money left on the table) represent transaction costs and inefficiencies that must be overcome in order to create corporate value.
There are two roles (Gant and Coleman). One division, Household Appliances (HA), has developed a new technology that has value if sold outside of the company. However, the division does not have a charter to sell chips. In order to take advantage, the technology must be transferred to the Chips & components (CC) division.
The four issues in the negotiation are:
- Transfer price. This allows the transaction to take place but creates no value. Extra time spent on this distributive issue could be viewed as wasted…
- Competitive protection for Household Appliances would keep the innovation from HA’s rivals and preserve their competitive advantage. However, CC would have to give up revenues. This is an integrative issue and could create value (larger pie) if they arrive at the optimal amount of protection.
- Competitive protection for other divisions is relevant mainly to the Office Automation (OA) division. They are not a party to the negotiation but would like to have the technology kept from their rivals as well. No one at the table has any incentive to protect this interest though it is part of the value to be created for Micro Design. The negotiators have enough info in their roles to arrive at the optimal solution but it is not reflected in their direct payoffs. Also, I have prepared a separate payoff table for OA even though they are not at the table and I don’t hand that out.
- Training HA provides to facilitate the transfer is another integrative issue so the parties can explore the payoffs to identify the optimal level.
The spreadsheet displays what the optimal solutions are to the last 3 issues (there is no optimal transfer price). It also charts the money left on the table as value not created. I follow this with a discussion of how you would maximize the value created through: 1) incentives, 2) org structure & design, and 3) culture/clan. No one level offers a complete solution to the problem (e.g., no perfect incentive, etc.). A reasonable conclusion might be that a firm that can address these problems better might enjoy a competitive advantage over time.
This is a straightforward exercise in terms of the timing. Usually, I assign roles the class before so they can prepare for the negotiation (even through the roles are only 2 pages). In class, I pair them with someone who has the opposite role and give them 20 minutes to negotiate. As they turn in their agreements, I enter them in the spreadsheet so I can display the results graphically. This leads to a rich discussion of incentives, structure, and culture — sometimes I devote up to two classes to the exercise to accommodate a deeper discussion.
Contributed by Russ Coff