CMG 302 CASE & SLP

Module 3 – Background

The process in finding the Zone of Possible Agreement requires a little bit of detective work in order to make it work. It begins with a proposal by a person, commercial entity, or organization known as a ‘Proponent‘. Essentially, this is the person who puts an offer on the table. The receiving end of a proposal is known as a ‘Prospect‘. This is the person or entity who considers the merits of the offer or proposal. The prospect will accept the proposal, make a counter proposal/offer, or outright reject it. This is where the game begins to get seriously fun. 

The proponent is trying to sell us something. This can be a product, a business idea, services, an organizational concept or a combination of these things. The proponent is more commonly called the ‘seller‘. The prospect, on the other hand, is more commonly called the ‘buyer‘. 

The seller wants to get the maximum amount possible for their proposal, but generally may also set a limit for the least amount they will accept. The least amount they are willing to accept is known as the seller’s ‘Reservation Price’. This is the amount where they draw the line, also know as the ‘walk away‘ from the deal point.

The buyer, on the other hand, wants to pay the least amount possible, but may consider a higher amount that they might be prepared to pay as well. The maximum amount they are prepared to pay is also known as the buyer’s ‘Reservation Price‘ or ‘walk away‘ from the deal point. 

The differences between these respective lows and highs of both the seller and buyer are their range of expectations. When you have a common ground or overlap between these two different ranges, this is known as ZOPA or the Zone of Possible Agreement. 

Of course, common sense dictates that if there is no overlap in the expectation ranges of the seller and buyer, agreement becomes highly unlikely. Similarly, even where ZOPA exists, the agreement might still not materialize, when the parties are unable to agree regardless. The letter ‘P’ in ZOPA meaning a possible agreement, will more probably occur, but it’s not a definite. 

An illustration might make this clearer. Fiona intends to sell her business. She advertises her business for $30,000, which is her highest expectation on what she has determined as the optimum value, but will let it go for as low as $25,000, being her reservation price. 

Gerald is interested, but he can only afford to pay $27,000 which is his reservation price, and so he makes a tentative first offer of $24,000. Neither of them knows the reservation price of the other. 

The overlap range or ZOPA lies between $25,000 and $27,000, which is the comfort area where the two parties might be able to come to an agreement. Even if Fiona convinces Gerald to enter her seller’s range, she might still opt to hold out for a better offer from someone else. 

The ideal piece of information would be the other party’s reservation price. It is generally believed that you should never reveal your own reservation price. The real trick is trying to find that sweet range of ZOPA. 

Source: Negotiation.com, Retrieved on November 27, 2012.

Module 3 – Case

Assignment Overview

 The Panama Canal Negotiations 

The completion of the Panama Canal is one of the world’s great engineering feats. The negotiations to complete and build this vital connector between two oceans spans decades. The cost in human lives, suffering, and capital staggers the imagination. 

It all began in 1847 when the United States entered into a treaty with New Granada (later to be known as Colombia), which allowed the U.S. a transit passage over the Isthmus of Panama. The treaty guaranteed Panama’s neutrality and recognized that Colombia would have sovereignty over the region. 

Nothing really occurred with this development and ultimately, a French company called the Compagnie Nouvelle du Canal de Panama acquired the contract to build the canal in 1881. By 1889, the Compagnie had gone bankrupt and had lost roughly $287 million U.S. along with approximately 20,000 lives in the process. It is also in 1889 that the U.S. had become convinced that the canal passage was absolutely vital to their interests. They appointed Rear Admiral John Walker to head the Commission and choose the most viable route. 

Naturally, the U.S. was interested in the Panama route already started by the French. The French company, which had been heading for bankruptcy, saw the writing on the wall before their bankruptcy in 1889, and had entered into negotiations with the U.S. The French company was eager to extricate themselves from the project. At the time, their holdings included land, the Panama Railroad, 2,000 buildings, and an extensive amount of equipment. They felt their total holdings should be valued around $109 million U.S., but Rear Admiral Walker estimated them to be not greater than about $40 million U.S., a significant difference. 

As negotiations progressed, the Americans began to hint that they were also interested in the possibility of building an alternative canal in Nicaragua. The French countered the ploy by claiming that both Great Britain and Russia were looking at picking up the financing to complete the canal’s construction. It was subsequently leaked to the U.S. press, much to the French company’s pique that the Walker Commission concluded that the cost to buy out the French company was too excessive and recommended the Nicaraguan route. 

A couple of days after this news, the president of Compagnie Nouvelle resigned. The resulting furor caused the stockholders to demand that the company be sold to the U.S. at any price they could get. The Americans became aware that they could now pick up all the French holdings for $40 million. However, the Walker Commission had not just been a ploy by the Americans: the Nicaraguan route was actually a serious proposal that had a lot of backing in the U.S. Senate. President Roosevelt had to engage in some serious political maneuverings to get everybody on board the Panama passage. The Walker Commission changed its recommendation to favour Panama as the canal route. 

But the story does not end there. Next, the U.S. signed a new treaty with Colombia’s charge d’affairs which gave the U.S. a six-mile area across the Isthmus and agreed to financial remuneration that was to be paid to Colombia. The Colombian charge d’affairs had signed the treaty without communicating with his government. The treaty was rejected by Colombia. In the meantime, revolution against Colombian authority was afoot in Panama. Since they believed they had signed a legitimate treaty, Roosevelt sent warships to the area to negate the Colombians, and thus secured U.S. interests, and offered aid to the Panamanians in their quest to separate from Colombia. Panama succeeded in their revolt and became a republic. In 1914, the Panama Canal was opened.

Assignment Instructions

Turn in a 2-page paper (page count does not include cover or reference list) addressing the following questions: 

1.    By 1889, how much had the The Compagnie Universelle du Canal Interoceanique lost in building the canal? How much did they demand when they first entered the negotiation?

2.    How much would the U.S. pay the French company?

3.    Since there is a huge difference, what are the tactics they played to justify their claims?

4.    What dramatically changed the whole situation so the U.S. won the negotiation?

5.    How did the U.S. secure its own interests? Any additional comments from this Case? 

Assignment Expectations

1.    Answer questions with clarity.

2.    Show depth and breadth to enhance the quality of your paper.

3.    Search in our library to find some papers/articles to support your argument and show them in the reference list.

Turn in your at least two page answers by the Module due date.

Module 3 – SLP

Assignment Instructions 

Think about a business situation where you need to negotiate. Describe this process and illustrate how the Zone of Possible Agreement could help you negotiate. Be as specific and detailed as possible.

Consult background readings, browse our library to find more articles, and check relevant websites to support your argument.

SLP Assignment Expectations

1.    Answer questions with clarity.

2.    Show depth and breadth to enhance the quality of your paper.

3.    Search in our library to find some papers/articles to support your argument and show them in the reference list. 

Turn in your 2-page paper by the module due date.