Strategic Case Analysis
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chapter on “Business Concepts”), they can agree on either Y
or Z, for example, as opposed to settling for outcome F.
The maximum value extraction for either party can improve
with multiple rounds of negotiation. However, the exercise of
creating and claiming value has limitations, represented in the
above figure by the Pareto Frontier. The Frontier represents
what is ultimately possible by joint action after the negotiators
from both companies have tried their best to maximize value
for themselves and for each other. This requires creativity,
unlocking hidden value, etc., which are all ingredients of
integrative bargaining, as opposed to a distributive approach.
Pareto Frontier is a heuristic, and exists only theoretically.
Neither company may know the exact location of this frontier.
However, awareness that this best possibilities frontier exists
will help the negotiators create and claim more value than
they otherwise could. On this frontier, company A cannot find
another negotiated agreement that makes it better off without
making company B worse off. For example, if company A is
aware of this frontier but company B is not, company A can
negotiate for outcome X, which represents the same value for
company B as outcome F, but which represents a higher value
for company A compared to outcome F.
Relational Contracts
Relational contracts are a prevalent form of doing business.
These are tacit understandings or formal written agreements
that partners in business use to co-operate in the facilitation of
business transactions. As long as the relationship is good, the
firm tends to reward its partner. However, if the relationship
turns sour, for whatever reason, the firm will punish its
partner.
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