The Weekly: Edition #29 - January 24, 2020
Negotiating and Value
This week, we wanted to share a few thoughts around negotiations. We wrote about negotiating deals in edition #9, highlighting strategies for making negotiated arrangements a win-win for both sides. Four articles below (NPR on bananas, Chick-Fil-A, Coke, Isabel Dos Santos) illustrate negotiated scenarios that are noteworthy.
The dark story of United Fruit's Minor Cooper Keith illustrates the series of negotiations, bordering on maniacal and cutthroat, that led to the company's global banana trade. He raised the equivalent of $200 million and, in exchange for building the railroad for free, negotiated with the government of Costa Rica for:
- a 99 year easement along the route of the railroad he would build
- total control of the port in Limon
- 800,000 acres around the railroad route
Never mind the fact that he had already burned through millions prior to offering the government this deal. How was one man able to strike such a bargain with a sovereign government - and repeat this multiple times with other sovereign nations? He knew the position of Costa Rica better than they did.
For starters, Costa Rica was desperate financially and wanted a railroad to modernize its economy, and Keith was able to position his enterprise as the only solution in town. Eventually, he would begin to grow bananas to feed his employees while they worked on the railroad. Little did he know, this product would be exported globally and would end up ultimately being the money maker. As the saying goes - when you borrow $100,000 and go broke, it's your problem. But when you borrow $100,000,000 and go broke, it's the bank's problem. Lesson: pick your partners carefully up front and avoid situations where there is a significant chance you'll be left without control or an alternative. Costa Rica learned the hard way and paid a large price to an outsider for its missteps.
Chick-Fil-A charges franchisees 15% of sales and 50% of profits because its product is that valuable. What's the caveat? They only charge $10,000 up front for a franchisee to open a store (if they get selected, that is). Competitive fast food restaurants charge franchisees hundreds of thousands if not millions to open a chain. Chick-Fil-A on the other hand, owns the real estate and equity of the business. Effectively, they take on the risk up front for franchisees, but lower the end reward in response. Lesson: know your brand, product, or services' worth, and negotiate accordingly. Additionally, look for creative, alternative ways to attract talented people and create win-win deals that share the economics with them.
Isabel Dos Santos used her political position to siphon off hundreds of millions from Angola's coffers, but her corruption was eventually brought to light. She is currently facing embezzlement charges for her misdeeds. Negotiating from a position of power is every company's goal in striking deals. But there is a continuum of 'value' in a negotiated deal that ranges from a loss to a win-win to outright theft. We believe that long-term thinking involves striking as many win-win deals as possible, because outright theft (be it political corruption or gouging customers) eventually leads to scrutiny and ultimately to an organization's demise. Lesson: whether you are negotiating with customers, suppliers, or political authorities, play the game to be mutually beneficial over the long-run. It's in your business's best interests.
Finally, we arrive at Dean Kamen, the inventor of the Slingshot machine and Coke's Freestyle machine. Kamen knew that he had a solution to the global crisis in fresh water for those in undeveloped countries without access to potable water. However, what he lacked was a distribution network to reach these people. Coke, on the other hand, had the best distribution system in the world, but needed a creative engineer to help them design their new Freestyle machine. It was a match made in heaven. Lesson: ask yourself how your organization can provide a missing piece to another company's puzzle, and how they in turn can do the same. The Kamen-Coke deal is a textbook win-win.
There will be bananas (NPR)
+ The incredibly dark story of entrepreneur Minor Cooper Keith and the creation of the 20th century banana empire known as United Fruit.
Bargaining for clean water: why Dean Kamen invented the Coca Cola Freestyle machine (ProBiotic)
+ "Kamen’s goal to mass distribute Slingshots to thousands of water-polluted/water-stressed rural locations has been slowed by his lack of resources. Unfortunately, his medical connections were little help delivering water purifying systems to rural areas—medical technology is distributed in wealthy areas. So, he turned to Coke for assistance in mass distributing his invention."
He wanted a unicorn, but he got a sustainable business (Wired)
+ For some, a billion-dollar startup is the ultimate success. For others (like us), a sustainable, profitable business will do the trick. Knowing when to raise outside capital versus bootstrapping a business can be a difficult decision for first time founders.
Goodwill sparks deep divisions, at least on balance sheets (Wall Street Journal)
+ "At issue is an accounting term known as goodwill, which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept."
What we can learn about financial scams from the man who tried to sell the Eiffel Tower - twice (Fortune)
+ "Victor Lustig talked people into things because he was a master manipulator with a huge ego. But he also understood people and utilized the soft skills of trust and persuasion as well as anyone."
How Isabel Dos Santos sidestepped a crackdown by western banks (Quartz)
+ "“These guys hear about Isabel and they run like the devil from the cross,” read an email sent the next year by a business manager for dos Santos, daughter of the then-president of Angola, who led one of the world’s most corrupt regimes."
Nothing this week…
Why it only costs $10k to own a Chick-Fil-A franchise (The Hustle)
+ "The franchisee only pays the $10k franchise fee. Chick-fil-A pays for (and retains ownership of) everything — real estate, equipment, inventory — and in return, it takes a MUCH bigger piece of the pie. While a franchise like KFC takes 5% of sales, Chick-fil-A commands 15% of sales + 50% of any profit."
The number of people over age 100 in Japan has reached 70,000 (Japan Times)
+ The grey wave isn't just a US phenomenon, but a global one as well. This larger story is yet to play out as massive amounts of wealth are transferred from seniors to the next generation.
How America uses its available land (Bloomberg)
+ "According to the U.S. Forest Service, timber harvests typically occur on about 11 million acres each year. But because of regrowth, the volume of U.S. timber stock grew by about 1 percent annually from 2007 to 2012. Weyerhaeuser Co. is the largest private owner of timberlands in the U.S. With 12.4 million acres, the company controls 2.3 percent of all commercially available timber, an area nearly the size of West Virginia."
A Maine paper mill's unexpected savior: China (New York Times)
+ "First came the Buddhist monks. Then the feng shui consultant. In the summer, a battered New England mill town greeted the new owner of its factory — one of the richest tycoons in China."
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