Pacific Oil Company (A)

The Pacific Oil Company “Look, you asked for my advice, and I gave it to you,” Frank Kelsey said. “If I were you, I wouldn’t make any more concessions! I really don’t think you ought to agree to their last demand! But you’re the one who has to live with the contract, not me!” Static on the transatlantic telephone connection obscured Jean Fontaine’s reply. Kelsey asked him to repeat what he had said. “OK, OK, calm down, Jean. I can see your point of view. I appreciate the pressures you’re under. But I sure don’t like the looks of it from this end. Keep in touch—I’ll talk to you early next week. In the meantime, I will see what others at the office think about this turn of events.” Frank Kelsey hung up the phone. He sat pensively, staring out at the rain pounding on the window. “Poor Fontaine,” he muttered to himself. “He’s so anxious to please the customer, he’d feel compelled to give them the whole pie without getting his fair share of the dessert!” Kelsey cleaned and lit his pipe as he mentally reviewed the history of the negotia- tions. “My word,” he thought to himself, “we are getting completely taken in with this Reliant deal! And I can’t make Fontaine see it!” Background Pacific Oil Company was founded in 1902 as the Sweetwater Oil Company of Oklahoma City, Oklahoma. The founder of Sweetwater Oil, E.M. Hutchinson, pioneered a major oil strike in north central Oklahoma that touched off the Oklahoma “black gold” rush Source: Case prepared by Roy J. Lewicki. Although this case is over 20 years old, the editors of this volume believe that it presents valuable lessons about the negotiation process. 582 of the early 1900s. Through growth and acquisition in the 1920s and 1930s, Hutchinson expanded the company rapidly and renamed it Pacific Oil in 1932. After a period of consolidation in the 1940s and 1950s, Pacific expanded again. It developed extensive oil holdings in North Africa and the Middle East, as well as significant coal beds in the western United States. Much of Pacific’s oil production is sold under its own name as gasoline through service stations in the United States and Europe, but it is also distributed through several chains of independent gasoline stations. In addition, Pacific is also one of the largest and best-known worldwide producers of industrial petrochemicals. One of Pacific’s major industrial chemical lines is the production of vinyl chloride monomer (VCM). The basic components of VCM are ethylene and chlorine. Ethylene is a colorless, flammable, gaseous hydrocarbon with a disagree- able odor; it is generally obtained from natural or coal gas, or by “cracking” petroleum into smaller molecular components. As a further step in the petroleum cracking process, ethylene is combined with chlorine to produce VCM, also a color- less gas. VCM is the primary component of a family of plastics known as the vinyl chlo- rides. VCM is subjected to the process of polymerization, in which smaller mole- cules of vinyl chloride are chemically bonded together to form larger molecular chains and networks. As the bonding occurs, polyvinyl chloride (PVC) is produced; coloring pigments may be added, as well as “plasticizer” compounds that determine the relative flexibility or hardness of the finished material. Through various forms of calendering (pressing between heavy rollers), extruding, and injection molding, the plasticized polyvinyl chloride is converted to an enormous array of consumer and industrial applications: flooring, wire insulation, electrical transformers, home fur- nishings, piping, toys, bottles and containers, rainwear, light roofing, and a variety of protective coatings. (See Exhibit 1 for a breakdown of common PVC-based prod- ucts.) In 1979, Pacific Oil established the first major contract with the Reliant Cor- poration for the purchase of vinyl chloride monomer. The Reliant Corporation was a major industrial manufacturer of wood and petrochemical products for the construc- tion industry. Reliant was expanding its manufacturing operations in the production of plastic pipe and pipe fittings, particularly in Europe. The use of plastic as a sub- stitute for iron or copper pipe was gaining rapid acceptance in the construction trades, and the European markets were significantly more progressive in adopting the plastic pipe. Reliant already had developed a small polyvinyl chloride production fa- cility at Abbeville, France, and Pacific constructed a pipeline from its petrochemical plant at Antwerp to Abbeville. The 1979 contract between Pacific Oil and Reliant was a fairly standard one for the industry and due to expire in December of 1982. The contract was negotiated by Reliant’s purchasing managers in Europe, headquartered in Brussels, and the senior marketing managers of Pacific Oil’s European offices, located in Paris. Each of these individuals reported to the vice presidents in charge of their companies’ European offices, who in turn reported back to their respective corporate headquarters in the States. (See Exhibits 2 and 3 for partial organization charts.) Pacific Oil Company (A) 583 The 1982 Contract Renewal In February 1982, negotiations began to extend the four-year contract beyond the December 31, 1982, expiration date. Jean Fontaine, Pacific Oil’s marketing vice presi- dent for Europe, discussed the Reliant account with his VCM marketing manager, Paul Gaudin. Fontaine had been promoted to the European vice presidency approximately 16 months earlier after having served as Pacific’s ethylene marketing manager. Fontaine had been with Pacific Oil for 11 years and had a reputation as a strong up-and-comer in Pacific’s European operations. Gaudin had been appointed as VCM marketing manager eight months earlier; this was his first job with Pacific Oil, although he had five years of previous experience in European computer sales with a large American computer manufacturing company. Fontaine and Gaudin had worked well in their short time together, establishing a strong professional and personal rela- tionship. Fontaine and Gaudin agreed that the Reliant account had been an extremely profitable and beneficial one for Pacific and believed that Reliant had, overall, been sat- isfied with the quality and service under the agreement as well. They clearly wanted to work hard to obtain a favorable renegotiation of the existing agreement. Fontaine and Gaudin also reviewed the latest projections of worldwide VCM supply, which they had just received from corporate headquarters (see Exhibit 4). The data confirmed what they already knew—that there was a worldwide shortage of VCM and that demand was continuing to rise. Pacific envisioned that the current demand–supply situation would remain this way for a number of years. As a result, Pacific believed that it could justify a high favorable formula price for VCM. Fontaine and Gaudin decided that they would approach Reliant with an offer to renegotiate the current agreement. Their basic strategy would be to ask Reliant for their five-year demand projections on VCM and polyvinyl chloride products. Once these pro- jections were received, Fontaine and Gaudin would frame the basic formula price that 1.Describe the problem that Pacific Oil Company faced as it reopened negotiations with Reliant Chemical Company in early 1985. 2. Evaluate the styles and effectiveness of Messrs. Fontaine, Gaudin, Hauptmann, and Zinnser as negotiators in this case. 3. What should Frank Kelsey recommend to Jean Fontaine at the end of the case? Why?