ONE ACRE FUND: CASE STUDY The scene is Bungoma, Kenya; Moises Postigo is a buyer interested in purchasing fertilizer on a large scale for his not-for-profit organization the One Acre Fund (OAF). OAF’s mission is to provide fertilizer to farmers “who have nothing” on a credit like system and when the farmers produce their crops a percentage of their supplus would be returned to OAF. Eventually the farmers would no longer need a “free hand out” and will be able to support themselves and their families without putting further strain on the government and the economy.
When first looking at Kenya, Postigo had five different suppliers that all met certain criteria he had for doing business. He narrowed down the suppliers by contacting them and asking them for a RFQ. He then, with his knowledge of the market and his product as well as coming to the table prepared, negotiated the fertilizer to an acceptable price that could be offered to farmers enrolled in the OAF program. 1. Fertilizer is a commodity – why did Postigo spend so much time developing a relationship? Shouldn’t he have just set up an auction?
Postigo did his homework and understood that developing and building relationships is a very important dimension in the Kenyan culture. “Kenyan culture’s emphasis on relationships and hierarchy stems from the importance of family. Kenya is a place where you need to get to know people…in a room with twenty-five people, you need to shake everyone’s hand” (Negotiating, pg 3). Postigo realized that most of his potential suppliers we located in Kenya. He also knew that if he could make a deal with a vendor in Kenya then the transportation costs would be much lower, thus creating a little more wiggle room for his BATNA.
Postigo grasped the importance of building relationships from a different, more strategic purpose. OAF’s short-term plan incorporated rapid growth with regards to the small family farms, which required rapid growth in their requested quantity of DAP. Postigo recognized that in building a relationship he was really opening up their opportunities for the future. If he could guarantee larger batch orders in the future, then he might be able to use that leverage to talk the supplier into lowering the current price.
Postigo knew that establishing his desire for a strong relationship would pay off in multiple ways, both satisfying the cultural status quo while also putting a strategic plan into place to realize cost savings in the future. 2. What was Postigo’s BATNA to reaching a negotiated agreement with Dehvi Medji and Sons? During the negotiations for fertilizer, Postigo was concerned with three major issues: delivery date, price, and the ability for growth into the future. Keeping these things in mind, it seems that the best alternative to a negotiated agreement would have come from the current market prices of fertilizer in the area.
If he was not able to come to an agreement with any of the suppliers and negotiate a better contract for OAF, then Postigo would simply buy the fertilizer at regular market prices. According to the research, in Nakuru, where both the cost of fertilizer and the cost of transportation were taken into consideration, a 50kg bag could be purchased for 4,000 Ksh (Negotiating, pg 6). This cost of 4,000 Ksh would have been the BATNA for Postigo’s negotiations; However, the BATNA could also have been found in one of the other vendors that were being looked into.
If these other vendors had offered him a reliable price then that value could have been seen as Postigo’s BATNA. 3. Should Postigo have spent the time and money to meet face-to-face with all five potential vendors for the purpose of telling them about One Acre Fund, rather than sending them an e-mail? Working for a not-for-profit organization, Postigo understood that he needed to save money wherever possible. Meeting with the vendors in person might have had a larger effect on empathy throughout the negotiation. He might have been able use that to his advantage, but in the end, the benefit would not have outweighed the cost.
Postigo contacted five vendors, four of which came back with bids. The first scenario where the cost outweighed the benefit: had he traveled to the fifth vendor, it would have been a complete waste of time and money. Secondly, as soon as Postigo informed the potential vendors of their expected delivery date, a second vendor dropped out of the running, stating that they would not be able to make the delivery date. By sacrificing the face-to-face meetings, Postigo saved a large amount of time and money while still attracting 3 potential vendors; eventually leading to a deal that, from his standpoint, was very successful. . Followup question: Did Postigo pay particular attention to the other party’s needs in the phone calls with Dehiv Medji? Postigo did a very good job of paying attention to Dehiv Medji’s needs throughout the negotiations. They spoke about the affect the Kenyan government might have on both parties, understanding the government subsidies could cripple both parties. He brought up Medji’s opportunity to grow and wanted to be involved in their growth, “he asked about growth prospects…indicated that the two organizations might grow together” (Negotiating, pg 7).
Postigo negotiated in a fair and cooperative manner, providing flexibility on delivery dates and transportation costs. “One of the biggest appeals of Dehvi Medji to OAF was its willingness to fix a price in November for a January delivery” (Negotiating, pg 7). Postigo was very aware of the other party’s needs and acted accordingly. He felt obliged to make the negotiation a win-win scenario and when all was said and done, he did just that. 4. What do you think about Pastigo’s sharing information with Dehvi Medji about OAF’s strategy for the future?
Was this a good thing to do? Is this a good way to develop a relationship? In the situation that Pastigo was in an open discussion about the long term goals of the not for profit OAF was a valid opening strategy. It gives Pastigo a fair amount of leverage epically since OAF is planning to have a large amount of growth in the near future, that information alone allows Pastigo to negotiate much harder for present prices with the perceived promise of future growth. It is also a valid and simple way for Pastigo to begin building a relationship with the supplier.
By opening with a good amount of information, especially with a local supplier, OAF as an organization can leverage the fact that they are trying to grow the amount of fertilizer used by a large amount of farmers which is good for the fertilizer suppliers. This was also an efficient means to build the relationship the OAF was hoping to have with their future supplier, by showing that they were open and upfront with both the plans and goals of OAF any possible relationship would from more easily. All in all by being open from the beginning Pastigo put himself in a good position to conduct the negotiations. . If Dehvi Medji’s price had been good but not the best, would you still have recommended that Postigo try to negotiate with Dehvi Medji? As we have mentioned before, Postigo was concerned with three major issues: delivery date, price, and the ability for growth into the future. Taking into consideration all of these issues, it could be seen that Dehvi Medji met the other qualifications for a good supplier in that they could meet the proper delivery schedule in January and they were a small company that had the ability to grow alongside OAF going into the future.
Price was only one of the concerns that Postigo was looking at. The case study goes on to state that “in previous fertilizer negotiations between OAF and Dehvi Medji, the company had settled for 10 percent off its initial offer” (negotiating, pg 7). This indicates that although the initial bid that Dehvi Medji produced might have not been the best, their company was proven to have wiggle room during the negotiations process and could possibly still be convinced to lower their price to become the best price.
Although Dehvi Medji might not have had the best initial price coming out of the initial requests for proposals (RFPs), their initial price could be negotiated and they met the other requirements, delivery schedule and ability for growth in the future, that OAF was looking at. Our recommendation to Postigo would be to still enter the negotiation phase with Dehvi Medji, regardless of the initial price bid, in order to further scope out the qualifications of the supplier and possibly discover all of the benefits that they have to offer. . OAF’s founder, Andrew Youn, is a MBA. Given the importance of low-priced, good-quality fertilizer to his company’s ability to achieve its goals, should Youn be considering alternatives to buying from a handful of Kenyan wholesale suppliers? What might those alternatives be? The importance of low-priced, good-quality fertilizer was a major component to the success of the companies but it is doubtful that it was the only goal of the not for profit.
The goal of the OAF is to help the local small plot farmers become more self-sufficient and by choosing local wholesalers over a foreign supplier can build the fertilizer industry in Kenya allowing local farmers to have better access even if the OAF was to leave the country. It is quite likely that Mr. Youn did consider other options during the start-up process but in the end decided local suppliers would be a better option. An option that they may considered would be using a foreign wholesaler and bulk ship the fertilizer to Kenya and then ship it to the warehouses to break down and disperse to the participating farmers.
This option may have saved them enough money on the base product to offset the increase in shipping and handling cost to get the fertilizer into Kenya. This may not have been a viable option in this opening round of negotiation due to the limited amount of fertilizer the OAF was purchasing at the time. 7. Postigo informed the case writers that the Kenyan government did implement its program of buying fertilizer in bulk to distribute at reduced prices to farmers, but that this program did not really affect OAF farmers because they could not afford to travel to government depots and did not have the cash to buy or transport the fertilizer.
However, this action by the Kenyan government might have secondary effects for OAF’s negotiations with fertilizer suppliers in the future. What do you think those secondary effects might be? There are a variety of secondary ramifications for the OAF when negotiating future fertilizer purchase form local suppliers due to the government subsidized supply. One obvious problem in the risk that the a current or future supplier may not be able to stay competitive in the fertilizer market in Kenya and will go out of business, forcing the OAF to search elsewhere for their supply of fertilizer.
Another less gloomy prospect is with the government subsidizing fertilizer in Kenya the OAF may have a better bargaining position with the local wholesalers, allowing the OAF to purchase more fertilizer with the same investment helping the program to expand faster. This choice by the Kenyan government may also allow the OAF to negotiate with the government to receive the discounted price and focus instead on the transport of the fertilizer from the government depots to the farmers who need it most. 8. In what way did Postigo use his awareness of hierarchy in Kenyan culture during his negotiations with Dehvi Medji?
During the second round of negotiations which were exclusively with the Dehvi Medji firm the awareness of the hieratical culture of Kenya was used to help set a price from which Postigo could begin the round of negotiations. This was seen in the sentence on page seven of the case study where Pestigo from looking previous negotiations knew that Dehvi Medji sold for roughly ten percent less than their opening offer. This was an assumption made due to the fact that Postigo was working with decedent of the former managers who made this 10 present discount a way of business.
There is also the fact the before the negotiators began discussing price Pestigo first discussed the increase in the price of fertilizer and the effects it was having of the OAF, the likely hood of government intervention, and finally the growth prospects of both the OAF and Dehvi Medji. Only after all of this opening information was shared were the negotiations for price and transportation brought into the negotiation. Both of these considerations made by Pestigo showed he was prepared to enter negotiations with Jiten Patel and allowed them both to come to an agreeable solution. 9.
What do you see as the strengths and weaknesses of Postigo’s negotiating strategy for fertilizer in 2007? Postigo had many strengths and weaknesses in his attempt of his first large acquisition of fertilizer for the OAF. His main strengths were the facts that he was knowledgeable about his product and the suppliers he was dealing with as well as the fact he was prepared going into the negotiation process. His main weakness included the fact that he had not built a relationship with his Kenyan suppliers knowing far in advance that that is an essential procedure in Kenyan business culture.
He also failed to have realistic expectations when asking a smaller company like Delvi Medji and Sons to potentially supply such a large customer base. The fact that Postigo did not build a relationship could have resulted in Dehvi Medji and Sons’ Jiten patel(the supplier) agreeing with Postigo only to avoid confrontation knowing far in advance they would not be able to meet his needs. Postigo’s knowledge of the wholesale prices as well as his market and expected forecast did allow him however, to accurately predict OAF’s growth and was contributed heavily to his success of getting the fertilizer under the market price of 3,263 Ksh/50kg bag.
He was able to work the suppliers down through both price competition but more importantly by providing a “win-win” situation for both him and the supplier. His main incentive was by doing business with OAF the supplier would grow with the OAF as it expanded its market to 30,000 farmers. He in return expected a supplier to reduce their costs helping the OAF. Even though Postigo had some weaknesses in his overall negotiation strategy by not meeting face-to-face,In the end, Postigo successfully worked to an agreeable solution where both parties benefited in 2007.