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NORa-SakaRi: A ProPosed Joint Venture in MAlAysiA

MGMt 170 Laura Lander Charles Clark Sergey Gorbatov Nick Marchewka Annemiek Hopmans

Q1
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Why have the negotiations so far failed to result in an agreement? Is the formation of the JV between Nora and Sakari the best option for both companies to achieve their respective objectives?

ecause every problem almost always has more than one solution, the question of whether or not a joint venture between Sakari and Nora would be the best option for either of the companies is difficult to assess. However, there are certain benefits, which are mentioned in the case, that clearly outline the initial motivation for forming the join venture. From the Sakari side, the motivation came in the form of a new market in Southeast Asia, while Nora was motivated by Sakaris telecom technology and the possibility of acquiring it and/or replicating it in the future. The forming of the joint venture would benefit both companies if the terms of the agreement were favorable for both parties. It is also noted in the case that Sakari had another option of expanding its operations into the European (EU) market (primarily the United Kingdom), which in turn split the corporation into two camps one for the joint venture with Nora and one against it. While Sakari had a second strategy to pursue, Nora already placed a competitive bid for the TMB project and was in dire need of a partner to fulfill its contract. With the stage set, we now turn to analyzing the negotiations that Sakari and Nora held and why these two companies could not find common ground to form a joint venture. With the help of Hofstedes Value Dimensions and the information provided by the case we see that there are a number of issues that hindered the two companies for reaching a mutual agreement. When applying the value dimensions model to compare Finlands values to those of Malaysia, we notice that they differ significantly (by almost 50%) in each dimension. Refer to the diagram: the darker shaded regions represent Malaysia, while the lighter regions represent Finland. In the power distance dimension, Malaysia scores three times higher than Finland, showing that in general the Malaysian culture promotes a very hierarchical society with a large degree of separation between upper management and regular line workers. A possible repercussion of that was noted in the case that while Noras executive had the power to make contractual decisions on the spot (since they held the centralized decisional power of the company), Sakaris negotiators had to refer contentious items to the company board before [they] could make any decisions that went beyond the limits authorized by the board (190). The next dimension that the companies differed on was the uncertainty avoidance. While in this dimension the two sides differed least, Nora was more inclined to take risks involved with the creation of the joint venture. They were Data: Hofstede / ITIM International responsible for the establishment of the factory (manufacturing) as well as operational (managerial) offices, while negotiating contracts with TMB and keeping the company in the good graces of the government. In turn, Sakaris higher uncertainty avoidance made negotiations more difficult and lengthy as they found problems with equity ownership distributions and the technology transfers between companies. Throughout the case, as a reader, I felt as if the Sakari negotiators did not trust Nora and did not believe strongly in the success of the proposed joint venture, which further contributed to the adherence to their proposed high uncertainty avoidance. While the masculinity dimension did not play a large role in the negotiations, the issues of female leadership could have risen in the future if the joint venture has worked out. An example of such issue could be that a female executive from Sakari could be assigned to oversee certain expatriate operations in Malaysia, thus causing problems with the predominately masculine management at Nora. Furthermore the issue of individualism could not be ignored in this case. It is clear that while Nora (less individualistic, more collective) was working to ensure a collectively and mutually beneficial joint venture for both companies, Sakaris (more individualistic) negotiators were seeking ways to make sure that Sakari and its employees were getting the best deal possible for themselves. This particularly was exemplified with the outrageous demands for compensation of Sakaris expatriates working at Nora in Malaysia. Finally our last comment on the failed negotiations between Nora and Sakari is that it seemed that Sakaris negotiators were not as experienced and not as prepared as those representing Nora. There were a few instances, such as Sakaris arrogant engineer that had to be sent home as well as the lack of research on the Malaysian cost of living that should have been done by Sakari, which really seems to put the Finnish negotiators in a ridiculous position.

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Q2

What are the motivations of Nora for the JV? What are the motivations of Sakari for the JV?

MotiVAtions For norA to enter JV AGreeMent Nora had several motivations to enter the agreement, one of which was that they would benefit from the technology transfer. Nora was looking to secure a share of the contract from TMB, as well as the technology to switch from telecom. Recently, Nora lost a 32 million contracted was anxious to recover and move toward high end feature phone market. There were many motivations as to why Nora chose Sakari specifically to collaborate with to meet their underlying motivations. Sakari was an internationally recognized company, and was familiar with the process of creating joint ventures to enter new markets. Sakari was the leading telecom company in Europe and had experience using high technology to enable a small country to have a fast growing economy. Nora was looking to do the same thing in Malaysia if given a piece of the contract. Malaysia had adopted the British system and Sakari, unlike other larger corporations could make the components customized. Sakari has a switching system called the SK, which is based on open architecture, uses components that are available in the open market, and was modular and could be interfaced easily with new equipment. The SK33, leads to the development of a new switching system. Sakaris networks were easily adjustable and could cater to large exchanges in urban areas, and small ones in rural areas. Sakari was willing to deliver what larger corporations couldnt, a customized system to meet the needs of the customers. Nora also was looking to expand their R&D department, 5 to 6 percent over the next two to three years. Sakari used about 17 percent of its revenue for R&D and was looking to open research centers in leading markets, including Southeast Asia. MotiVAtions For sAKAri to enter JV AGreeMent Sakari also had many motivations for entering the joint venture with Nora. The main reason is that Sakari was also looking to benefit from the access to knowledge and new technologies, but mainly they were anxious to move into the market in southeast Asia and share a portion of the fixed network market. Sakari had lots of reasons why they should join with Nora, the Malaysian household name. Nora had lots of experience working long term with Japanese companies, and culturally different negotiations. Not only is Nora already familiar with supplying and distributing, but they were also awarded a liscense from the UK to sell their products in southeast asia as well as 8 other markets. They had already established a niche in the Malaysian market. Sakari also was motivated to join with Nora because the founder, Osman Jaafar, who was well known in the marketplace to have political connections. Jaafar was close with the Prime Minister of Malaysia and his partner is close with the Finance Minister, which would prove to be helpful in negotiations. Jaafar was also quoted saying he likes to fight for new business opportunities, and was known for his Islamic values and believed that, one must always be sincere to be able to develop good working relationships. Sakari and Nora both had many motivations why they would want to create a joint venture, and there were also a number of motivations why they should collaborate with each other. Both companies invested a great deal into this negotiation, over 3 million, which is enough of a motivation for both parties to see negotiations through to the end.

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Q3
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What options [at least 3] exist for Zainal? What are the pros and cons of the available options from Noras perspective? What are the pros and cons of the available options from Sakaris perspective? Make sure you include Noras TMB contract in your thinking.

ora signed a contract with Telecom Malaysia Bhd, for 1/5 share of the RM 2 billion, and therefore is responsible for delivering 800,000 telephone lines over a period of 5 years. Zainal does not have the option to end this deal, and consequently, Nora must find a partner to complete the contract. Zainals first option is to look for a new partner, and end the negotiations with Sakari. From Noras perspective, the benefits of this action would be the option of negotiating with a company that has similar negotiating techniques, since the Finnish technique was hard to deal with. Also, if they could find a company that has similar interests in the fields of salaries and benefits, it would be much easier for Nora to strike a deal. The losses to Nora would also be substantial. Nora and Sakari had very similar interests in R&D, both companies believing that it was one of the most important branches of a company. Having a partnership together, the two could focus more on the research and development, and have great results. Nora could have learned a lot from Sakari about their technology. By ending negotiations with Sakari, Nora would be throwing away a lot of potential. Also, Nora would have to adamantly search for a new partner, which would be difficult, and potentially a lot more work than simply compromising with Sakari. From Sakaris perspective, the benefit would be that they could focus their attention on entering the UK market, since they no longer had to negotiate with Nora. Many of Sakaris employees believe that it would be more beneficial to attempt penetration into the EU market, as it is closer to home, making management easier, with less cultural differences. Since the UK market is similar, and Sakari has local knowledge, they could even set up a wholly-owned subsidiary instead of a JV company. Also, Sakari was worried about the efficiency of Malaysian workers in the JV in manufacturing the product, maintaining product quality, and ensuring prompt deliveries. By avoiding the partnership with Nora, Sakari would be avoiding those issues as well. The loss to Sakari would be the missed chance of entering the Southeast Asian market, which a partnership with Nora would have accomplished. Since Southeast Asia is an emerging market, it could have meant huge potential visibility for Sakari. Another option for Zainal is to fold to the requests of Sakari, and compromise their own interests in order to complete the deal. From Noras perspective, the pros would be that they signed the deal, and could move forward with the delivering of telephone lines for TMB. They would have the opportunity to learn from Sakari, although Sakari would only give them limited access to their technology. Sakari is worried about Nora acquiring too much information, and then being able to become a competitor after the partnership agreement is over. The cons for Nora would be giving up what they wanted out of the negotiation. Since Nora had already agreed to make additional investments, such as buildings and a switching plant, they would negotiate royalties of only 2%. If Sakari got their way, however, royalties would be higher, at the 5 percent proposed rate of the Sakari negotiators. Nora preferred a rate of 2 percent since Noras return on investment would be less than the desired 10 percent if royalty rates exceeded 3 percent of net sales. Giving in to a 5 percent royalty rate would be a huge let down for Nora. Also, the lower royalties were due to the added benefits that Sakari would get from access to Japanese technology. The salaries and benefits would be much higher than originally anticipated, since the standard of living in Finland is much higher than in Malaysia. Also, an arbitration process would take place in Helsinki, following the norm of Finnish firms, instead of in KL, like Nora prefers. Nora would be the majority stakeholder in the JV, and therefore would much prefer to have any arbitration process occur in its home country. With the technology transfer, Nora preferred to have the switching system by developed in KL, so that Nora could acquire the root of the switching technology. If Nora submits to Sakaris requests, Nora will not have access to that technology. If Zainal takes this option, there will be many benefits for Sakari. They will be granted the subsidy proposal. The difference between the experts present salaries and the amount paid by the JV company would be subsidized. The equity ownership would be split 49 percent for Sakari and 51 percent for Nora. Nora proposed a split of 30 percent for Sakari and 70 percent for Nora. In Malaysia, the common practice is based on the old government regulations that required a maximum of 30 percent ownership by a foreign company. Although this regulation is no longer required, the practice remains commonly observed. Sakari would achieve their proposal of technology transfer as well. They would provide the JV with the basic structure of the digital switching system, so the core of the switching technologies would remain well-protected. The third option for Zainal would be to continue negotiations with Sakari in the hopes that they can make certain compromises regarding each companys proposals. With the high growth in the Asia-Pacific region, this JV company could be a hub to enter these markets for Sakari, which is a huge benefit for them. JVs are an efficient way to enter a new market, even if the company lacks local knowledge, and Sakari could take advantage of this, even if they had to give up some of their proposals in the negotiation. Since the chances of getting the UK contract were quite low, it would advantageous for Sakari to seriously consider the partnership with Nora. Nora would benefit from the extensive technology knowledge that Sakari could bring them, and even if they compromise some of their issues, it would definitely be more valuable if Nora completes the partnership with Sakari than if they were to search for a new partner that might not be as technologically advanced.

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Q4

If Zainal decides to renegotiate (and assuming that Kuusisto agreed), how should he restructure the terms of the deal?

ConClusion Compromise must be sought out between the two companies as it is obvious there is sizable revenue to be made from the alliance between these two companies. To find this aforementioned compromise, the two companies must find their own individual strengths relative to their counterparts individual strengths. Sakari is a very innovative niche market supplier of digital switches, and attributes their previous success to extensive research and development. Nora can deduce that Sakari, because of their expertise should be the driving force behind the technological development of the JV. Nora should compromise accordingly, knowing their counterpart is a masterful digital switch producer, and should be catered to as such. However, Sakari is not the only valuable cornerstone in the equation. Nora [is] a leading supplier of telecommunications (telecom) equipment in Malaysia. (Ainuddin 181) Sakari must realize much of their success in Malaysia will be a direct result of the expertise Nora has as the leading supplier in Malaysia. Sakari should strategically use this information as incentive to compromise in the attempt to build the JV. Sakari was approached by a strong force in Malaysia, and with their expertise coupled with Noras, a large amount of revenue could be actualized. Emerging market firms need technical expertise and financial capital to be competitive and their respective economies require these resources to develop and grow. Our results supported these needs. Managerial expertise also seems particularly important in newly privatized firms to help them compete in a free market economy. (Hitt 29) In a research article titled Partner Selection in Emerging and Developed Market Contexts: Resource-Based and Organizational Learning Perspectives, research concluded that technological expertise coupled with managerial expertise of the country business will be taking place in, in this case Malaysia, are the fundamental necessities of a successful alliance between companies looking to do business in emerging markets. This ultimately verifies that Nora and Sakari are both equally necessary to one another, and if equal value is realized, these companies can strike middle ground. Nora therefore, should assume 70 percent equity ownerships leaving 30 percent equity ownership to Sakari. I would advise that Nora is the most suitable managerial force of the two in Malaysia, and thus should assume the biggest portion of equity ownership. Technology transfer should be protected to the highest degree by Sakari as that is what is so valuable about their company. Nora should let Sakari keep the technological development of the switches in house, and stick to Sakaris proposed assembly and installation plan as they have the most experience in providing the digital switches. Expatriate salaries and perks should reflect conditions in Helsinki as Sakari, Nora, and their JV require the technical expertise of the Finnish experts working for Sakari. Without them the product quality and the efficiency may diminish, and eliminating any possible variables should be sought by both sides. This argument justifies paying the experts according to Sakaris proposal. Royalties should be compromised upon as Nora, according to aforementioned actions has compromised most thus far. Seeking a 3 percent of net sales royalty will show Noras willingness to go to the edge of its limits to pay royalties while Sakari would also realize the benefits and leeway given by Nora. Accepting 3 percent of net sales would preserve Noras request of 10 percent return on investment, a pivotal demand on Noras part. For arbitration, a neutral territory should be sought. Whether neutrality be dictated by being equidistant from Helsinki and Kuala Lumpur or by different standards is a minor detailed to be determined in negotiation, but rather than giving a distinct advantage to either side in arbitration may turn off either side to compromise. By having a neutral site this advantage would disappear and nullify any disagreement.

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Q5
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What are the three most important lessons from this case? Why?

fter the completion of the Nora-Sakari: A Proposed JV in Malaysia Case, three important lessons can be drawn out. The first of these lessons is that an essential factor in a joint venture is to understand the culture of both the company and country you plan on doing business with. Concerning this case, both Nora and Sakari were not as knowledgeable about each others culture as one expects. This was seen when the discussions concerning the payment of the employees was ongoing. Nora believed that Sakari was demanding too much compensation for work done compared to the living standards which are present in Malaysia, while Sakari believed that Nora did not properly compensate for the relocation and expertise of their employees. Another instance in the lack of understanding was seen when the Nora negotiating team conducted the discussions with the Finnish company in the same manner they would have done if the company was British or North American. The importance of this understanding is that when a company does business abroad, it should be able to act as if they were in their own country. Being immersed in another commercial is beneficial because it allows companies to better understand one another. Ultimately, this will be of great aid when it comes to negotiations. The second most important lesson seen in this case is that before a company enters into a large contract, they better be sure their joint venture is official rather than in the negotiation phase. It seems that when Nora entered into the contract with TMB, they believed that the process of having a successful joint venture would happen sooner rather than later. When the contract was given out to the five joint ventures, TMB expected them all provide what they promised. If Nora were to break away negotiations with Sakari, they would have to work very fast to find a partner and continue to conduct their business. However, if they failed, their brand image would take a hit because they could not fulfill their current contract. If a business is to succeed, they must be able to deliver on promises made in a manner which outshines the competition. Finally, the third important lesson which is seen in this case is when doing business abroad, companies must be willing to make sacrifices in order to make any deals run smoothly. However, this does not mean that they compromise their values or their culture, but rather each company come to a mutual understanding that reflects the direction of the joint venture. For example, in this Case, Nora may have to sacrifice how the joint ventures are usually split and Sakari will have to sacrifice their unwillingness to allow their technology to be divulged. When all is said and done, Nora not only has the opportunity to have a contract with TMB, but also, to gain technical knowledge they did not previously possess. On the other hand, Sakari will be able to get a foot inside the Asian market and ultimately continue the expansion of their company. These three lessons are important for any company which wishes to form a joint venture with a foreign company because they will allow for the process to proceed smoothly. Also, when a company is fully prepared for any situation in which they enter, they will have no issues when it comes to successful growth. In conclusion, if Nora and Sakari were to have realized these lessons, they would not be in the position of turbulent negotiations, but rather the successful partaking of the TMB contract. sourCes Ainuddin, R. Azimah. Nora-Sakari: A Proposed JV in Malaysia. International Management: Managing Across Borders and Cultures. (2008) 181-190 Hitt, Michael A. et al. Partner Selection in Emerging and Developed Market Contexts: Resource-Based and Organizational Learning Perspectives College Station: Texas A&M Lowry Mays College and Graduate School of Business, 1998. Hofstede, Geert. Geert Hofstede Cultural Dimensions. 02/12/2009. http://www.geert-hofstede.com/hofstede_malaysia.shtml - Malaysia http://www.geert-hofstede.com/hofstede_finland.shtml - Finland