CaptainDiscoveryAlbatross26
Question 1 The case below is adapted from Harvard Business Case…
Question 1
The case below is adapted from Harvard Business Case Study “Smart Health:
Negotiate with a Social Purpose.”
Jamie Zheng is Founder and CEO of Smart Health, a Shenzhen-based social enterprise
specialising in developing intelligent health care products for the elderly. In particular,
the Smart Health Medicine Watch which can remind the wearer to take medication,
make emergency call and communicate with family members and healthcare
professionals is its core product. Smart Health has five patents based on Jamie’s design
of the Smart Health Medicine Watch for this market. Three months ago, this product
was launched in the Chinese market with great success, generating average monthly
revenue of RMB¥100,000[1]. However, Jamie thinks that this product can benefit from
substantial modifications to make life easier for the elderly. The next step is for the
company to continue spending on research and development in order to refine the
product. To achieve this goal, Jamie is seeking a first-round investment of ¥5 million
for a 20% share of the company.
Five different institutions and individuals have approached Jamie with offers. Two of
them are being seriously considered by Jamie. One investment company is offering ¥4
million for 20% of the company but Jamie is concerned that this investor is mainly
concerned with maximising profits and may abandon the social purpose of his
enterprise, namely to help the elderly. The second offer is from an impact investor (such
investors invest to address social or environmental issues). The impact investor is
offering ¥3 million for 20% of the company. Jamie is not keen to accept this second
offer as it is too low even though he appreciates the support of his social purpose.
Smart Health is registered as a social enterprise because its social purpose is important
to Jamie on a personal level. While pursuing his master’s degree at Hong Kong
University, he lived with his grandmother, who suffers from hypertension and diabetes
for the past 20 years. On one occasion, Jamie’s grandmother fainted and almost died
because she forgot to take her medicine. Luckily, a kind-hearted neighbour saved her
life, but this experience changed Jamie’s outlook on what is important. As a result of
this incident, Jamie made it his primary purpose in life to help the elderly live safely
through increasing interactions with their family, friends and care-givers, and founded
Smart Health with this purpose. With an initial innovation funding from 3M, Jamie
invented the Smart Health Medicine Watch and started his social enterprise with the
dual goals of helping as many elderly people as possible while running a sustainable
and profitable business.
Based on these goals, Jamie designed a business model as follows. First, Smart Health
sells its products to high-end customers to generate profits (currently about ¥100,000
per month in revenue) through both online and offline platforms. Second, the social
enterprise spends a portion of revenue from sales to donate a simplified version of the
Smart Health Medicine Watch to those low-income elderly who cannot afford it
(currently, this costs the company about ¥20,000 per month). Third, Smart Health
requires that its employees spend time volunteering at events for the elderly and also
covers the cost of these events, which range from parties at nursing homes to
community workshops for the elderly. Smart Health provides a demonstration of its
products at these events but does not sell its product on these occasions (currently, this
costs about ¥20,000 per month). The last two activities help Jamie achieve the social
purpose of his enterprise but reduce the profitability of Smart Health. To maximise
profits, many investors have suggested that Jamie should focus all his resources on
high-end customers, but so far Jamie has refused. He believes that it is important to
help all the elderly and he firmly believes that the company needs to devote sufficient
resources to its social goals.
Jamie is recently approached by XYZ Capital, one of the largest venture capital funds
in China. Jamie met its managing director, Chris Liu at an event held by Tencent[2] two
months ago. In their conversation, Jamie shared the vision and unique nature of Smart
Health as a social enterprise.
Chris seems to empathise and understand the social contributions of the company.
Jamie feels an immediate connection after Chris shares that his mother is also suffering
from health ailments. Chris recognises the benefits of Smart Health’s products, in
particular, the Smart Health Medicine Watch and seems to also be passionate about
helping the elderly. Due to Chris’s passion for the elderly, Jamie is optimistic that a
deal can be made.
As managing director of XYZ Capital, Chris has full authority to decide which
companies to invest in, as long as the investment can achieve a targeted return on
investment (ROI) of at least 30%. After completing the due diligence, Chris sees high
potential in Smart Health. However, this is the first time he is considering investing in
a social enterprise.
Due to the market reception of the Smart Health Medicine Watch, Chris sees high
potential for a return on investment that is acceptable to XYZ Capital because of the
patent technology in the watch and the forecasted market growth of products for the
elderly (see Note below on Chinese Aging Population). When assessing an initial
investment, Chris also strongly considers founder characteristics and he finds Jamie to
be charismatic, passionate and driven – all key traits of a successful entrepreneur. With
his invention, Jamie believes Smart Health provides an innovative solution that fills an
existing market gap for the elderly demographic and Chris agrees with this vision.
From a purely financial perspective, Chris’s market research indicates that Smart
Health can make an above-average market return on investment (compared to similar
companies that XYZ Capital has invested in). Current projections estimate that the
Smart Health Medicine Watch has a profit margin of a very healthy 40%, and there is
great potential for Smart Health to produce more products, due to the extensive
investment and effort that Smart Health has devoted to research and development.
Smart Health is requesting an investment of ¥5 million for 20% of the company. If
Smart Health were a normal for-profit enterprise, Chris would have no problem with
these terms, since his due diligence indicates that the investment is likely to yield a
sufficient ROI for XYZ Capital.
However, Smart Health is a social enterprise. It dedicates a significant amount of
company time and financial resources to organising social functions at community
events for the elderly, as well as donating simplified versions of the watch to low-
income elderly. These efforts have the potential to benefit the company in the future,
but currently they have an adverse impact on the financial resources, as Smart Health
has been spending much of its existing profits on donations to the elderly (by donating
the simplified version of its products to the low-income elderly and organising events
to enhance their lives). This significantly reduces Smart Health’s profits, which is
certainly not acceptable to XYZ’s investors. Though Chris is sympathetic to helping
the elderly on a personal note, he still needs sufficient financial returns in order to invest
in Smart Health.
If Jamie insists on continuing with the social activities that reduce profits, Chris is not
sure how to properly value the company and is afraid that he will not reach the ROI that
is acceptable to XYZ Capital. In fact, if Jamie continues to use the profits from sales of
the Medicine Watch to help the elderly, Chris is sure that the ROI will not meet XYZ
Capital’s standards. XYZ Capital is after all, not involved in venture philanthropy or
impact investing. As a traditional investment institution, ROI has always been most
important to XYZ Capital. Therefore, controlling the flow of funds (i.e., placing
financial conditions on how funds are accessed) or controlling the board may be a key
tool to enable Chris to control how Smart Health makes financial decisions in the future,
to ensure it achieves an acceptable ROI.
Jamie and Chris agree to meet in two weeks’ time to explore:
1. The amount that XYZ Capital will invest in Smart Health and the percentage of
share that Smart Health will sell for this amount.
2. The number of board seats that XYZ Capital will receive. Currently, there are
five seats on Smart Health’s board of directors, including Jamie. If XYZ
receives more than two seats, this will mean Jamie giving up decision-making
control over the company to XYZ.
3. Any financial conditions as to when and how much money is given (i.e.,
whether in instalments) and under what conditions (i.e., meeting certain profit
or revenue targets).
[1] ¥ = CNY = Chinese yuan renminbi; ¥ 1 = approximately 0.14 US Dollars or 0.19 Singapore Dollar (as
at end 2022) [2] Tencent Holdings Ltd, a Chinese multinational technology conglomerate holding company. [3] Yvonne Wu and Qun Zheng, Trends in integrated elderly care and medical services in China (Deloitte,
2018), accessed November 2, 2021 https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/life-
sciences-health-care/deloitte-cn-lshc-the-last-mile-of-senior-care-en-181024.pdf [4] The four seniors refer to the two sets of grandparents of the child.
China’s Aging Population[3]
China’s population is aging faster than in the past. It is expected that the number of
people aged over 60 in China will exceed 350 million by 2030. Due to the one-child
policy, which was implemented since the 1980s, most families face the problem of
“four seniors, one young couple, and one child”[4]. Therefore, with the increasing
dependency ratio, traditional family-supported elderly care can no longer satisfy
people’s needs. As a result, since China’s 11th Five-Year Plan period, the government
has proposed developing the elderly care industry and has started introducing a series
of policies to encourage private capital to help improve it. Public data shows that
China’s elderly care industry will reach ¥13 trillion by 2030. Given the huge market
potential, more and more players – from various sectors including real estate,
insurance, pharmaceuticals, and elderly care service – are emerging in the market.
Since 2013, the State Council and other departments have issued policies and guiding
principles to develop integrated elderly care and medical services. In 2017, in a report
delivered at the 19th CPC National Congress, a section on carrying out the Healthy
China 2030 initiative said: “As we respond proactively to population aging, we will
adopt policies and foster a social environment in which senior citizens are respected,
cared for, and live happily in their later years. We will provide integrated elderly care
and medical services, and accelerate the development of old-age programs and
industries.” The integration of medical services and elderly care service is a clear
development priority for the elderly care sector in China.
Question 1c
After his earlier rounds of negotiation, Jamie realises that negotiation is both an art and
a science. Assume you are Jamie, examine the ten (10) best practices of negotiation and
discuss how you would be guided by these practices to conduct a successful negotiation
with Chris.
Step 1: Be prepared
Step 2: Diagnose the Fundamental Structure of the Negotiation
Step 3: Identify and Work the BATNA
Step 4: Be Willing to Walk Away
Step 5: Master the Key Paradoxes of Negotiation
Step 6: Remember the Intangibles
Step 7: Actively Manage CoalitionsThose Against You, For You, and Unknown
Step 8: Savour and Protect Your Reputation
Step 9: Remember That Rationality and Fairness Are Relative
Step 10: Continue to Learn from Your Experience
