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New vistas in competitive bidding strategies
E~rrop’w~lManagemen: /ortrnal Volume 7 No 4 ? European Management journal 2989 ISSN 0263-2373 $3.00
New Vistas in Competitive
Bidding Strategies
Bernard Cova and Timothy Allen Faculty of the EAP-Ecole
Europknne
des Affaires,
Paris
Competitive bidding has tended to be based on the principle of pricing over other criteria, rather than on a specific business relationship in the past. This implies that the bidder will generally place himself in a position that reinforces his chances of award on a “one off” basis, without looking to the buyer with an open intention of strengthening ties on a long-term co-operative basis. This has reduced the bidders role to that of a supplier of services based on a competitive policy in which price has always been the predominant ploy. The bidder will thus look for any means that will allow him to cut corners, without creating a direct qualitative impact on the bidder/buyer relationships, but which will allow the bidder to increase his profitability and ensures that the bid remains cost effective. Recent trends in the eighties have transformed this approach substantially. Internationalisation of procurement has exerted greater pressure on the firm’s capacity to provide cost effective “one off” bids, due to the bidding firm’s structures, the time factor in response to bids and the identification of a greater number of bidders that are in a position to respond to the buyers’ specification. The direct consequence of this phenomenon is that the bidder wishing to remain competitive must be perceived by the future buyer as the most adequate business partner in future business development. This in turn will encourage the bidder to find other arguments to win the award, which will be specifically oriented away from value/cost analysis of the specific deal in question.
Introduction Competitive bidding is common practice in the world of international sourcing, be this for the private sector, the Government or for institutional markets. The OECD estimates that private/public tenders account for over 25% of current business trends in Europe alone; public market procurement is a constant preoccupation for the European Community that has recently integrated procedures and approach within the framework of the Single European Market. Trends would tend to indicate that private tenders are becoming more and more frequent, especially in industries susceptible to rapid change and strategic surprise. The development of winning bidding strategies are a malor concern for the business development officer and the industrial marketing manager. Winning strategies are changing, but it would appear that most of the extensive competitive bidding literature that is available is oblivious to current trends. The hackneyed
approaches of negotiation, decision making where the explicit aim of the process is to determine a price-bid that maximises profit are still being churned out, more or less constantly. These approaches are fine in themselves, but tend to ignore the undercurrent of what is really happening in the marketplace today. In sensitive industries such as electronics, aerospace and biotechnology, business is changing fast. This article reports on experiences in competitive bidding on a project basis and demonstrates that the vistas for competitive bidding strategies go far beyond the theoretical models that have been developed on the subject.
The Bidding Competitive schemes
Process bidding is commonly
as “First Price Auction”.
included in auction In the case of a sale,
452
BERNARD
COVA
and TIMOTHY
ALLEN
it is normal practice that the highest bidder takes all. Therefore, the highest sealed bid wins the item and pays the amount that was promised. In the case of procurement, the seller submitting the lowest sealed bid wins the contract and will be paid “bid price”. To ensure that the quality of the item under procurement is up to standard, restrictions will be applicable in the form of standards and projected base price/quality references will be stipulated in the tender document. For procurement the competitive bidding procedure will be “open”, that is to say, announced publicly and available to any comer, or it will be “selective”. In that case, the buyer will invite those firms that have been preselected for the iob, in function of their ~te~atio~~ and technical reco~tion and reputation (see Figure I).
Public
Open
Invitation
to al1 Competitors
Selecfiv?
1
i
\
. .
one on the seminal work of Lawrence Friedman using operational research and probability models;’ one on the work of Martin Vickrey,” using game theory models.
In 1979, Rothkof and Starck3 estimated that there were more than 500 research papers describing competitive bidding processes, most of them relying on pricing models. A typical example of a bidding model is to be found in the work of Murphy Sewall” published in the ~0~~~~1of ~ar~ei~n~ of October 1976 (Figure 2). The crucial component in the model is the probability evaluation of the bid price and its relative position in relationship to the competition. The factors in this model will determine the probability and possibility of a direct competitor bidding or not. In the case where the probability is affirmative, the factor of bid price acceptability by the firms involved could be determined. The l~elihood of award is the result of probabilities of winning against each competitor.
/ GIVEN,
Sealed El;:;
I--___-.+‘ion
?!oZpetitors\
Pi(B) = the probability
that competitor
“i” bids above “b”
pi
that competitor
“i” places a bid on
= the probability
the contract; P(B)
/ Sealed Price Bids of Approved
= the probability
that all competitors or don’t bid at all;
bid above “b”,
THUS,
Competitors
Selection
Figure f
The ~o~~ef~fjve ~iddi?~g Process
Source: M. Sewall,
Figure 2
Multinationals, Governments around the world and international organisations such as the United Nations, the EEC, revert constantly to this practice. The World Bank as a financial institution has gone a long way to making competitive bidding compulsory in public procurement procedures.
~o~~~uZ of Mur~efi~z~, October
The Mafhemafics
1976
of Underbidding
Bidding Trends
Bidding Models
As researchers have refined the original bidding models the process of bidding has become more complex. It would appear that many researchers have lost sight of the basic phenomena that are no longer solely based on pricing the bid (Figure 3 opposite).
The inherent simplicity in the competitive bidding process enticed researchers to set up a “winning model“ that could be used by companies to guarantee success in the bid process. This model is based on elements specifically referring to pricing practices. Two main areas of research have been concentrated:
The first phenomenon to abruptly change the process is the introduction and the use of an approved list of bidders which complicates the task of identifying the probability of competition that the bidding firm has come to recognise. The second phenomenon will encompass the criteria of acceptability of factors in the
NEW VISTAS Sources
of se1ect1on
All ( *vnprtltorh
Market Supplrers’ Buver’s
\
Research
Documents Records +
i
IN COMPETITIVE
BIDDING
STRATEGIES
453
on business activity has acutely developed the need to create a new set of criteria in selection. This has also clearly demonstrated the need to define “new” buyer patterns of behaviour which relate specifically to the requirements of inter-organisational linkages. These factors put together show that the need in current day procurement no longer solely rely on the simple concept of supply and demand, but shows that the process goes much deeper. In fact, these various linkages have determined new criteria based on industrial and commercial co-operation.
Selected
Figuw
3
Final
Competitors
The evolved
Co~~efifi~e
Selection
giddii7~ Process
bid process. In many cases, the element of price, although important, will have less of a direct economic impact than before. This is due to factors such as the pressure of time, volume, transport and quality of the items to be procured. The third factor that is often added to the process is a negotiation stage, where a shortlist of competitors will be confronted for the play off. These elements have been put forward within the latest research on business purchasing processes - see the “Matbuy Model” developed by Kristian Moller,5 or the “supplier choice model” developed by Arch Woodside and Naren Vyas.6 This may explain why fewer than 10% of contractors in the US use models in bid preparations.’
Bidding for International Projects As has been previousiy stated, bidding is a common phenomenon in industries that are susceptible to rapid change and strategic surprise. These factors enhance the position of the potential supplier, provided that response can be fast, flexible, reliable and adaptable in a market of constant change and transformation. On the basis of prerequisites in technical and commercial requirements, firms submit bids for a host of items, ranging from capital equipment, sub-assemblies, complex and specific components. The “tailor made” aspects of procurements is also a criterion which is becoming more and more selective and which adds to the difficulty of responding to the bid process. The internationalisation
of procurement
and its impact
These felt requirements’ rank from the simple demand of technical training and can evolve through the need of the development of a joint venture with the buyer or in developing new activities with a firm in the buyer’s network (see Figure 4). This becomes even more important when the procurement involves highly perceived risks by the buyer, either through the analysis of commercial, political risk. Cases have demonstrated that this wilf equally apply to financial risk involving high amounts of capital for lengthy periods in time. A good example of this process can be seen in the recent contract won by Abrospatiale in Brazil against Bell Helicopters .9
Types Technical Training Assistance Agreements Barter Counterpurchase Project Financing Risk Partnership Buy Back Agreements Debt-Equity Swaps Industrial Offsets Franchising Know-how Licensing Build Operate and Transfer Projects Non-equity Cooperative Agreements Equity Joint Venture
Degree of Inter~rganizational Dependence Negligible I Low I Moderate
: High
(Source: Adapted from ~o~tractor/Lorange, 1988) Figure 4
Types and Degrees of International Corporate Linkages Between Buyers and Sellers
In spite of the fact that the actual bid price was lower for the supply of helicopters to the Brazilian Army, Bell lost the bid to Akrospatiale. The difference in price was quite substantial as the final offer made by ACrospatiale was approximately US$27 million higher. The principal reason that allowed award to Aerospatiale was the fact that ACrospatiale proposed a partnership with
454
BERNARD
COVA and TIMOTHY
ALLEN
Engensa, a Brazilian company, accompanied by a countertrade agreement, and won the contract. This phenomenon is even more systematic in South East Asia. Current practices that the Malaysian authorities have adopted encourage foreign bidders to submit only when criteria of countertrade, transfer of technofogy and local content can be incorporated into the bid. This has even been taken further by the request that bids in certain areas such as infrastructures, anticipate build, operate and transfer elements in the tender proposal formulated by the supplier. Recent irtdications would even tend to incorporate concepts of debt equity swap formula that are being used by the Japanese in the Philippines.
The ACrospatiale Survey A French landing gear supplier, Messier-HispanoBugatti (subsidiary of the French public sector firm SNECMA), offered us the opportunity of an indepth analysis of three typical cases of international competitive bidding for pr0jects.l’ The first case took into consideration the supply of landing gear for the CN 235, a commuter aircraft developed by Casa in Spain and Nurtanio in Indonesia. The second case was for the supply of landing gear for the ATR 42, a commuter aircraft developed by Aeritalia in Italy and AQospatiaie in France. The third case was more complex in nature. This case dealt with the supply of main landing gear for the AMX, a fighter aircraft developed by Aeritalia and Aermecchi in Italy in association with Embraer in Bra&. The strategies used by the bidders in these three cases were intimately linked and highly integrated. Messier-Hispano-Bugatti (referred to herein after as MHB) was solicited to bid on the three cases we studied. The firm had been sought after because of its international recognition and the networks that it had been able to build up in the industry with other potential partners in its line of activity. MHB was systematically shortlisted in the three instances thanks to its proposals that were based on price, delivery dates, weight and quality of solutions submitted. MHB managed to win the three contracts in question because of its high degree of international and interorganisational linkage and the company’s orientation to industrial andzommercial co-operation. In the case of the Hispano Indonesian operation, MHB accepted to transfer the production process through a licensing agreement to CASA. This agreement speci-
fically referred to the 51st aircraft. Part qualification testing was also an intangible element into the success of the operations, which was based on the degree of confidence that the two managing directors had in each other’s firms corporate objectives. This is particularly true in the French context where delegation of authority and quality control aspects are very difficult for firms to relinquish. In the case of the ATR 42, MHB accepted a partnership with two small Italian suppliers (Magnaghi and Nardi) for the production, adaptation and development of the landing gear. The participation in the operation was done on a tri-part basis, on an equal footing between the three firms. As for the AMX, MHB accepted a partnership with ERAM (a small French firm) that had long-established links with the Brazilian firm Embraer. The partnership defined co-development and production of the components. MHB equally accepted the principle to gradually transfer production to Brazil based on a licensing agreement with Embraer. The transfer of production was based on the degree of technological integration of the process by the Brazilian firm. This was based on the number of aircraft that Embraer was to produce without MHB direct production. The threshold was set from the 25th-99th aircraft.
Managerial Implications The experience of Messier-Hispano-Bugatti provides an accurate view of the bidding process for the procurement of industrial projects. If we observe the three examples that MBH have provided, we can immediately determine that these specific cases fall perfectly into the framework of the competitive bidding process as defined by Figure 3. In the second instance, we can clearly identify that there is an active approach to the “best partner” solution, either in function of delegation due to technical standards and a positive attitude towards the potential of new business oppo~unities that partnerships can provide, or due to the specific aspects and attitudes of local market acceptance by the institutional authorities. In the third instance we can also perceive that the process of transfer of production and technology reinforces the group’s capacity to come up with new solutions either in the form of technological adaptation or through innovation of new markets by gaining acceptability for future business. In the case of Brazil and even Indonesia, it is important to remember that the process of industrial integration
NEW VISTAS
must imply local firms if to be acceptable to medium or long-term co-operation. With these two markets,
future economic development and the potential of business opportunity, MHB and its European partners are banking on their local counterparts to help the anchorage of business lines in the local context. Consequently, it is clear that a broader view of bidding strategies is needed. The focus on a firm’s capacity to determine an acceptable and a reasonable quality is no longer sufficient to guarantee award in international industrial tender operations. Competitive bidding strategies therefore require that operations fit not only the three classic stages of the bidding process, but that the firms involved incorporate creative and innovative approaches to the interactive and dynamic aspects of the marketing mix (Table 1).
Stages Mix Ellements Price Quali tv Delivery dates Sales relationships Nets orking Co-operation Promotion
Bidders‘ List
Shortlist
Final Selection
X X X X X X
Key: >; = Major task for marketers Table 1
The Competitive
Bidding Mix
In the first stage (bidders list), the emphasis will be centred around promotion (the firm’s capacity to use its references) and on networking (the firm’s capacity to identify potential partners that will guarantee award either through their technical/international recognition, or their influence in the local context). In the second stage, the emphasis will shift to value/ cost analysis, quality and time span. This will, however, be relegated if the bidder can demonstrate that the industrial process involved could be transferred and will provide the local context with a greater degree of industrial integration of the indigenous private or public sector. It is important, therefore, in this stage, to ensure that the concept and impact of the industrial process has been fully understood by the decision maker, who is often neither the direct user nor the implementor of Government policy. The third stage will be totally directed to the aspects of co-operation, technological build-up and the definition of requirements in the transfer stages. It is impor-
IN COMPETITIVE
BIDDING
STRATEGIES
_ 455
tant for the parties involved to be able to identify and anticipate the numerous restraints that can be encountered in this area. This implies that all companies have an excellent understanding of the availability of qualified personnel, management practices as well as the expectations of the local Ministry of Industry in the industrial integration process that has been identified for the indigenous manufacturing sector.“,”
Conclusion Competitive bidding processes are undergoing radical changes. These are due to factors of economic or industrial integration based on economic development in the developing economies, and the influence of global business in the industrialised world. If the process is changing, strategies and tactics that potential bidders use will have to adapt to the “new situation”. With buyer/supplier interaction, new challenges will have to be met and this will also be perceptible in the adaptation that the company is willing/unwilling to carry out in its structure, promotion and, above all, in its recruitment. Horizontal contact with “friendly” complementary businesses in other parts of the world will become a predominant key to success in the future; this means that business has to organise itself to more cross-cultural management with adaptable business systems than ever before. Being awarded the contract will, in time, not be the highlight of a business deal as it is at present. It is no longer a case of getting the contract, but being able to cope with the contract’s long-term implications of technological transfer, analysis of risk and orientation of business policy in the future. If these problems are not anticipated, the company will fall foul of overdevelopment costs, miscalculations of the delicate processes in technology transfer and, in some cases, might even find itself out of business. Finally, as we have tried to demonstrate, competitive bidding is no longer just a problem of marketing and getting the specification right, it is much more a problem of corporate survival in a world of fast changing technology, business activity and industrial allegiances.
References 1. Friedman, L., “A competitive bidding strategy“, Operations Research, 4, 1956. 2. Vickrey, M., “Counterspeculation, auctions and competitive sealed tenders”, Journal of Finance, vol. 16, no. 1, 1961.
456
BERNARD
COVA and TIMOTHY
ALLEN
3. Rothkopf, R.H. and Starck, R.M., “Competitive bidding: a comprehensive bibliography”, Operations Research, 27, 1979. 4. Sewa& M., “A decision calculus model for contract bidding“, journal of Marketing, October 1976. 5. Moller, K., “Buying behaviour of industrial components: Inductive approach for descriptive model building”, in Research in international Marketing, P.W. Turnbull and S. Paliwoda, Croom Helm, 1986. 6. Woodside, A.G. and Vyas, N., Industrial Purchasing Strategies, Lexington Books, 1987. 7. Boughton, I’., “The competitive bidding process: beyond probability models”, Industrial Marketing Management, 16, 1987.
8. Contractor, F.J. and Lorange, I’., “Competition versus cooperation”, Management International Reviezu, Special Issue, 1988. 9. Liberation, 27 June 1988. 10. Cova, B., “Marketing myopia in competitive bidding strategies”, Proceedings of the 4th IMP Conference, September 1988. 11. Riesman, A., Fuh, D.C. and L.I.G., “Achieving advantage with countertrade”, industrial Marketing Management, 17, 1988. 12. Zurawicki, L., “Marketing rationale for countertrade”, European Management /ownal, vol. 6, no. 3, 1988.
New Vistas in Competitive
Bidding Strategies
Bernard Cova and Timothy Allen Faculty of the EAP-Ecole
Europknne
des Affaires,
Paris
Competitive bidding has tended to be based on the principle of pricing over other criteria, rather than on a specific business relationship in the past. This implies that the bidder will generally place himself in a position that reinforces his chances of award on a “one off” basis, without looking to the buyer with an open intention of strengthening ties on a long-term co-operative basis. This has reduced the bidders role to that of a supplier of services based on a competitive policy in which price has always been the predominant ploy. The bidder will thus look for any means that will allow him to cut corners, without creating a direct qualitative impact on the bidder/buyer relationships, but which will allow the bidder to increase his profitability and ensures that the bid remains cost effective. Recent trends in the eighties have transformed this approach substantially. Internationalisation of procurement has exerted greater pressure on the firm’s capacity to provide cost effective “one off” bids, due to the bidding firm’s structures, the time factor in response to bids and the identification of a greater number of bidders that are in a position to respond to the buyers’ specification. The direct consequence of this phenomenon is that the bidder wishing to remain competitive must be perceived by the future buyer as the most adequate business partner in future business development. This in turn will encourage the bidder to find other arguments to win the award, which will be specifically oriented away from value/cost analysis of the specific deal in question.
Introduction Competitive bidding is common practice in the world of international sourcing, be this for the private sector, the Government or for institutional markets. The OECD estimates that private/public tenders account for over 25% of current business trends in Europe alone; public market procurement is a constant preoccupation for the European Community that has recently integrated procedures and approach within the framework of the Single European Market. Trends would tend to indicate that private tenders are becoming more and more frequent, especially in industries susceptible to rapid change and strategic surprise. The development of winning bidding strategies are a malor concern for the business development officer and the industrial marketing manager. Winning strategies are changing, but it would appear that most of the extensive competitive bidding literature that is available is oblivious to current trends. The hackneyed
approaches of negotiation, decision making where the explicit aim of the process is to determine a price-bid that maximises profit are still being churned out, more or less constantly. These approaches are fine in themselves, but tend to ignore the undercurrent of what is really happening in the marketplace today. In sensitive industries such as electronics, aerospace and biotechnology, business is changing fast. This article reports on experiences in competitive bidding on a project basis and demonstrates that the vistas for competitive bidding strategies go far beyond the theoretical models that have been developed on the subject.
The Bidding Competitive schemes
Process bidding is commonly
as “First Price Auction”.
included in auction In the case of a sale,
452
BERNARD
COVA
and TIMOTHY
ALLEN
it is normal practice that the highest bidder takes all. Therefore, the highest sealed bid wins the item and pays the amount that was promised. In the case of procurement, the seller submitting the lowest sealed bid wins the contract and will be paid “bid price”. To ensure that the quality of the item under procurement is up to standard, restrictions will be applicable in the form of standards and projected base price/quality references will be stipulated in the tender document. For procurement the competitive bidding procedure will be “open”, that is to say, announced publicly and available to any comer, or it will be “selective”. In that case, the buyer will invite those firms that have been preselected for the iob, in function of their ~te~atio~~ and technical reco~tion and reputation (see Figure I).
Public
Open
Invitation
to al1 Competitors
Selecfiv?
1
i
\
. .
one on the seminal work of Lawrence Friedman using operational research and probability models;’ one on the work of Martin Vickrey,” using game theory models.
In 1979, Rothkof and Starck3 estimated that there were more than 500 research papers describing competitive bidding processes, most of them relying on pricing models. A typical example of a bidding model is to be found in the work of Murphy Sewall” published in the ~0~~~~1of ~ar~ei~n~ of October 1976 (Figure 2). The crucial component in the model is the probability evaluation of the bid price and its relative position in relationship to the competition. The factors in this model will determine the probability and possibility of a direct competitor bidding or not. In the case where the probability is affirmative, the factor of bid price acceptability by the firms involved could be determined. The l~elihood of award is the result of probabilities of winning against each competitor.
/ GIVEN,
Sealed El;:;
I--___-.+‘ion
?!oZpetitors\
Pi(B) = the probability
that competitor
“i” bids above “b”
pi
that competitor
“i” places a bid on
= the probability
the contract; P(B)
/ Sealed Price Bids of Approved
= the probability
that all competitors or don’t bid at all;
bid above “b”,
THUS,
Competitors
Selection
Figure f
The ~o~~ef~fjve ~iddi?~g Process
Source: M. Sewall,
Figure 2
Multinationals, Governments around the world and international organisations such as the United Nations, the EEC, revert constantly to this practice. The World Bank as a financial institution has gone a long way to making competitive bidding compulsory in public procurement procedures.
~o~~~uZ of Mur~efi~z~, October
The Mafhemafics
1976
of Underbidding
Bidding Trends
Bidding Models
As researchers have refined the original bidding models the process of bidding has become more complex. It would appear that many researchers have lost sight of the basic phenomena that are no longer solely based on pricing the bid (Figure 3 opposite).
The inherent simplicity in the competitive bidding process enticed researchers to set up a “winning model“ that could be used by companies to guarantee success in the bid process. This model is based on elements specifically referring to pricing practices. Two main areas of research have been concentrated:
The first phenomenon to abruptly change the process is the introduction and the use of an approved list of bidders which complicates the task of identifying the probability of competition that the bidding firm has come to recognise. The second phenomenon will encompass the criteria of acceptability of factors in the
NEW VISTAS Sources
of se1ect1on
All ( *vnprtltorh
Market Supplrers’ Buver’s
\
Research
Documents Records +
i
IN COMPETITIVE
BIDDING
STRATEGIES
453
on business activity has acutely developed the need to create a new set of criteria in selection. This has also clearly demonstrated the need to define “new” buyer patterns of behaviour which relate specifically to the requirements of inter-organisational linkages. These factors put together show that the need in current day procurement no longer solely rely on the simple concept of supply and demand, but shows that the process goes much deeper. In fact, these various linkages have determined new criteria based on industrial and commercial co-operation.
Selected
Figuw
3
Final
Competitors
The evolved
Co~~efifi~e
Selection
giddii7~ Process
bid process. In many cases, the element of price, although important, will have less of a direct economic impact than before. This is due to factors such as the pressure of time, volume, transport and quality of the items to be procured. The third factor that is often added to the process is a negotiation stage, where a shortlist of competitors will be confronted for the play off. These elements have been put forward within the latest research on business purchasing processes - see the “Matbuy Model” developed by Kristian Moller,5 or the “supplier choice model” developed by Arch Woodside and Naren Vyas.6 This may explain why fewer than 10% of contractors in the US use models in bid preparations.’
Bidding for International Projects As has been previousiy stated, bidding is a common phenomenon in industries that are susceptible to rapid change and strategic surprise. These factors enhance the position of the potential supplier, provided that response can be fast, flexible, reliable and adaptable in a market of constant change and transformation. On the basis of prerequisites in technical and commercial requirements, firms submit bids for a host of items, ranging from capital equipment, sub-assemblies, complex and specific components. The “tailor made” aspects of procurements is also a criterion which is becoming more and more selective and which adds to the difficulty of responding to the bid process. The internationalisation
of procurement
and its impact
These felt requirements’ rank from the simple demand of technical training and can evolve through the need of the development of a joint venture with the buyer or in developing new activities with a firm in the buyer’s network (see Figure 4). This becomes even more important when the procurement involves highly perceived risks by the buyer, either through the analysis of commercial, political risk. Cases have demonstrated that this wilf equally apply to financial risk involving high amounts of capital for lengthy periods in time. A good example of this process can be seen in the recent contract won by Abrospatiale in Brazil against Bell Helicopters .9
Types Technical Training Assistance Agreements Barter Counterpurchase Project Financing Risk Partnership Buy Back Agreements Debt-Equity Swaps Industrial Offsets Franchising Know-how Licensing Build Operate and Transfer Projects Non-equity Cooperative Agreements Equity Joint Venture
Degree of Inter~rganizational Dependence Negligible I Low I Moderate
: High
(Source: Adapted from ~o~tractor/Lorange, 1988) Figure 4
Types and Degrees of International Corporate Linkages Between Buyers and Sellers
In spite of the fact that the actual bid price was lower for the supply of helicopters to the Brazilian Army, Bell lost the bid to Akrospatiale. The difference in price was quite substantial as the final offer made by ACrospatiale was approximately US$27 million higher. The principal reason that allowed award to Aerospatiale was the fact that ACrospatiale proposed a partnership with
454
BERNARD
COVA and TIMOTHY
ALLEN
Engensa, a Brazilian company, accompanied by a countertrade agreement, and won the contract. This phenomenon is even more systematic in South East Asia. Current practices that the Malaysian authorities have adopted encourage foreign bidders to submit only when criteria of countertrade, transfer of technofogy and local content can be incorporated into the bid. This has even been taken further by the request that bids in certain areas such as infrastructures, anticipate build, operate and transfer elements in the tender proposal formulated by the supplier. Recent irtdications would even tend to incorporate concepts of debt equity swap formula that are being used by the Japanese in the Philippines.
The ACrospatiale Survey A French landing gear supplier, Messier-HispanoBugatti (subsidiary of the French public sector firm SNECMA), offered us the opportunity of an indepth analysis of three typical cases of international competitive bidding for pr0jects.l’ The first case took into consideration the supply of landing gear for the CN 235, a commuter aircraft developed by Casa in Spain and Nurtanio in Indonesia. The second case was for the supply of landing gear for the ATR 42, a commuter aircraft developed by Aeritalia in Italy and AQospatiaie in France. The third case was more complex in nature. This case dealt with the supply of main landing gear for the AMX, a fighter aircraft developed by Aeritalia and Aermecchi in Italy in association with Embraer in Bra&. The strategies used by the bidders in these three cases were intimately linked and highly integrated. Messier-Hispano-Bugatti (referred to herein after as MHB) was solicited to bid on the three cases we studied. The firm had been sought after because of its international recognition and the networks that it had been able to build up in the industry with other potential partners in its line of activity. MHB was systematically shortlisted in the three instances thanks to its proposals that were based on price, delivery dates, weight and quality of solutions submitted. MHB managed to win the three contracts in question because of its high degree of international and interorganisational linkage and the company’s orientation to industrial andzommercial co-operation. In the case of the Hispano Indonesian operation, MHB accepted to transfer the production process through a licensing agreement to CASA. This agreement speci-
fically referred to the 51st aircraft. Part qualification testing was also an intangible element into the success of the operations, which was based on the degree of confidence that the two managing directors had in each other’s firms corporate objectives. This is particularly true in the French context where delegation of authority and quality control aspects are very difficult for firms to relinquish. In the case of the ATR 42, MHB accepted a partnership with two small Italian suppliers (Magnaghi and Nardi) for the production, adaptation and development of the landing gear. The participation in the operation was done on a tri-part basis, on an equal footing between the three firms. As for the AMX, MHB accepted a partnership with ERAM (a small French firm) that had long-established links with the Brazilian firm Embraer. The partnership defined co-development and production of the components. MHB equally accepted the principle to gradually transfer production to Brazil based on a licensing agreement with Embraer. The transfer of production was based on the degree of technological integration of the process by the Brazilian firm. This was based on the number of aircraft that Embraer was to produce without MHB direct production. The threshold was set from the 25th-99th aircraft.
Managerial Implications The experience of Messier-Hispano-Bugatti provides an accurate view of the bidding process for the procurement of industrial projects. If we observe the three examples that MBH have provided, we can immediately determine that these specific cases fall perfectly into the framework of the competitive bidding process as defined by Figure 3. In the second instance, we can clearly identify that there is an active approach to the “best partner” solution, either in function of delegation due to technical standards and a positive attitude towards the potential of new business oppo~unities that partnerships can provide, or due to the specific aspects and attitudes of local market acceptance by the institutional authorities. In the third instance we can also perceive that the process of transfer of production and technology reinforces the group’s capacity to come up with new solutions either in the form of technological adaptation or through innovation of new markets by gaining acceptability for future business. In the case of Brazil and even Indonesia, it is important to remember that the process of industrial integration
NEW VISTAS
must imply local firms if to be acceptable to medium or long-term co-operation. With these two markets,
future economic development and the potential of business opportunity, MHB and its European partners are banking on their local counterparts to help the anchorage of business lines in the local context. Consequently, it is clear that a broader view of bidding strategies is needed. The focus on a firm’s capacity to determine an acceptable and a reasonable quality is no longer sufficient to guarantee award in international industrial tender operations. Competitive bidding strategies therefore require that operations fit not only the three classic stages of the bidding process, but that the firms involved incorporate creative and innovative approaches to the interactive and dynamic aspects of the marketing mix (Table 1).
Stages Mix Ellements Price Quali tv Delivery dates Sales relationships Nets orking Co-operation Promotion
Bidders‘ List
Shortlist
Final Selection
X X X X X X
Key: >; = Major task for marketers Table 1
The Competitive
Bidding Mix
In the first stage (bidders list), the emphasis will be centred around promotion (the firm’s capacity to use its references) and on networking (the firm’s capacity to identify potential partners that will guarantee award either through their technical/international recognition, or their influence in the local context). In the second stage, the emphasis will shift to value/ cost analysis, quality and time span. This will, however, be relegated if the bidder can demonstrate that the industrial process involved could be transferred and will provide the local context with a greater degree of industrial integration of the indigenous private or public sector. It is important, therefore, in this stage, to ensure that the concept and impact of the industrial process has been fully understood by the decision maker, who is often neither the direct user nor the implementor of Government policy. The third stage will be totally directed to the aspects of co-operation, technological build-up and the definition of requirements in the transfer stages. It is impor-
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tant for the parties involved to be able to identify and anticipate the numerous restraints that can be encountered in this area. This implies that all companies have an excellent understanding of the availability of qualified personnel, management practices as well as the expectations of the local Ministry of Industry in the industrial integration process that has been identified for the indigenous manufacturing sector.“,”
Conclusion Competitive bidding processes are undergoing radical changes. These are due to factors of economic or industrial integration based on economic development in the developing economies, and the influence of global business in the industrialised world. If the process is changing, strategies and tactics that potential bidders use will have to adapt to the “new situation”. With buyer/supplier interaction, new challenges will have to be met and this will also be perceptible in the adaptation that the company is willing/unwilling to carry out in its structure, promotion and, above all, in its recruitment. Horizontal contact with “friendly” complementary businesses in other parts of the world will become a predominant key to success in the future; this means that business has to organise itself to more cross-cultural management with adaptable business systems than ever before. Being awarded the contract will, in time, not be the highlight of a business deal as it is at present. It is no longer a case of getting the contract, but being able to cope with the contract’s long-term implications of technological transfer, analysis of risk and orientation of business policy in the future. If these problems are not anticipated, the company will fall foul of overdevelopment costs, miscalculations of the delicate processes in technology transfer and, in some cases, might even find itself out of business. Finally, as we have tried to demonstrate, competitive bidding is no longer just a problem of marketing and getting the specification right, it is much more a problem of corporate survival in a world of fast changing technology, business activity and industrial allegiances.
References 1. Friedman, L., “A competitive bidding strategy“, Operations Research, 4, 1956. 2. Vickrey, M., “Counterspeculation, auctions and competitive sealed tenders”, Journal of Finance, vol. 16, no. 1, 1961.
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3. Rothkopf, R.H. and Starck, R.M., “Competitive bidding: a comprehensive bibliography”, Operations Research, 27, 1979. 4. Sewa& M., “A decision calculus model for contract bidding“, journal of Marketing, October 1976. 5. Moller, K., “Buying behaviour of industrial components: Inductive approach for descriptive model building”, in Research in international Marketing, P.W. Turnbull and S. Paliwoda, Croom Helm, 1986. 6. Woodside, A.G. and Vyas, N., Industrial Purchasing Strategies, Lexington Books, 1987. 7. Boughton, I’., “The competitive bidding process: beyond probability models”, Industrial Marketing Management, 16, 1987.
8. Contractor, F.J. and Lorange, I’., “Competition versus cooperation”, Management International Reviezu, Special Issue, 1988. 9. Liberation, 27 June 1988. 10. Cova, B., “Marketing myopia in competitive bidding strategies”, Proceedings of the 4th IMP Conference, September 1988. 11. Riesman, A., Fuh, D.C. and L.I.G., “Achieving advantage with countertrade”, industrial Marketing Management, 17, 1988. 12. Zurawicki, L., “Marketing rationale for countertrade”, European Management /ownal, vol. 6, no. 3, 1988.