MID-TERM EXAM: Nora-Sakari: A Proposed JV in Malaysia

Introduction:

This case, set in 2003, involves setting up of a joint venture (JV) between a Malaysian company,

Nora Holdings Sdn Bhd (Nora), a Malaysian company, and Sakari Oy (Sakari), a conglomerate

from Finland. Nora is one of the leading suppliers of telecommunication solutions in Malaysia

while Sakari has expertise in mobile phones, digital exchanges, is a niche player in the global

switching market, and has a major share of the Finnish mobile market. Nora submitted a bid for

tenders that were floated by Malaysia’s national telecommunication company, Telekom

Malaysia Bhd (TMB), to develop the country’s telecommunication infrastructure to align with

the government’s “Vision 2020” program. TMB neither had the technical know-how nor the

expertise to take on the massive infrastructure project.

Nora was one of the seven companies short-listed by TMB to install digital switching exchanges

in various parts of Malaysia to support four million telephone lines. It needed the JV with Sakari

to ensure it could meet the obligations for the TMB contract, learn from their success, and

replicate their model in the Malaysian market. It had government ties, had won a part of the bid,

wanted to enter the South Asian market piggy backing on Sakari’s technology, and above all,

had knowledge of the Malaysian market. Sakari, on the other hand, wanted to enter the Asian

market because of the opportunities it offered, and had technology that Nora was looking for.

The negotiations between Nora and Sakari included twenty meetings and each side had invested

not less than RM3 million in securing the JV. The following personnel participated in the

negotiations:

EMBA-Organizational Behavior Fall 2009 Deven Verma (ID: dv89)

Sakari: Ossi Kuusisto (VP), Junttila, Ghazi (Senior Manager), Aziz (Manager), three engineers,

and Julia Ruola (lawyer).

Nora: Zainal Hashim (Vice Charirman), General Manager for Corporate Planning Division, an

accountant, two engineers, and Marina Mohamad (lawyer)

Problem & Issues Identification:

Many problems occur when companies begin operating globally. These include significant

differences such as business ethics, distribution channels, culturally embedded value systems and

legal regulations. These differences often require the marketing strategies, product features, and

operating procedures to be customized to best match conditions in the target country. The issues

which stalled the negotiations on the JV between Nora and Sakari stemmed from the following:

• Cultural differences – both parties were not prepared for the culture shock:

• Different management styles and work ethics

• Intransigence on part of both parties on key issues, which were

o Equity ownership

o Technology transfer

o Royalty payment

o Expatriates’ salaries and perks

o Arbitration

• The other sub-issue was that both Nora and Sakari were not prepared for negotiation

planning.

EMBA-Organizational Behavior Fall 2009 Deven Verma (ID: dv89)

Analysis & Evaluation:

• Cultural differences – both parties were not prepared for the culture shock:

o Nora instilled Islamic values in its workforce, which focuses on relationships;

assumed Finns were like Americans who tend to be open, enthusiastic, and

responsive; dealt with their Finnish counterparts in the same way as they had with

North American and European counterparts.

o Finns are perceived as cold, aloof, obstinate; focused on individualism; prefer to

be silent; in fact, due to the aggressive nature of one of the team members led the

Nora team to ask him to leave

Alternatives: Both the companies should have attended a class or seminar in

communication across cultures and cross-cultural negotiations and decision

making. This would have exposed them to the other parties’ culture, work ethics,

and would have removed communication gaps and misconceptions.

• Different management styles and work ethics

o Malays favor centralized decision making and depend on the main lead. Zainal’s

absence from the meeting on July 8th, 2003, could be the reason for the breakdown

of the negotiation process. Nora’s management, led by Zainal, had zeroed in on

Sakari’s technology, and did not oppose the decisions made by him

o Finnish work culture provides for greater equality between members of the

organization resulting in greater opportunity for employees to participate in major

decisions; also provides them opportunity to strongly disagree with decisions that

are less beneficial for the company

o The two companies did not pick the right team for negotiations

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 o There was no support from Sakari’s main office for the deal – there were two

camps, and one of them wanted to focus on the European/ UK market.

Alternatives: Both the companies should have picked good teams and should have

appointed a chief negotiator at the outset of the JV formation process. Kuusisto

should have taken Sakari’s HQ into confidence about the JV, and addressed all

concerns of the camp that wanted to focus on UK/ EU. They should have had

BATNA defined.

• Intransigence on part of both parties on key issues, which were

o Equity ownership: both sides agreed to the JV with an initial investment of RM 5

million, but didn’t like the equity share proposed by the other side. While Sakari

suggested 49 -51 percent split between itself and Nora to control the JV, Nora put

forth a 70-30 split between itself and Sakari based on the historical foreign equity

regulation set by the Malaysian government

Alternatives: Nora should have been flexible and offered 35 – 40 percent of

equity stake to Sakari to alleviate any doubts.

o Technology transfer: Nora proposed that the development of the basic structure of

the switch take place at the JV company so that it could access the root of the

switching technology. Sakari, to protect its intellectual rights, proposed to provide

the basic structure of the digital switch and assemble the switching exchanges at

the JV plant and then install them at required locations

Alternatives: Sakari’s proposal of assembling the switch for the TMB contract at

the JV is a good alternative.

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 o Royalty payment: Sakari suggested a royalty payment of five percent of the gross

sales from the JV; Nora proposed a payment of two percent of the net sales

Alternatives: There was no discussion by the two parties on this issue.

o Expatriates’ salaries and perks: Sakari proposed daily rate of US $1,260/day for

short-term employees and US $20,000/day for long-term employees. Nora

proposed short-term rate of RM 1,170-1,350/day and long-term rate of RM

20,700 - 27,900/month based on experience.

Alternatives: Nora reached a point of “take-it or leave-it” when Sakari came up

with “exorbitant amounts” (according to them). Though this was uncalled for,

Nora had clearly researched the cost of living in Malaysia, and offered a package

that was fair and matched those of other expatriates working in Malaysia.

o Arbitration: Both parties agreed that arbitration should be pursued in the event of

a dispute, but didn’t agree on the location. While Sakari insisted on Helsinki,

Nora wanted any arbitration to be held in Kuala Lumpur.

Alternatives: Both firms should have agreed to a neutral place for negotiation. It is

not clear from the Case if this was considered by either of them.

o The other sub-issue was that Nora and Sakari were ill prepared for negotiation

planning.

Alternatives: JV negotiations should accomplish the following - Establish the

potential partners’ interest and test their strategic fit, provide opportunities to

create trust and mutual respect, establish business plans for the proposed JV. At

the end of the process, both parties should equally share the risks and benefits.

Overall Alternatives for Nora:

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Nora has three options before it, and are as follows:

1. Accept current terms proposed by Sakari. This would enable it to fulfill TMB’s contract.

This would also mean that there are no further costs in trying to form a JV with another

firm. The drawback of this approach is that it will end up with some terms that are not

favorable to it.

2. Terminate the negotiation with Sakari – Though this option would mean getting away

from difficult negotiators, it would have to spend more time, effort and capital in forming

a JV with another entity to fulfill TMB’s contract, and won’t have access to Sakari’s

switches. Also, in light of the time required, it won’t be able to spend enough time in

vetting the potential partner.

3. Nora can renegotiate, and Zakalia can reach out to Kussisto. It could be that Sakari would

be willing to renegotiate and form an alliance with new terms, but more costs would be

involved.

Recommendations:

Based on the case presented, I have the following recommendations:

• Both the companies should have attended a class or seminar in communication across

cultures and cross-cultural negotiations and decision making. This would have exposed

them to the other parties’ culture, work ethics, and would have removed some of the

misconceptions and communication gaps.

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 • After the above seminars and classes, they should have taken efforts to chalk out a

negotiation process. This should have covered the following(from Prof McCabe’s

handout on Executive Negotiation skills):

o pre-negotiation preparations: forming a good negotiating team, and finalizing the

agreement.

o Research the other side

o Determine interests and goals

o Know the bottom-line and walkaway points

o Be flexible and creative

o Adopt a win-win approach

o Maintain high aspirations and personal integrity

o Be patient

o Think of mediation, arbitration and negotiation

o Points to be included in the agreement should have covered the mission of the JV,

its structure and governance, ownership and control details, identification of

performance objectives and milestones, conflict resolution procedures, and

provision for termination of the partnership.

• The companies should define their BATNA (best alternative to a negotiated agreement),

anchors and framing

• Deadline should be defined

• They should deduce commonalities and minimize differences

• Establish the negotiator’s authority – upper and lower limits on bargaining ranges

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Overall recommendation on the issues that were affecting the JV are as follows:

o Equity ownership: Nora’s share be 55 – 60%, Sakari’s be 35 – 40%

o Technology transfer: The JV assembles the telecommunication switch for TMB’s

contract and develop a new switch for export puposes

o Royalty payment: 3 – 4% on net sales

o Expatriates’ salaries and perks: Rates proposed by Nora

o Arbitration: Neutral and geographically central place such as Belgium or

Switzerland.

Conclusion:

This case presents a variety of strategic, cultural and political issues as well as places the reader

in decision making on issues such as strategy, culture, social responsibility, technology and

human resource management in the global arena. The case is classic example of issues facing

companies from two different cultures and geographically diverse parts of the world.

EMBA-Organizational Behavior Fall 2009 Deven Verma (ID: dv89)

EMBA-Organizational Behavior Fall 2009 Deven Verma (ID: dv89)