To begin with, it would be reasonable to provide some background information about the case under consideration. The company specializes in production of sophisticated electromechanical devices. The company manufactures a few products. That is why manufacturing operations are diversified between several product lines. Recently, the company has launched a new product line. This line will be producing an electronic tracking device. This device will be placed in fleet vehicles, such as a taxi cabs, etc.
That is why it has applied to Hangsu Manufacturing Company in Japan to provide four critical electromechanical switching devices. This company has broad experience and positive reputation in providing these products. The Japanese company had produced 40,000 of these components before.
It is an evident fact that exchange rate should be accounted in such international operations. At the moment of decision the exchange rate was acceptable. Hangsu has supplied the components according to the agreement and SDC performance specifications.
The company under consideration has only one major competitor on the market. The size of the market is 100,000 units. The company has already signed one contract to supply the devices, but the trial units have not passed the test. The problem has been found in Japanese components. Another client of the company has also postponed the contract because of these problems. In the end, the company under consideration required from Hangsu to repair all the components. However, Hangsu claims that specifications of SDC have been changed significantly. The company’s components that work in Japanese tracking devices are appropriate. That is why the company is not ready to resolve the conflict, because it does not see its fault in the situation.
Tom Decker, supply manager for SDC, has decided to withhold $1 billion from Hangsu to establish a better negotiating position. Also, the exchange rate dynamics is not the best for the companies under consideration. The company is facing deterioration of the yen/dollar exchange rate. Generally, the following questions should be answered in this case study.
The situation is very unpleasant for all the parties in the agreement. SDC Company is on the verge of losing its clients. It would be terrible situation for the company. Its reputation is going to be spoiled. Reputation is probably one of the most valuable factors in the modern business world. Spoiled reputation means that the company is not going to get new clients in the nearest future. Of course, it will be resulted in bad financial situation. It can be a fatal mistake in the modern conditions of the global financial crisis.
The situation is also unpleasant for other two companies – Hangsu and MTC. Probably, Hangsu is really not guilty in this situation. However, even bad rumors are able to affect reputation of the company. Also, discussions with SDC require additional financial expenditures of the company. The situation may even lead to court, what is simply unacceptable. The words about importance of positive reputation in the business world can be proved by the following quote:
“A positive reputation is arguably the most valuable intangible asset that a firm can possess. Firms with favorable reputations are more attractive to investors, customers, suppliers, exchange partners and employees; this attractiveness yields price, cost, and selection advantages, and it often persists over time” (Why Corporate Reputation Matters, 2011).
Finally, MTC as negotiator also suffers. Unlike the above mentioned companies, losses of this company are mainly financial. The company, simply speaking, may not get a full commission for the transaction under consideration.
As we can see, all the companies are going to suffer from this situation. There are two main questions. On the one hand, instruments to resolve the conflict should be found. On the other, steps that could have prevented the conflict should be pointed out.
First of all, steps that could have helped to avoid the conflict should be mentioned. It looks like there were some problems in the contract and specifications. There is no information whether specifications have been changed or not. If specifications had been changed, the company has made a serious mistake. It means that SDC should apologize to Hangsu, change specifications and resign the contract. Of course, some financial fines should be paid.
Second, probably, a supplier of components should have been found in the country. International cooperation puts forward a lot of additional risks. For example, fluctuations of the exchange rate are one of them. It is going to be considered in details below. There should be suppliers of similar components on the local market. It would be much easier to negotiate with them and resolve conflicts.
Third, all the companies should have predicted such situation. Mechanisms of resolution should have been presented in the contract. The conflict would be resolved without delays and problems. However, the companies are forced to look for other solutions in the given conditions.
Finally, the company should have performed without moderators in this situation. It is possible that the problem of asymmetric information is actual in the situation under consideration. SDC and Hangsu may not know every details of the conflict. As a result, a lot of complaints to each other occur. The reason for it may be covered in performance of negotiator.
The following task of the case study is to propose instruments and mechanisms that will help to resolve the conflict. Among these instruments the following ones may be pointed out:
First of all, both main companies should cooperate directly without any moderators. The problem of asymmetric information will be eliminated. The companies should try to find a compromise, since reputation of both is endangered. As an additional benefit from this situation, the companies should consider the fact that they may save some money, needed to pay services of the moderator.
Second, Tom Decker should show his best negotiation skills. There is always a chance to resolve any conflict, especially, when the price of conflict is quite high. It will be described in details below.
Third, both companies should revise the specifications and ensure whether the components meet them. There is no information, whether specifications have been changed. If so – situation should be changed.
As it has been already mentioned, a lot is going to depend on negotiation skills of the project manager, Tom Decker. Developed and effective negotiation skills are going to be a key to success in resolving the conflict. Among the required negotiation skills in the situation under consideration the following ones may be pointed out.
First of all, the right position should be chosen. There is no need to accuse Hangsu in all the problems. There is a fault of both companies, and they both should try to reach a compromise. Tom Decker should follow this approach. Both companies should be partners in the process of resolving the conflict.
Second, Tom Decker should be ready to devote all his time and efforts to this problem. It should become the main priority this time. It is important to solve the problem as soon as possible. That is why it is unacceptable to divide attention between different processes and problems.
Third, Tom Decker should not rely only on his own knowledge and forces. Teamwork and job delegation are also a key to success in any problem. Specialists from the different areas should be invited: legal professionals, IT professionals, translators and moderators. One of the main tasks of Tom Decker is to select right people and create a team that will be able to solve the problem.
Finally, Tom Decker should persistent and protect the interests of his company. He should not see the situation as an opportunity to prove his professionalism. Personal interests cannot be higher than interests of the company. It should be the slogan of the whole campaign of resolving the conflict.
Probably, the main Tom Decker’s task is to convince Hangsu to rework 3,700 units. However, it is very difficult task. It will be easy to do if technical characteristics of these units do not respond to specifications. Hansgu is just forced to rework the units in such situation. It can be fined in the opposite situation.
Tom Decker can propose Hangsu some financial compensation for reworking the units. For example, SDC can pay 30% of value of the required works. The percentage depends on the degree of Hangsu’s fault in this situation. In any case, SDC can expect for some discount, since the company has been harmed because of Hangsu.
Finally, there is an ultimate way to resolve the conflict and force Hangsu to rework the units. SDC Corporation should simply sue Hangsu. The company should apply to the local court. Also, there is always an opportunity to apply to an international court.
SDC Corporation and Tom Decker should not forget about another important challenge in this situation – possible deterioration of yen to dollar exchange rate. Devaluation is the worst scenario, which may bring a lot of negative consequences to the company. One of the most appropriate definitions of the term devaluation is the following.
“Devaluation is a deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country's government (i.e. central bank) can alter the official value of the currency” (Investopedia, 2013).
The imported Japanese units are going to be more expensive for the company. It means that the company will be forced to increase price of its products. It is not the best strategy in the conditions of the global financial crisis. It will decrease the company’s products’ competitive advantages on the national market. It means that the company should hedge the risk of changing of the exchange rate. It can be done via such financial instruments as forward and future contracts in Japanese Yen.
In conclusion, the companies under consideration are facing significant problems, which may spoil reputation and financial results of both companies. That is why they must try to resolve the conflict as soon as possible. The instruments how to resolve the conflict have been presented in this research paper. These instruments should become a basis for development of the strategy of resolving the conflict. Following it will help the company to save its reputation, partners, clients and established level of financial results.