This case study examines a construction firm's (BWA) costly negotiation failures on an Indonesian infrastructure project, analyzing key breakdowns in cross-cultural communication, bargaining power assessment, and decision-making authority. The paper identifies four critical issues: negotiating style differences between Western contract-focused and Indonesian relationship-based business cultures; misjudgment of bargaining position due to weak rule of law; improper delegation of authority to intermediaries; and failure to understand the opponent's financial constraints. The analysis reveals how relationship-building, direct engagement with key decision-makers, and cultural preparation are essential for successful international business operations in Indonesia and other non-Western markets.
BWA was faced with costly delays in a construction project in Indonesia. The firm's manager on the scene attempted to alleviate the problem through negotiation but could only achieve a proposed $1 million dollar payment, one-fifth of the cost of the delay. BWA management then decided to take a more direct approach to negotiations, and the result was no payment and further costly delays. These were only alleviated when the on-site manager went to the customer during a time of atonement and repaired the relationship.
There are several key issues with respect to this case. The first concerns negotiating style. As with many cultures, Indonesians do not negotiate in the same manner that Western firms do. The approach to business in that culture is fundamentally different. In the West, a contract is viewed as a binding agreement. Terms are agreed to and all parties are expected to uphold the terms of the agreement. If one party fails to do so, some form of remedy must be paid.
In Indonesia, business relationships are seen as extensions of personal relationships. Contracts provide the framework for the business, but adherence to specific terms is not considered a requirement. It is understood in Indonesian business culture that situations may change, and therefore contracts are not considered binding. The business relationship between parties depends on the quality of the personal relationship, in part because the rule of law is weak.
The reason the on-site manager's initial negotiations yielded an offer was that he dealt with the issue in terms of the relationship. The reason that the home-office manager failed is that he did not respect the relationship. He only respected the contract, to which the Indonesian partner took personal offense. The personal relationship had been devalued, which in turn devalued the business relationship.
The second key issue is that of bargaining position. Both sides felt as though they had strength in their bargaining position. For BWA, this strength was drawn from the formal contract. They felt that the terms had been violated and therefore they had full right to demand complete compensation. In reality, the Indonesian company had a stronger bargaining position. The events took place in Indonesia, where the rule of law is relatively weak. This means that in local court, it would be difficult to obtain the ability to enforce specific components of the contract. Thus, whereas BWA thought they had strong formal authority, they in fact had none.
The third key issue concerns levels of authority. Being unfamiliar with the business environment in Indonesia, the on-site manager sent a local partner to deal with the issue. In this case, however, the local partner did not have the formal authority that the on-site manager possessed. The low offer for compensation likely derived from the fact that the on-site manager did not make the case to the Indonesian partner himself. To the Indonesian partner, this was a signal that the issue was not of significant importance.
The fourth key issue concerns understanding the opponent's position. This is more a fundamental of negotiating than an intercultural issue, but it is one that BWA failed to address. Part of the resistance on the part of the Indonesian company's management was that they could not pay the $5 million requested. BWA management, particularly the home-office representative, failed to understand that it would not recover the full $5 million because the Indonesian company simply did not have it. As a result, they needed to formulate a request that the Indonesian company could meet.
"Alternative approaches the on-site manager should have taken"
"Preparation and cultural research needed for Indonesian market entry"
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