MARTINEZ CONSTRUCTION COMPANY IN GERMANY

Juan Sanchez glanced out the window of the Boeing jetliner and admired the countryside below. The overcast skies failed to dampen his enthusiasm for the challenges and opportunities he and his company now faced. Two generations of local services had done little to prepare Martinez Construction for the coming days. Nevertheless, Juan remained confident that once the spirit of cooperation and trust was established, the new German operation would be a success.

Martinez Construction Company

Martinez Construction is a well-established construction company in Eastern Spain. Founded in Barcelona in the mid-1940s, its reputation and quality of service ensured growing profits for decades. However, a recent decline in contracts has resulted in a growing awareness of the dependence the business has on local economic conditions. Diego Martinez, president and son of the founder of Martinez Construction, now faces a growing certainty that the survival and continued growth of the family business depend on expansion into the international marketplace. In Barcelona, Diego had met many German tourists. They seemed to enjoy the warm sunshine of Spain. He also knew that many German companies now conducted business in Spain. Thus, it was natural when his company started thinking globally that they were drawn to the new German states. The recent collapse of communism and subsequent opening of new markets in Eastern Europe provided what seemed like an excellent opportunity for expansion. After all, why shouldnt Martinez Construction take advantage of the cheap labour and raw materials? More information was needed, however. Martinez Construction representatives contacted banks, commercial departments of foreign consulates, and chambers of commerce, as well as the Investor Services department of the Treuhandanstalt (THA), which was, for a short time, the worlds largest holding company. They also depended on accountants, lawyers, consultants, and others to provide advice. After the initial research and discussion of the alternatives with other members of management, Diego has come to the conclusion that the best approach to this venture will be through the acquisition of an existing company from the Treuhandanstalt. This decision was made after concluding that Martinez Construction lacked the resources necessary to risk a Greenfield operation. Added to this was the certainty that an alliance with other German companies would not allow Martinez Construction to establish itself as a serious competitor in the international construction market. Diego chose his brother-in-law and manager of the Barcelona branch of Martinez Construction, Juan Sanchez, to act as the negotiator for the company with THA. Although Juan is unfamiliar with German business practices, Diego feels that Juans friendly character and expertise in the needs of the company will ensure the establishment of the necessary trust to build a strong cooperative venture with THA. Juan will be accompanied by Diegos nephew and projected manager of the new German acquisition, Miguel Martinez. Miguel is the youngest and most educated of the Martinez managerial staff. His background includes a business degree from a university in the United States, as well as years of employment in the family business. Although lacking in practical managerial experience, it was largely due to his influence that Diego saw the wisdom and necessity of expanding operations abroad. Miguels opportunity has fuelled his optimism despite the challenges he faces in the management of a foreign subsidiary.

Treuhandanstalt
Because of the collapse of communism in the German Democratic Republic, the two Germanys were finally going to be reunified. The Treuhandanstalt was created in what was the German Democratic Republic. The sole purpose of the THA was to find private buyers for some 13,500 businesses and 15,000 parcels of real estate that had been previously owned by the German Democratic Republic. The government knew that the economy in this sector had to be stimulated quickly. There were hopes that many investors would take advantage of the new markets opening up. However, little thought was given to the immensity of the job. No guidelines were issued, which later led to charges of dubious deals, and limited funds were made available to run the agency. Therefore, any firm wishing to purchase an existing facility in East Germany had no choice in the matter they had to deal with the THA. The primary job of the THA was to sell the companies and to match existing companies with buyers. However, this proved to be an almost impossible task because the THA had insufficient or no information about the financial positions of the companies it was supposed to sell. In some cases, it could not ascertain what companies were to be sold. The firms wishing to purchase properties through the THA were initially evaluated on the basis of financial soundness. Second, they were evaluated on potential employment opportunity. Next, they were measured according to the cost of restructuring to the buyer. The speed of the sale was, however, the most important issue to the THA. The sooner the THA finished its work, the sooner the economy would improve. Price was the main aspect of the sales negotiations. Other facets of the negotiations involved guaranteeing jobs for present employees and arranging for the upgrade and improvement of the companies. This meant the investment of a great deal of time and money by the buyer because many of the firms had fallen into disrepair. In fact, some were no longer operable in their present state.

Negotiations
The THA finally found what it considered to be a match for Martinez Construction. It was an existing construction firm, Konstruktion Dreizehn, located in Leipzig, Germany. (Leipzig is a city of about 564,000 people located in the Eastern part of Germany.) From the time of his arrival in Germany, Juan felt that he was having a difficult time just getting acquainted with the Germans. He felt pressured by the THA representatives. The Germans were all business. They didnt seem to have time to get to know Juan personally: Rush and urgency to complete the sale was the focus of their approach. The first meeting was scheduled for 9:00 A.M. Juan and Miguel arrived at 9:15. Juan noticed that the THA representative, Helga Schmidt, seemed quite agitated when they arrived. She didnt even offer them coffee. He wondered what had upset her so much. When he suggested that they be taken on a tour of the city this morning instead of immediately starting the negotiations, he was reminded of the necessity of proceeding with the negotiations. Even though this displeased Juan, he agreed to start negotiations for the sale. The Germans presented their proposal to Juan. He was amazed. Every detail was in this contract, and yet the THA had not yet ascertained the financial status and position of the construction firm in Leipzig. For this reason, Juan had expected some sort of flexible agreement. Given the dearth of available financial analysis, this was especially important since there was no way to determine the extent of future problems. Didnt the Germans know this? If the THA was to be trusted, why bother with this type of contract? He told the Germans exactly what his thoughts were on this subject.

Helga was clearly uncomfortable with Juans emotional outburst. However, she did see his point and decided to compromise by offering a phased contract, which made Juan more comfortable with the situation. However, the Germans felt lost without the technicalities represented in the original contract. The negotiations proceeded smoothly from this point. The final contract stated that the original price would be reviewed in two years, and the contracted parties would recalculate it based on new and presumably more reliable data concerning the true value of the firm. Although there were problems with the negotiations, one thing did impress Juan about the Germans. He really appreciated the way the negotiations were organized. When there was a question, Helga always knew whom to contact. She also knew what forms, reports, and so on, needed to be sent to which department of the THA. Helga, on the other hand, was very uncomfortable with Juans relaxed manner. She did, however, value his genuineness and practicality.

Operations
Miguel Martinez arrived tired but excited in Leipzig. The flight provided ample time to consider his actions in the new German subsidiary. After spending a few days setting up household, Miguel met with the three-member management team sent the month before to begin studying the situation. It was the consensus of the team, and they quickly convinced Miguel that human resources would be crucial to the recovery of the company. The company had employed approximately 350 workers inside the German Democratic Republic (GDR). The THA had reduced the workforce to 100. Miguel and his team estimated that 50 employees would be sufficient. However, it was not long before the parties realized that East Germans did not have the same concept of work, or the same incentives, as did West Germans. Further confirmation of the effect of the workers place of origin showed in the degree of initiative and responsibility demonstrated by the workers, or the lack thereof. Miguel was frustrated by the unwillingness of some employees to actively participate in the formulation of ideas and implementation of new procedures and policies. More than forty years of communism had taught them to expect all guidance and solutions to come from the top. Added to the lack of initiative were a fear and distrust of management. These were quickly justified when Miguels new management team investigated a labour unions report criticizing the previous managements hiring practices and competence. Six months after Miguels triumphant arrival, his optimism was fading fast. He had just received the latest report concerning the companys financial position, and it was clear that the figures were far from what Martinez Construction had been led to believe. Strict environmental and employee protection regulations forced large investments in plant modifications. Further, other costly projects that had hot been foreseen during the negotiation process required attention. Cash flow problems were beginning to arise, and this threatened the very existence of the company. Although re-evaluation of the contract was specified after two years, Miguel wondered whether immediate action might be necessary. Sitting in his office overlooking the southern complex of the plant, the heavy rain clouds matched the darkness of his mood.
Source: H. Deresky, International Management: Managing Across Borders and Cultures , 5th Edition, International Edition, Pearson Education International, 2006, pp. 174-177. Term project by Ann Eubanks and Derek Bonen Clark, graduate students at the State University of New YorkPlattsburgh, spring 1995 Copyright 1995 by Helen Deresky This case and the characters represented in it are fictional. The case is presented as a basis for educational discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Appendix 1: A Comparison of Spanish and German Democratic Republic Work Styles

Spanish Clear goals not common: work under assumption that goals of past will be goals of future Hierarchical society with status based on position: line of authority is top-down Promotions usually determined by seniority Decisions influenced by human factors.

German Democratic Republic Goals related to politics; what is good for the state (society) Everyone is equal; however, superiors expected to provide all solutions Lifelong employment common; advancement decisions political Decisions influenced by what is good for society as a whole.

Appendix 2: Negotiating Styles of the Spanish and Germans

Spanish Prefer to establish trust by taking time to get to know counterparts Dont attach importance to punctuality Discuss things at length Raise their voices and interrupt speakers during disagreements Make decisions based on general principles and leave details undecided.

Germans Keep business and pleasure separate Stress the importance of punctuality State facts in a concise manner Reserved and formal during discussions Exhibit a strong concern for details and exacting contracts.