Negotiating Coordination Costs

The MicroTech negotiation is a slightly simpler version of another exercise in the Toolbox. It focuses on the problems promoting cooperation across divisions (for example to achieve synergies). Caucasian mid-adult businessman and woman staring at each other with hostile expressions.MicroTech is a negotiation over the terms to transfer a technology between 2 divisions of a company 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. In the process, about 20-40% of the potential value is typically left on the table. The discussion focuses on how to align objectives and achieve cooperation across divisions. It turns out that such cooperation is hard to achieve in a competitive culture. How, then, can the firm create a cooperative culture? This, it turns out, may be a VRIO resource…

The three issues in the negotiation are:

  1. 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…
  2. 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.
  3. 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.

The spreadsheet displays what the optimal solutions are to the last 2 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) people (hiring/selecting/firing), 3) processes (measurement, etc.), 4) structure (cross functional teams, etc., and 5) symbols (like Samsung burning $50M in phones when quality was low). No one lever offers a complete solution (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 (e.g., it is a VRIO resource).

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 organizational design and strategy — sometimes I devote up to two classes to the exercise to accommodate a deeper discussion.

Click here are all of the required materials (roles, spreadsheet, PowerPoint, etc.).

Contributed by Russ Coff

3 thoughts on “Negotiating Coordination Costs

  1. You might wonder how we know the payoffs to the division (Office Automation) that has not been invited to the table. If you read the two roles (in the section “NPV of Available Deal Options”), you can see:
    Household Appliances knows: “The Office Automation division … predicts a significant increase in market share if they can have the technology FOUR YEARS before rivals.”
    Chips and Components knows: “Office Automation predicts a market share increase that it values at about $40M if the technology is kept from their rivals.”

    So, together, they know that four years of protection is needed for Office Automation and that this is worth $40M. This is reflected in the payoff table in the form of profit sharing for household appliances. However, this is a small enough amount that it is not particularly motivating to Household Appliances. In most cases, both parties miss this information and focus on the value of the deal to their own divisions.

    The actual payoff table is below but you really don’t need it for the debrief.

    Payoff Table for Office Automation:

    Yrs . . . . Payoff to Office Automation
    ==== . . ====================
    Impasse (4yrs) . . . . 40
    0 . . . . . . . . . . . . . . . 0
    1 . . . . . . . . . . . . . . . 10
    2 . . . . . . . . . . . . . . . 20
    3 . . . . . . . . . . . . . . . 30
    4 . . . . . . . . . . . . . . . 42

  2. I used the MicroTech dilemma as a backdrop to develop a simulation resembling a serious game in strategic decision making. We played across two half days one week apart.

    On day 1 we had the teams (three divisions, one TMT) experience information asymmetry and formulate/negotiate decision intentions, on day 2 we had two plants in two out of three divisions and one in the TMT to simulate trust breach in the two division teams that had the plants.

    We had six runs with different groups and all runs turned out differently. It was inspiring to us as a teaching team and a good exercise for the students (evaluation still has to come in). We played with undergrads.

    • Rob, thanks for your input.
      it sounds like you went way beyond the original negotiation exercise. Perhaps this should be a separate post with more detail and the associated materials?

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