Question

MILKWAY S.A, a soymilk producer has a long-term business relationship with BEANS LTD. On a yearly basis BEANS LTD supplies soybeans each to MILKWAY, which are used by MILKWAY to produce soymilk. The companies are about to negotiate an annual supply contract concerning price and quantity of soybeans.

In year 2022, MILKWAY agreed on a contract of the form (w,q) = (680, 5000 tons) where 680 US dollars is the wholesale price of 1 metric ton of soybeans and 5000 tons is the quantity that MILKWAY agreed to buy from BEANS for a total payment of 3.4 million USD.
The price of market price of soybeans is expected to range between 640 and 700 USD. Due to the energy crisis and inflation MILKWAY has to get the lowest price possible from its supplier to be able to remain in the market. MILKWAY finds itself in great financial
distress, because of consecutive losses during the years 2021-2022. A bank loan or a capital increase is no option.
Therefore, negotiating the 2023 contract, MILKWAY asks for w = 400 USD/ton, to offset higher than expected costs and not go bankrupt. However, at that price BEANS is making a negligible profit, a fact known to both parties.
If BEANS rejects the proposal, MILKWAY will exit the market, very probably at the beginning of 2024. This means that BEANS will lose a long-term customer and have severely reduced sales for 2023. Moreover, if MILKWAY goes bankrupt, it is almost certain than it will be taken over by a competitor of BEANS, firm COMPA S.A, a vertically integrated firm that produces both soybeans and soymilk. So, the bankruptcy of MILKWAY will not only reduce the sales of BEANS dramatically, but it will also empower its competitor, leading to fiercer competition and lower profits for BEANS for the years ahead.
Suppose you are the sales manager of BEANS SA and you have to negotiate the offer of MILKWAY to buy 9000 tons at 400USD/ton. In case you accept, the profit margin will be 0.5% compared to the profit margin of 5% you achieved last year, nevertheless the quantity of beans demanded by MILKWAY is much higher. Moreover, MILKWAY will be able to recuperate, reorganize and stay in the market. If you reject MILKWAY’s offer you may counteroffer a higher price, say 500 but then demand by BEANS will probably fall to 4000 tons and MILKWAY will probably exit the market, so BEANS will not enjoy any revenues from MILKWAY in 2024 and on and face a stronger competitor.
a. Discuss what each party wants to get from the negotiation. Do the parties claim or create value? Give a brief explanation.
b. What strategy would you suggest to each of them? Justify your choice.
c. Determine verbally the BATNAs of all parties. How could parties weaken the BATNA of the other party and why they should try? Discuss briefly your answer.

Answer 1

MILKWAY S.A and BEANS LTD have poor BATNAs and each can weaken the other's position to improve negotiating power, but must avoid extreme measures that could collapse negotiations.

Step-by-step explanation:

In evaluating the BATNAs (Best Alternative to a Negotiated Agreement) for MILKWAY S.A and BEANS LTD, it is clear that both parties have significant incentives to reach an agreement on the annual supply contract. MILKWAY's BATNA appears to be poor, as their alternative is exiting the market, which would likely result in bankruptcy. BEANS LTD's BATNA is not favorable either; the loss of MILKWAY as a customer would severely reduce their sales, and the potential takeover of MILKWAY by COMPA S.A could increase competition. To weaken the BATNA of the other party, MILKWAY could explore alternative suppliers or pivot to a different business model not reliant on soybeans, applying pressure on BEANS LTD to offer better terms. Conversely, BEANS LTD could seek out new buyers for their soybeans or diversify their client base to reduce dependency on a single buyer, thus lessening the impact of losing MILKWAY as a customer.

Both parties should attempt to weaken the other's BATNA to improve their negotiating power. By doing so, each party could potentially secure a more favorable deal concerning the price and quantity of soybeans. However, it's essential that they do not weaken the other's position so drastically that it results in a breakdown of negotiations, leading to the very outcomes both are trying to avoid.

Ultimately, the negotiation requires careful balancing of interests to ensure that both companies can continue their business relationship in a mutually beneficial manner.