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Criterion Marks Awarded Answer's
Self Assessment Determine BATNA Attempt to provide a reasonable BATNA (0.25) Justification of choice of BATNA (0.25) Provide the Correct BATNA (0.5) Reasonable BATNA : Macao, however, customer will need to catch a ferry to go to HK and Zhenzen Justification:
- No 5% airport infrastructure fee,
- Retain full ownership with Jetstar Macau so business model secure
- No ban of super discount,
- No slow role out
- No need to protect local airlines
- No restriction from the government, Correct BATNA: 6.9-5%=6.555c per seat, per km Determine Reserve price 0.25 marks for correct and justified answer Same as BATNA because
- we don't need to fuel competition
- We would prefer China so a wide ZOPA is best Determine Target Price 0.25 marks for correct and justified answer 6.9-15%=5.865 (Australian cost bases - 15% savings) Determine risk Propensity Correctly determines risk propensity (0.25) Jetstar – risk seeking/neutral; seeking because they are seeking a risky overseas deal with the Chinese government. Neutral based upon Hofsted cultural dimensions and that they hope to still enforce this deal.
Identify risk mitigation techniques What are the risks? Contractual risk - The willingness of the Chinese government to honour the terms. Risks ( read sources of risk p37)
- Expropriating of the Jetstar assets
- Not following contracts terms -> particularist vs universalism/ high v low context culture
- Ceding too much control
- BATNA falling out
- Relationship souring
- Involving Chinese legal system Mitigation of risks Strengthen BATNA -> Draft a contract with MAcou government Contracts with arb-med clause to decrease the chance of expropriation and involving Chinese legal system Understanding the chinese culture, constant effort in maintaining relationships and guanxi Pay large amount of fine if contract is broken No. 10 -> arbitration clause + Request for a foreign law i.e. HK as the law of the contract and the court of that country to have the jurisdiction over the dispute of the contract. Insert an arbitration clause in the contract – rationale/advantage:- Arbitrator -> HK because Chinese needs to save Chinese face and if you suggested other country , it may come across to be disrespectful and lasck of trust towards Chinese government. How the Chief Negotiator can enforce the deal on to the government Build relationship Strategic important + symbolically important, e.g. Strategic: employee Chinese people, Symbolic: make Asian pacific Head Office in China as China will seem to be the most important country in the Asian Pacific. (week 10) Arbitrator can be a person chose by the parties than a court appointed judge Can have the award enforced in 147 countries under the New York Convention Can be made completely confidential Do not require to follow the rules of evidence Can be done anywhere and anytime i.e. don’t have to wait for a trial date. Cheaper, faster Seek an important joint venture partner
Is the Chinese government an Expected Utility Maximiser (EUT) or Satisfice (Herbert Simon) If EUT – to package the maximum that he can get from the negotiation IF safisfice [satisfy and sacrifice criteria] (bounded rationality) – where one does just enough to satisfy their needs, does not attempt to utility maximise. To only aim for that acceptability threshold. China is EUT due to politics and culture – ‘face’ at stake if unable to get the maximise utility from the deal. Therefore it is necessary to pad your price to a culturally reasonable level that allows you to give away some margin to the Chinese to hope them gain face and satisfy their bureaucratic needs and wants. Which issues is more important to the Chinese government?
- Protect China’s local airline industry, particularly in large cities like Shanghai and Beijing, but also in smaller cities
- Wants ownership of the venture by Chinese Firms
- Charge expensive airport taxes
- Two-year roll out
- Promote tourism/business in smaller cities
What is the Chinese government’s reference point? The deal Jetstar struck with the Vietnamese Government Monolithic or non- monolithic
- Not entirely monolithic
- key players:
- Smaller cities who want commerce and tourism
- other local airlines
- investing firms
- Other players in the Chinese govt party Identification of negotiable issues and actionable strategies and/ or packages and/or Issues valuation tables/s Correctly Identifies Issues` 0.25 per correctly identified issue Distributive: Airport infrastructure fee; government restriction of price; Airlines in big cities; competition with local airlines; tax; slow 2 years test (can be offered or played with packages like lower taxes); hub cities Integrative: Jet Star’s base location (same as hub cities) (only if Jet Star can gain from it like tax discount); Ownership (only if Chinese government would like to pay and gain some control in exchange – well, technically we can’t do this); international airlines Compatible: airlines to small cities; domestic airlines; pricing strategy (if JetStar convinced Chinese government); domestic airlines Describes and characterizers issues 0.25 per correct identification of the type of issue in play and why the issue is of that type, as well as the correct description of the issue generally
Correctly identifies psychological biases, heuristics, errors and effects in play 0.25 per correct identification
1. Sunk cost/Endowment effect- especially by the Chinese in paying for the the airport infrastructure and the loss of profits for local firms. Solution : its important that Jetstar not consider this factor in making the agreement as not to pay more when considering the Chinese sunk cost. On the flip side its important to ask the Chinese what they will gain from this negotiation so they ignore their sunk costs. 2. Optimism bias, Chinese and Jetstar may be very hopeful about the success of this deal in helping tourism. Solution : counterfactual thinking will ensure that you consider the opposite of this deal success and what it will mean. 3. High power distance , as shown in the dealings with the female junior negotiator. Solution : ensure that Jetstar team is of equal status to the Chinese team. 4. Certainty effect, the Chinese have a high uncertainty avoidance culture as such they may be willing to pay for certainty in a deal. Solution: offer the Package you want them to pick with certainty built into it. 5 Commitment and consistency effect, the Chinese may have stated publicly that it wants a JV similar to the deal in Vietnam. This will create strong pressure to consistency with that commitment. Solution : exploit this exposure by asking for more for same deal and strengthen it by currying the favour by offering jobs and training facilities. 7. In group bias, created by the idea of guanxi, the need to build and maintain a web of relationships. Solution: Time is needed to build strong relationships this could be enhanced/fast- tracked by becoming strategically important i.e. naming China as the company new Hq of R&D 8. Collectivism, Chinese cultural. Solution: Demonstrate your desire to help the community at large (see 5). 9. High context culture, In Chinese culture their is a lot of implied knowledge in negotiations. In contrast to Australia where every details is spelt out. Solution : have professional translators and perhaps explain the cultural situation to the Chinese. 10. Planning Fallacy – Jetstar may underestimate how long it will take to enter/turn a profit in the Chinese market. They also may underestimate the associated costs of entering. They may also underestimate the benefits, assuming their entry will stimulate demand. Strategy - Solution to this is analogy based reasoning (chapter 7). 11. Liking – perhaps with the opposing negotiator – could be based on attractiveness, similarity, complements or familiarity with them i.e. contact and co-operation. Strategy – don’t send in the Junior. Ensure that the Chief negotiator present Jetstar – look for familiarity.
Correcty identifies actionable solutions or strategies to deal with these psychological factors 0.25 per correct and implementable strategy See above. Correctly identifies relevant evaluations techniqies 0.25 per correct and implementable strategy Expected Utility theory - work out the maximum that the Chinese can get out of the negotiation.
- Airport tax is still higher than charged by Macau
- And the % of equity holding by local Chinese firms is the same of not higher than than offered by Jetstar to the Chinese Government Competition define pricing - try and get pricing equal or below Chinese firms. Two part pricing - offer an initial cheap flight and then charge for all the extras like baggage. (like on page 71) Bounded rationality - The Chinese govt and Jetstar can not know all the relevant possibilities to make a truly rational choice, they are bounded by their decisions. Solution : Deconstruct the system by finding all the relevant elements, and then understand those relationships. It may not get past bounded rationality but it will give you an understanding of the complexity of the situation. The Lemons Market: in relation to ‘joint ownership’ you would assume that Jetstar knows much more about its plane, service, operations etc than the Chinese government would. This asymmetric information could led to the Chinese government to under value the ‘proposed share’ into the business due to lack of transparency/symmetry of knowledge. Possibly Jetstar also experience the endowment effect (a form of loss aversion) whereby they value the share in the business more than it what it is objectively worth. Strategy : Evaluation from third party, Trial of the service/ case study of its success in other markets, Bartering – hopefully the lemon effect will cancel out Cultural mental models : what cultural factors are framing the structure of the negotiation Correctly identifies relevant strategies based upon the use of the evaluation techniques 0.25 per correct and implementable strategy See above.
Cultural issues 1. The Chinese do not go straight into business negotiations but rather try to get acquainted with the other party first to establish mutual trust.
- Use local Chinese employees? Some seen to held authority and obedience? Someone respected by the Chinese government/ppl
- Trusts and guanxi are key social elements in Chinese business negotiation. Good guanxi with Chinese government officials and company executives is crucial to effective negotiation with china.
- Chinese negotiators are highly conscious of the age and rank of members of the other party. For foreign companies, it is vitally important to send the right people to china for negotiations, age and rank are two considerations.
- Great perseverance and patience are called for when negotiating with the Chinese.
- Power distance – China is a high-power distance country (vs. low power distance e.g. Australia and NZ) – the extent of acceptance and expectation of the ppl of the uneven distribution of power. Bosses are treated with respect and addressed by title. The need to find out who is negotiating from the Chinese side and send an equally ranked negotiator at Jetstar end.
- Collectivism society – China is a collectivism society. Therefore the need to convince the group and not just the chief negotiator.
- Uncertainty avoidance – middle UA culture e.g. Australia vs. low UA e.g. China – affect how one structure deals and price risk.
- In China, a particularism country (vs. Australia – universalistic countries e.g. wrong to run a red light whether there were cars or not – contracts are not often referred to and contracts reflect more of an initial agreement. How parties interact with each other in future tends to be governed by the particular situation and not by the general rules of right/wrong set out in the initial contract.
- Create positive emotion in the other party by being a positive-emotion person. They create trust and rapport through that technique. In distributive situations, they resort to compromise, and in integrative situations their positivity increases creativity at the table.
- Crucial important to show the Chinese the political support and governmental backing the business proposal
- To negotiate effectively with the Chinese, western managers should take a people-oriented approach to negotiate, never expecting one-off legal agreements to bring about the planned outcome. It pays off to cultivate guanxi and friendship through social activities with a view to establishing mutual trust even before formal face-to-face interaction commences.
- Maintaining the same team throughout the negotiation process is an essential means of gaining trust from the Chinese side.
- Invite the Chinese to negotiate abroad because your kindness in assisting the Chinese to travel abroad will not be forgotten by them. On the basis of the guanxi principle, it will be reciprocated later. (Reciprocity Rule)
- Be patient, tolerant, calm, persistent, and honest in dealing with the Chinese to win the Chinese heart and trust.
- China is nationalistic culture, and the Chinese consumer was less willing to accept foreign brands when Chinese alternatives existed.
Case Study: Jetstar in Asia
Type of issue Chinese Government Jetstar Solu7ons
Operations in main hubs (large cities) Integrative Protect local carriers Most revenue opportunity Jetstar take a smaller part of the pie? Expand the pie with low cost option. Operations in smaller hubs (smaller cities) Compatible Not as profitable for local operators/ some areas have none Opportunity to run domestic operations where there are no or little interest from local carriers Jetstar to be allowed to operate in smaller hubs/cities Short roll out plan Distributive Long term outlook to test the water Long term roll out = 15% loss in revenue due to economies of scale The equality rule – 1-year roll out plan or contingency agreement Low fees (includes taxes/airport infrastructure) Distributive Recoup airport costs and drive state revenue through taxes Low cost airline. Need approx. 15% savings in comparison to Aus – vital for business model Negotiate between fees and shares. Implement low pricing strategy Integrative Brand damage to existing more expensive airlines. Will drive a price war. Low pricing will increase demand. Chinese are risk adverse. Go for less risky packages. Two tier pricing. Joint ownership Compatible Wants part ownership in the venture. Open to joint partnership but wants to maintain control. Exchange no taxes/fee for equity in the business.
