Negotiation

1
Negotiation
2
Outline

• standard terms of negotiation
• examples of negotiation
• David and Goliath
• price negotiation in a channel
• force-cost reduction
• a company and a government
• preparation and tactics of negotiation

2
3
Standard Terms in Negotiating
3
4
Negotiation

• formal communication to seek mutual agreement
• usually verbally
• often between two sides
• on sharing and allocation of resources, cost,
  benefits, etc.
• skills
• required preparation
• sharpened by practice

4
5
Terms in Negotiation

• BATNA (best alternative to a negotiated
  agreement) (??)
• positions (??)
• interests (??)
• needs (??)
• wants (??)

5
6
Conditions to Use Negotiation

• expensive operations
• high-value, large-volume contract
• complex technical requirements on product and
  process, possibly evolving specifications
• capital-intensive items, e.g., plant and
  equipment
• special buyer-supplier relationship
• important value-adding activities required from
  suppler

6
7
Examples
7
8
Which Side Won?

• rental negotiation

Party A Party B
age middle age 20s
group size two, couple single
status landlord potential tenant
company local foreign
Position in company owner employee
8
9
Which Side Won?

• story
• potential tenant slow in responding
• property price gone up
• higher rental expected by developers

9
10
Rental Contract Negotiation by Mr. Stanley Yen

• Mr Stanley Yen
• 1971 June started as a messenger in the Taiwan
  branch of American Express (AET)
• 1971 end took care also general affairs of AET
• Now a living legend in tourism, management,
  social welfare,

10
11
Rental Contract Negotiation by Mr. Stanley Yen

• Mr. Yen, How come you do this? As a custom of
  foreign company, I recorded the agreed rental in
  a memo.
• mutual respect that grew into long-term
  employee-employer and then family-type
  relationship
• lessons
• systematic
• polite

11
12
Real-life Negotiation with Suppliers
12
13
Examples of Price Negotiation

• some general practice 5th video clipping
  001420 to 002020
• depending on opponents
• intellectual, traditional, personality
• possessing information
• BANTA and needs of opponents
• market price, actual production cost
• strengthen and BANTA of my company

13
14
Jose Ignacio Lopezde Arriortua
14
15
Force-cost Reduction

• win-lose strategy
• acting personally, offensively, and emotionally
• demanding immediate effect
• changing existing contracts
• threatening reduction or less no business

http//www.projectmagazine.com/monitoring-and-cont
rolling/53-cost/270-qforcedq-cost-reduction-how-to
-respond
15
16
Deep Trouble of GM in Early 90s
Michael H. Moffett and Willian E. Youngdahl
(1999) Jose Ignacio Lopez de Arriortua,
Thunderbird International Business Review, 41(2)
179-194
16
17
Questions from the Paper

• What was the life of Jose Ignacio Lopez?
• What changes were made in the GM purchasing
  practice by Lopez?
• What do you think about the purchasing strategic
  used by Lopez?
• How do you compare the strategies used by Carlos
  Ghosn and Jose Ignacio Lopez?

17
18
Life of Jose Ignacio Lopez

• doctorate in industrial engineering
• 1969?80 Firestone, Spain
• 1980?86 GM European operations, Spain
• 1986 GMs Opel, Germany
• 1987 head of purchasing for Europe
• work with Jack Smith to make GM Europe profitable
  
• 1992, April VP of Worldwide purchasing of GM
• Jack Smith as president of GM in Spring 92

18
19
New Rules in Purchasingby Jose Ignacio Lopez

• new rules
• all supply contracts by bidding
• a minimum of 10 bids for a supply contract, at
  least one not in north America
• no favorable treatment of internal suppliers, 70
  among all
• 50 productivity improvement by 1995

19
20
New Rules in Purchasingby Jose Ignacio Lopez

• second phase sending GM teams to help suppliers
  for improvement and cost reduction
• mixed results
• exemplary in some, e.g., Siemens, reduction of
  85 assembly line time 95 percent of inventory
  20 of cost
• not sharing cost sharing in some cases

20
21
New Rules in Purchasingby Jose Ignacio Lopez

• forced changes of existing supplier contracts
• renegotiation of five-year contract, e.g., cuts
  of supplier price of 5, 3, 2, 2, 1 in the
  next five years
• close working relationship with unions
• taking proprietary designs from suppliers for
  open bidding by other suppliers
• sharing insufficient fixed development cost with
  suppliers

21
22
New Rules in Purchasingby Jose Ignacio Lopez

• results
• saving 4 bill for GM
• poor relationship and rating by suppliers
• some suppliers out of business
• loss of supplier loyalty in long term
• not providing best product, nor best service
• switching partners at opportunity

22
23
Concurrent Chrysler Purchasing Policy

• long-term partnership with suppliers
• criterion contribution to whole product
  development and manufacturing process, not only
  cost
• involving suppliers right at the beginning

23
24
Contract Renegotiation with the Chilean
Government
http//www.negotiations.com/case/contract-renegoti
ation/
24
25
Contract Renegotiation with the Chilean
Government

• contract renegotiation over the El Teniente
  copper mine in Chile in 1960s
• two parties Kennecott, a U.S. company, and
  Chilean government
• background national sentiment in Chile for
  foreign companies to exploit its natural resource
  
• overwhelmingly strong BATNA of the Chilean
  government
• either tough financial terms or even
  expropriating the mine
• enough local experts to manage the mine

25
26
Contract Renegotiation with the Chilean
Government

• What can be done by Kennecott?
• a six-step win-win strategy that strengthens
  Kennecotts position
• 1? selling a majority equity of the mining
  operation to the Chilean government
• 2? divesting the fund into US banks getting an
  outside loan, to expand the mining operations
  (effect better deal in re-negotiation)
• 3? having the Chilean government to guarantee the
  loan, with the guarantee under the law of
  New York state
• 4? insuring as many as possible assets with U.S.
  backed guarantees (effect reducing loss in
  case of expropriation)
• 5? negotiating to sell output from expansion to
  clients in Europe and North America (effect
  diversifying customer base)
• 6? lastly selling the rights of the new contracts
  to a consortium of financial institutions
  from Japan, the United States and Europe (effect
  multi-party negotiation in future contract
  renegotiation, with parties having other
  interests with the Chile Government)

http//www.negotiations.com/case/contract-renegoti
ation/
26
27
Contract Renegotiation with the Chilean Government

• final remark expropriation years later but much
  better position for Kennecott in negotiation

27
28
Preparation and Tactics in Negotiating
28
29
Preparation for Negotiation

• identify participants and set up a team
• develop objectives
• e.g., price, quality, form of collaboration,
  service level, long-term relationship
• gather relevant information
• market price, historical prices, actual cost of
  supplier, history, financial strength, quality,
  service level, management of supplier, possible
  negotiator from supplier

29
30
Preparation for Negotiation

• analyze strengths weaknesses for suppliers and
  oneself
• for both sides, e.g.,
• how important is the supplier to us
• how much time we have
• any other backup supplier
• how important is the order for the supplier
• financial strength of the supplier

30
31
Preparation for Negotiation

• recognize other partys needs
• deduce real needs in others perspectives
• identify common goals and facts agreed
• to simplify discussion
• identify issues to discuss
• (potential) differences between the two sides

31
32
Preparation for Negotiation

• establish positions and BATNA
• develop strategies and tactics
• brief personnel
• practice the negotiation

32
33
Tactics

• argue based on facts
• answer carefully
• mind other sides feeling
• know the deadline
• avoid trapping oneself in a corner
• e.g., accept or no deal
• have courage to say no
• start with lowest
• start with highest
• show honesty
• take the initiative
• listen

• disappearance of key persons
• never give up
• fictitious competition
• unethical
• order issues
• take a rest to cool down
• check security
• select venue
• use threat
• side track the issue
• raise questions
• keep silent

33
34
Concessions

• give-and-take being common in negotiation
• guidelines for making concessions
• reserve room for concessions
• first understand the other sides needs and
  objectives
• first to concede minor but not the first to
  concede major
• portray unimportant concessions as valuable
• fight before every concession

34
35
Concessions

• guidelines for making concessions
• give, and remember to take
• concede slowly and by little
• never reveal deadline
• say no occasionally
• try not to retrieve concessions
• record of concessions

35
36
Power in Negotiation

• power the ability to influence
• sources of negotiating power
• informational power presenting relevant facts
  and persuasive argument
• reward power
• coercive power
• legitimate power credentials of experts
• referent power socially acceptable personal
  qualities and attributes, e.g., physical,
  honesty, charisma, friendliness, sensitivity

36
37
Win-Win Negotiation

• win-lose competitive or distributive bargaining
  
• win-win collaboration or integrative bargaining
• beneficial to both sides usually by increasing
  value or expanding resources to all participants
• equitable sharing of profit or cost
• tactics
• expand the pie
• logroll
• compensation for compliance
• a bridge solution

37
38
Getting to YesNegotiating Agreement Without
Giving In

• By Roger Fisher William Ury

38
39
Tips from the Book

• dont bargain over positions
• separate the people from the problem
• focus on interests, not positions
• invent options for Mutual Gain
• insist on using objective criteria

39
40
Dont Bargain Over Positions

• C customer S Shopkeeper
• C How much do you want for this brass dish?
• S That is beautiful antique, isnt it? I guess I
  could let it go for 75.
• C Oh come on, its dented. Ill give you 15.
• S Really! I might consider a serious offer, but
  15 is certainly isnt serious.
• C Well, I could to to 20, but I would never pay
  anything like 75. Quote me a realistic price.
• S You rive a hard bargain, young lady. 60 cash,
  right now.
• C 25.
• S It cost me a great deal more than that. Make
  me a serious offer.
• C 37.50. Thats the highest I will go.
• S Have you noticed the engraving on that dish?
  Next year pieces like that will be worth twice
  what you pay today.

40
41
Focus on Interests, Not Positions

• Negotiation between Egypt and Israel at Camp
  David in 1879
• Egyptian Sinai Peninsula occupied by Israel since
  the Six Day War in 1967
• Positions
• Egypt getting back whole Sinai Peninsula
• Israel holding part of Sinai Peninsula for
  national security

41
42
Focus on Interests, Not Positions

• interests
• Egypt sovereignty
• Israel national security
• Result returned the whole Sinai Peninsula to
  Egypt and de-militarized large area for security
  of Israel

42
43
Insist on using Objective Criteria

• I Insurance Adjuster T Tom
• I We have studied your case and have decided the
  policy applies. That means youre entitled to a
  settlement of 6,600.
• T I see. How did you reach that figure?
• I Thats how much we decided the car was worth.
• T I understand, but what standard did you use to
  determine that amount? Do you know where I can
  buy a comparable car for that much?
• I How much are you asking for?
• T Whatever Im entitled to under the policy. I
  found a secondhand car just about like it for
  7,700. Adding eh sales and excise tax, it would
  come to about 8,000.
• I 8,000! Thats too much.
• T Im not asking for 8,000 or 6,000 or
  10,000, but for fair compensation. Do you agree
  that its only fair I get enough to replace the
  car?
• I OK, Ill offer you 7,000. Thats the highest
  I can go. Company policy.
• T How does the company figure that?
• I Look. 7,000 is all youll get. Take it or
  leave it.
• T 7,000 may be fair. I dont know. I certainly
  understand your position if youre bound by
  company policy. But unless you can state
  objectively why that amount is what Im entitled
  to, I think Ill do better in court. Why dont we
  study the matter and talk again? Is Wednesday at
  eleven a good time to talk?
• .

43
44
Insist on using Objective Criteria

• .
• I Ok, Mr. Griffith, Ive got an adhere in
  todays paper offering an 89 Taurus for 6,800.
• T I see. What does it say about mileage?
• I 49,000. Why?
• T Because mine only had 25,000 miles. How many
  dollars does that increase the worth in your
  book?
• I Let me see 450.
• T Assuming the 6,800 as one possible base, that
  brings the figure to 7,250. Does the ad say
  anything about a radio?
• I No.
• T How much extra for that in your book?
• I 125.
• T How much for air conditioning?
• A half-hour later Tom walked out with a check for
  8,024.

44