Professional Documents
Culture Documents
NEGOTIATION
Learning Objectives
After completing this chapter, you should be able to
• Understand when and why a buyer enters into a sourcing negotiation
• Recognize the importance of planning within the negotiation process
• Appreciate the different sources of power that are present during negotiations
• Understand the characteristics of effective negotiators
• Appreciate the role of concessions during negotiation
• Recognize the subtleties and complexities involved with global negotiation
Chapter Outline
What Is Negotiation? Concessions
Negotiation Framework Negotiation Tactics: Trying to Reach Agreement
Identify or Anticipate a Purchase Requirement Win-Win Negotiation
Determine If Negotiation Is Required Good Practice Example: Mack Trucks Uses Negotiation
Plan for the Negotiation to Rev Up Its Sourcing Process
Conduct the Negotiation International Negotiation
Execute the Agreement Selected Countries
459
460 Part 4 Strategic Sourcing Process
The opening vignette highlights how a supply management professional, using negoti-
ation and contracting practices transferred from an unrelated industry, has created
new value that has enhanced his company’s competitiveness. The ability to improve
return on net assets was possible only through extensive planning, negotiation, and
the use of longer-term contracts that combined the requirements of geographically di-
verse operating units. Negotiation is a skill that is essential to all purchasing and sup-
ply managers.
Chapter 13 Negotiation 461
Everyone negotiates something every day, ranging from dealing with other drivers
at a four-way stop sign all the way to merging with or acquiring another company.
As such, negotiation is generally a highly complex and dynamic process, and many
books and articles have been written on how to effectively negotiate in a variety of sit-
uations. This chapter highlights important topics that are typically part of any negotia-
tion, especially those between buyers and suppliers. We begin this chapter by broadly
defining the concept of negotiation. The second section presents negotiation as a
five-phase process. Next, perhaps the most important part of any negotiation process—
planning—appears in detail. The following sections present common sources of negotia-
tion power, the effective use of concessions, negotiation strategies and tactics, and the
important topics of win-win negotiation, international negotiation, and the effect of the
Internet on the future of negotiation.
What Is Negotiation?
One of the most important activities performed by supply managers involves nego-
tiating agreements or contracts with their suppliers. Although supply management is
certainly not the only group in an organization that negotiates, negotiation is a vital
part of every sourcing process. Negotiation is an ideal way to implement the supply
management strategies and plans that a business unit develops. It is also often an
ideal way to convey the buyer’s specific sourcing requirements and specifications to
its supply base. See Sourcing Snapshot: American Airlines Knows the Importance of
Negotiation for a discussion of the importance of negotiation for American Airlines.
Negotiation has been defined in a variety of ways: “A negotiation is an interactive
communication process that may take place whenever we want something from some-
one else or another person wants something from us.”1 “Negotiation is the process of
communicating back and forth for the purpose of reaching a joint agreement about
differing needs or ideas.”2 “Negotiation is a decision-making process by which two or
more people agree how to allocate scarce resources.”3 “Negotiating is the end game
of the sales process.”4
For our purposes, we define negotiation as a process of formal communication, ei-
ther face-to-face or via electronic means, where two or more people come together to
seek mutual agreement about an issue or issues. The negotiation process involves the
management of time, information, and power between individuals and organizations
who are interdependent. Each party has a need for something that the other party
has, yet recognizes that an interactive process of compromise or concession is often re-
quired to satisfy that need.
An important part of negotiation is realizing that the process involves relation-
ships between people, not just organizations. A central part of negotiation involves
each party trying to persuade the other party to do something that is in its best inter-
est. The process involves skills that individuals, with the proper training and experi-
ence, can learn and improve upon. Good negotiators are not born; they hone these
necessary skills through planning and practice.
There are a number of terms with which all negotiators should be familiar:
BATNA, positions, interests, needs, and wants. A negotiator’s best alternative to a ne-
gotiated agreement (BATNA) is also known as the negotiator’s bottom line or reserva-
tion point, that is, that point in the negotiation where it is most advantageous for the
negotiator to walk away from the table and implement his or her next-best option.5
A negotiator should take extra caution to ensure that his or her reservation point or
BATNA is never revealed to the other party because the final settlement is unlikely
to vary much from that point.6 In addition, all negotiation settlements must ulti-
mately be judged in light of the other viable alternatives that existed at the time of
the agreement.
A negotiator’s position can be defined as his or her opening offer, which represents
the optimistic (or ideal) value of the issue being negotiated. A position is the stated de-
mand that is placed on the table by a negotiator. In contrast, the negotiator’s interest
is the unspoken motivation or reason that underlies any given negotiation position.
In many negotiation scenarios, the negotiator’s underlying interests are unlikely to be
expressly stated or acknowledged, oftentimes because they may not be directly ger-
mane to the stated position or may be personal in nature. Sharing the underlying in-
terests behind a position may cause a negotiator’s power to shift toward the other
party, resulting in a less-than-desired outcome. The negotiator must, in effect, play de-
tective to try and discern the other party’s interests through a series of open-ended,
probing questions. In order to reach a negotiated agreement using principled negotia-
tion, a negotiator should always attempt to focus on the other party’s underlying inter-
ests, not his or her stated position.7
The astute negotiator must also be able to distinguish between the other party’s
needs and wants. Needs are considered to be those negotiated outcomes that the nego-
tiator must have in order to reach a successful outcome to the negotiation. Wants, on
Chapter 13 Negotiation 463
the other hand, refer to those negotiated outcomes that a negotiator would like to
have as opposed to those outcomes that must be achieved. Wants can also be ex-
changed as concessions to the other party during a negotiation because they are not
as critical to achieving a successful conclusion to the negotiation. When a negotiator
is planning an upcoming negotiation, it is imperative to prioritize all of the potential
issues to be negotiated into needs and wants, thereby knowing what must be
achieved and what can be exchanged for something else of value.
A simple negotiation planning tool, called “Triangle Talk,” can help the negotiator
begin the initial preparation for an upcoming negotiation. This planning process,
shown in Exhibit 13.1, consists of the following three steps: (1) know exactly what
you want; (2) find out what they want and make them feel heard; and (3) propose ac-
tion in such a way that they can accept it.8
Step 1 in Triangle Talk is determining and formalizing the negotiator’s specific
goals and objectives for the upcoming negotiation. Being specific with one’s expecta-
tions and writing them down helps the negotiator to remain focused on his or her pre-
determined priorities during the negotiation. Having them written down also allows
the negotiator to refer back to them during the course of the negotiation, when it is of-
ten easy to be distracted by the other negotiator’s tactics and the pace of the give-
and-take process. The more clearly a negotiator can define his or her priorities, the
more likely he or she is to obtain them in the final agreement.
Step 2 involves trying to discern what the negotiator’s counterpart is likely to need
or want from the negotiation. It is difficult to develop common ground in the negotia-
tion without knowing what the other party is seeking. Ask specifically, “What does
the other party need or want?” Delve into the other party’s likely positions and try to
Step 3:
Propose Action in a Way That They Can Accept
Source: K. Anderson, Getting What You Want: How to Reach Agreement and Resolve Conflict Every Time,
New York: Plume, 1994, p. 14.
464 Part 4 Strategic Sourcing Process
estimate what the underlying interests are behind the positions. However, a negotia-
tor cannot automatically assume that the other party thinks the same way he or she
does. During the negotiation, the negotiator can ask open-ended, probing questions
to verify his or her preliminary analysis of the other party’s needs and wants. In addi-
tion, the negotiator should develop a strategy and accompanying tactics that will
make the other party feel heard. This will allow the third step in Triangle Talk to
take place.
Step 3 involves the consideration and analysis of the negotiator’s own needs and
wants and the needs and wants of the other party. This way, proposals and counter-
proposals can be offered that take both sets of needs and wants into account and are
framed in such a way as to make it easy for the other party to say “Yes.” It is im-
portant to remain flexible, fair, and reasonable so that the parties can work out an
agreement in which they are both better off. In addition to acknowledging (but not
necessarily agreeing with) the other party’s concerns, the negotiator can accomplish
this by speaking to those needs first when framing his or her proposals.
Negotiation Framework
Perhaps the best way to approach a buyer-supplier negotiation is by presenting it
as an interactive, give-and-take process involving five major phases:
1. Identify or anticipate a purchase requirement
2. Determine if negotiation is required
3. Plan for the negotiation
4. Conduct the negotiation
5. Execute the agreement
Exhibit 13.2 summarizes this general negotiation process.
Identify or
Determine if
anticipate a Plan for the Conduct the Execute the
negotiation is
purchase negotiation negotiation agreement
required
requirement
1 2 3 4 5
• Purchase • Is bid process • Identify • Perform fact • Provide
requisitions inadequate? participants finding performance
• Inventory • Are many non-price • Develop • Recess or caucus feedback
counts issues involved? objectives as necessary • Build on the
• Reorder • Is contract large? • Analyze • Work to narrow success of the
point systems strengths and differences negotiation
• Are technical
• New-product requirements weaknesses • Manage time
development complex? • Gather pressures
• New • Does contract information • Maintain informal
facilities involve plant • Recognize atmosphere
and equipment? counterpart’s • Summarize
• Does contract needs progress periodically
involve a • Identify facts • Employ tactics
partnership? and issues
• Keep relationships
• Will supplier • Establish positive
perform value-added positions
activities? • Develop strategies
• Will there be high and tactics
risk and uncertainty? • Brief personnel
• Practice the
negotiation
tive bidding will not satisfy the buyer’s purchase requirements on various issues. How-
ever, a buyer can still use a competitive bidding process to identify several potential
sources of supply. After identifying a potential supplier through bidding, the buyer
may need to negotiate with the preferred supplier to resolve other non-price issues af-
fecting the sourcing agreement.
The following areas or issues may require supply management to negotiate with
its suppliers:
• Identification of and agreement on a supplier’s allowable costs
• Delivery schedules and lead time requirements
• Expected product and service quality levels
• Performance metrics and how information is to be gathered and shared
• Technological support and assistance
• Contract volumes
• Special packaging and shipping requirements
• Liability for loss and damage
466 Part 4 Strategic Sourcing Process
An important question for the supply manager today is how much will the develop-
ment of information technology systems, such as Internet-based reverse auctions and
use of electronic-based communication media, change the need to negotiate or have
face-to-face interaction with suppliers? The use of reverse auctions has likely reduced
the need for face-to-face interaction or negotiation between buyers and sellers. How-
ever, it also likely that the type of items and services obtained through reverse auc-
tions (e.g., standard commodities with a moderate total dollar spend) do not warrant
higher-level negotiations in the first place. For items that are critical to the buyer or in-
volve many non-price issues, the likelihood that buyers and sellers will no longer en-
gage in face-to-face negotiation is small. See Sourcing Snapshot: Will E-Procurement
Change Negotiation? for a discussion on how electronic communication media can
affect negotiations conducted at a distance.
responsibility is to record what was said, who said it, what the other party’s reaction
was, and what the areas of agreement were.
It is during the negotiation that the parties play out their strategy with tactics—the
skill of employing available means to accomplish or achieve a desired end. Tactics are
the action plans designed to help achieve a desired result. A later section reviews vari-
ous common tactics that negotiators may employ or should be prepared for.
A sequence of four phases often characterizes face-to-face negotiation sessions.
The first consists of fact finding and information sharing between the parties. This
part of the process helps clarify and confirm information provided by the buyer and
seller. During the second phase, the parties often take a recess after fact finding. This
allows each party the opportunity to reassess relative strengths and weaknesses, re-
view and revise objectives and positions if necessary, and organize the negotiation
agenda. Next, the negotiating parties meet face-to-face in an attempt to narrow their
differences on the specific issues. This phase typically includes the offering of propo-
sals and counterproposals and exchanging concessions. Finally, the parties seek an
agreement and conclusion to the negotiation, plus establish any agreed-upon follow-
on activities.
Effective negotiators typically display certain behaviors or characteristics when con-
ducting a negotiation. They may be willing to compromise or revise their goals, partic-
ularly when new information effectively challenges their predetermined position.
Effective negotiators may also view issues independently, without linking them in any
particular sequence. Linking issues risks undermining an entire negotiation if the par-
ties reach an impasse on a single issue within the negotiation package. Effective nego-
tiators should also establish lower and upper ranges for each major issue, as opposed
to a single, rigid position that may limit the number of viable options available and
be more likely to create an impasse.
Highly effective or skilled negotiators explore more options per issue than do aver-
age negotiators. Furthermore, effective negotiators also make more comments about
the common ground between the parties (rather than the differences) than do aver-
age negotiators. Finally, when compared with average negotiators, effective or skilled
negotiators make fewer irritating comments about the other party, give fewer reasons
for arguments they advance (too many supporting reasons can dilute an argument),
and make fewer counterproposals. Effective negotiators are willing to make counter-
proposals, though not as many as an average negotiator. A willingness to make too
many counterproposals means the negotiator is probably compromising too much or
offering too many concessions. It may also indicate a lack of adequate planning and
preparation or a sign of vulnerability.
negotiated agreement. Both parties should work to build upon the success of a negotia-
tion. Carrying out the agreement as agreed upon should reaffirm the commitment of
the parties to work together in the future.
Negotiation Planning
Experts on negotiation generally agree that planning is perhaps the single most im-
portant part of the negotiation process. Unfortunately, many negotiators fail to prepare
properly before entering into a formal negotiation. A plan is a method or scheme de-
vised for making or doing something to achieve a desired end. Planning, therefore, is the
process of devising methods to achieve a desired end. Once negotiators develop their
plan and an overall guiding strategy, they can begin to develop the specific actions and
tactics necessary to carry out that plan. Negotiators frequently fall short of their goals
or reach an impasse because they neglect the other party’s problems, focus too much
on price, focus on positions instead of interests, focus too much on common ground,
neglect their BATNAs, or overadjust their perceptions during the actual negotiation.11
At least 90% of the successful outcomes of any negotiation are determined by effec-
tive planning. Preparing at the last minute just prior to a negotiation is a sure recipe for
disaster, especially when negotiating against someone who is far more prepared. There-
fore, being quick and clever while thinking on one’s feet is simply insufficient to ensure
a successful negotiation outcome. Successful negotiation planning is proactive, not reac-
tive, and consists of the following nine steps, none of which should be passed over.
number. For example, when buyers negotiate with a supplier for the first time, they
must often commit substantial time and energy to additional research in order to more
fully understand that particular supplier and its needs, wants, and priorities.
Analyzing the other party requires a thorough assessment of the relative strengths
and weaknesses of the parties, as well as each individual issue to be negotiated. This
due diligence process can greatly influence the effectiveness of the strategy and tactics
employed at the bargaining table. Buyers cannot assume that they have power or influ-
ence over the supplier or vice versa. Many times a supplier holds a power position
over the buyer because of its financial size, or perhaps because the supplier does not
have a great need for the contract. A later section details various sources of power
that are part of the negotiation process.
before the negotiation begins by identifying ranges of acceptable outcomes for each
and every issue and setting priorities in the event that concessions or tradeoffs are
required.
Buyer
Seller
< $10.50 $10.50 $11.00
Buyer
information that challenges the accuracy and credibility of the party’s original posi-
tion, or a major concession that leads the other party to modify its position on an-
other issue for the sake of reciprocation.
Power in Negotiation
An important part of the negotiation process involves the recognition and analysis
of the relative power relationship that exists between parties. Power is the ability to in-
fluence another person or organization. “A” has power over “B” if “A” can get “B” to
do something that directly benefits “A.” Throughout human history, we have seen
both positive and negative uses of power. As such, power, in and of itself, possesses
neither a positive nor a negative connotation; it is how that relative power is used
that gives it a particular perception. Within negotiation, the use of power employed
by the parties can dramatically influence the actual outcome of a negotiation or even
result in a stalemate.
Both individuals and organizations bring different sources of power to the negotia-
tion table, and the consideration of power should be a part of any negotiation strat-
egy. Some types of power are detrimental to a continued relationship, whereas others
are the result of expertise or access to information. Therefore, negotiators must under-
stand the advantages and disadvantages of using each source of power. They must
also understand the possible effects that using a particular source of power will have
on the relationship between the parties.
Chapter 13 Negotiation 475
Informational Power
Ready access to relevant and useful information is typically the most common ap-
plication of power found in a negotiation. It relies on influencing the other party
through the presentation of facts, data, and persuasive arguments to support one’s
own positions and to mitigate or challenge the other party’s positions. However, the
effective use of information in a negotiation does not necessarily mean open and com-
plete sharing. For example, one party may present only favorable information that
supports its position, whereas the other side may present only negative information
to refute a position. One party often manipulates information, as a source of power,
to control or constrain the options available to the other party.14
Reward Power
Reward power means that one party is able to offer something of perceived value
to the other party, such as a purchase contract or access to a new source of technol-
ogy. Using rewards represents a direct attempt to exert control over the negotiation,
particularly when compared with the use of informational power, which relies more
on persuasion. The basis of reward power is the belief that individuals respond and
behave accordingly when valued rewards are available. An important risk of reward
power is that a negotiation counterpart may eventually learn to respond positively
only when offered rewards.
Coercive Power
Coercive and reward power are somewhat related; they are two sides of the same
negotiation coin. If one party can give the other party something of value (reward
power), then that party can also take it away (coercive power). Therefore, coercive
power includes the ability to punish the other party—financially, physically, or men-
tally. Note that repeated use of coercive power can have damaging effects on longer-
term relationships. There is also a strong likelihood that retaliation or escalation can
occur if the power structure shifts unfavorably in the future. For example, when sup-
ply markets begin to tighten during an economic recovery, suppliers may retaliate
against the buyer by pursuing large price increases, not providing excellent service to
certain buyers, or even disrupting continuity of supply to the offending buyer.
Legitimate Power
The job position that an individual holds, rather than the individual him- or herself,
is the basis of legitimate power. Parents, pastors, managers, and political officeholders
are examples of individuals possessing legitimate power. In sourcing, a buyer may have
legitimate power simply because he or she legally represents a prominent company and
has the authority to buy. It is not necessarily the case that individuals with legitimate
power have reward or coercive power (e.g., a church pastor).
476 Part 4 Strategic Sourcing Process
Expert Power
Expert power is a related and special form of informational power. Successful appli-
cation of informational and expert power involves the development and retention of
a body of knowledge. Informational power exists when someone has thoroughly re-
searched and prepared for a negotiation. An expert is recognized as having accumu-
lated and mastered vast knowledge about a particular subject, often with verifiable
credentials to document that mastery. Expert power can influence others in a negotia-
tion by reducing the likelihood that another party will be able to successfully refute
the expert’s position. Furthermore, nonexperts are less likely to challenge an expert be-
cause of the expert’s perceived depth of knowledge. However, the other party must
value the expertise in order for it to be effective.
Referent Power
This source of power comes from attraction based on socially acceptable personal
qualities and attributes of an individual, such as one’s personality. These qualities
could be physical but likely include individual characteristics such as honesty,
charisma, friendliness, and sensitivity. In this source of power, the power holder—the
referent—has some attributes or personal qualities that attract the other party or
make him or her want to be like or respect the power holder. The basis of referent
power is that the nonreferent wants the referent to look favorably upon him or her.
Referent power is most successful in negotiation when the referents are aware that a
counterpart identifies with or has an attraction to them.
Parties holding power will likely apply all available types of power to their advan-
tage during a negotiation. Negotiators must be careful not to abuse their power, or
they risk damaging relationships, inviting retaliation, or diminishing the value of that
power. In most negotiations, the sources of power that are usually the most effective
are legitimate, informational, and expert. They are usually the sources of power that
allow the parties to maintain a positive relationship after reaching agreement. How-
ever, referent power can also synergistically interact with the other sources of power,
making them stronger or more effective in the influence process.
Concessions
A fundamental part of every negotiation process involves the offering and ex-
change of concessions—movements away from a negotiating position that offer
something of value to the other party. For example, a buyer’s willingness to offer
$8.50 per unit instead of $8.25 is a concession that favors the supplier. Effective nego-
tiators quickly learn to offer concessions that have little value to themselves in ex-
change for concessions by the other party that do have perceived value. To make the
negotiation process work, each party must recognize that the give and take of conces-
sions is a normal and necessary part of any negotiation. Buyers, however, will still
want to minimize how much they concede on each point by getting corresponding
value in return. Do not give away any concession without getting something of equal
or greater value in return.
Without an effective concession strategy, most negotiations will result in deadlock
or a failure to agree. However, a deadlock does not necessarily mean that the negotia-
tion failed. The parties to a negotiation could be so far apart in their positions that
an agreement is not likely. In such cases, it may actually be better not to agree than
Chapter 13 Negotiation 477
to accept a poor agreement. This is why it is very important for the negotiator to
have adequately prepared and established a thoughtful BATNA before the negotia-
tion begins. The negotiator must be aware of available options and understand that
no deal may be better than a bad deal.
The manner in which a negotiator approaches concession making is an important
part of every negotiation strategy. A buyer who opens the negotiation with a low ini-
tial offer (on price, for example) followed by a relatively small concession is signaling
a reluctance to be flexible. Conversely, a cooperative opening position or moderate of-
fer followed by a relatively strong concession signals a willingness to be flexible and
to reach mutual agreement.
Exhibit 13.4 illustrates how the pattern of concession making might influence the
other party’s response. If a seller continues to offer concessions during a negotiation,
the buyer is likely to continue to ask for further concessions. Examine Exhibit 13.4,
and ask yourself if you would continue to another round of negotiation given the pat-
tern of concessions presented. How negotiators position their concessions will often
affect the length and cost of the negotiation. It also affects the other party’s expecta-
tions of the possible outcomes.
Hendon, Roy, and Ahmed offered the following 12 guidelines for making success-
ful concessions:15
• Give yourself enough room to make concessions.
• Try to get the other party to start revealing his or her needs and objectives
first.
• Be the first to concede on a minor issue but not the first to concede on a ma-
jor issue.
Round Continue to
Round 5?
1 2 3 4
5 $0 $0 $0 $200
The objective of this tactic is to make each party aware of the relevant infor-
mation needed to create a mutually acceptable agreement.
• Questions. Open-ended questions serve a dual purpose as a negotiation tac-
tic. First, insightful questions can result in revealing new information about
the interests underlying the other party’s stated position. Second, questions
provide a period of relief or reflection as the other party takes time to con-
sider an answer. Questions seeking only a “yes or no” answer do not pro-
vide much additional information.
• Caucus. This tactic involves taking a time-out; negotiators might need to pro-
cess new information, take a needed break, or take a recess if the negotia-
tion is going poorly; negotiators might feel they are making too many con-
cessions and need to break the pattern.
• Trial Balloon. A negotiator using this tactic might ask, “What if I can per-
suade my manager to endorse this option? Would you go along?” Trial bal-
loons are tests of acceptability. The other party’s on-the-spot reaction to the
idea influences whether the parties should pursue the idea further.
• Price Increase. Sellers sometimes argue that, if a buyer does not agree to a
certain price or condition, the price will soon increase. A well-informed and
adequately prepared negotiator can tell the difference between a real price
change and a tactic used by the seller merely to make the sale.
• High Ball. This tactic involves taking an abnormally high initial position on
an issue. For example, the seller may put forth an extremely high selling
price. The underlying logic is that, once a party actually makes a concession
from the extreme position, the new position may appear more acceptable to
the other party. It also attempts to shift the bargaining zone in one’s favor.
• Best and Final Offer. This tactic often signals the end of a negotiation on a
given issue. The caveat to this tactic is that the person making the best and fi-
nal offer must be prepared to actually end the discussion if the other party
does not accept the offer. If a party rapidly amends a best and final offer,
this tactic quickly loses its effectiveness, and the negotiator loses credibility
when the bluff is called.
• Silence. This tactic involves not immediately responding when the other
party makes an offer in the hope that an awkward silence will encourage fur-
ther offers or concessions. We often show the tendency to fill in the gaps
when a discussion encounters silence so as to not offend the other party.
Also, when the counterpart makes a point that weakens our position, it may
be better to remain silent than to admit the other party is correct. The other
party may actually back away from its earlier position.
• Planned Concessions. This tactic uses concessions to influence the other par-
ty’s behavior. The use of planned concessions signals that it is now the other
party’s turn to reciprocate and make a concession on an important issue.
There is a natural tendency for an individual to respond in kind when receiv-
ing a concession.
• Venue. Some negotiators insist on negotiating in a location that is more fa-
vorable to them. One party may have to travel a great distance, face the sun,
or sit in an uncomfortable chair in an effort to create stress. Also, the choice
of venue can affect whether or not a negotiator can get up and leave the nego-
tiation at a critical time.
480 Part 4 Strategic Sourcing Process
effective when the other party is unprepared, stressed, under severe time deadlines, in-
experienced, fatigued, or disinterested. Be prepared, and don’t react off the cuff with-
out analyzing the tactic and its real effects.
Win-Win Negotiation
Many traditional supply managers believe that the primary objective of negotiation
is to win at the expense of suppliers. We call this win-lose negotiation (also called com-
petitive or distributive bargaining). Win-lose negotiation means that two or more par-
ties are competing over a fixed value with the winner taking the larger share. It is
also known as a zero-sum, or fixed-sum, game—if one party gains, it is only at the ex-
pense of the other party. Every increase in the purchase price benefits only the seller,
and every decrease in price benefits only the buyer. There are no other possible out-
comes. The level of competition in a win-lose purchase negotiation rarely makes a sup-
plier anxious to cooperate with a buyer to provide advantages that are not available
to other customers. There is no inherent advantage for the supplier to do so.
Win-win negotiation (also called integrative bargaining) seeks to expand the value or
resources available to all participants through collaborative negotiation. The parties
still negotiate, but they do so to determine how to equitably divide a bigger and ex-
panded value pie through the use of creative proposals. For example, increased value
to the buyer may mean receiving a more favorable purchase price than a competitor,
a shorter order cycle time from the supplier, joint efforts to reduce duplication or
waste between the parties, or assistance in developing new technology or product de-
signs. On the supplier’s side, increasing value may mean additional sales volume, pref-
erential treatment for future business, or technical assistance provided by the buyer
to help reduce its operating costs. Exhibit 13.5 contrasts the characteristics of win-
lose and win-win negotiation.
The fundamental question of win-win negotiation is how the buyer and seller,
through a collaborative negotiation process, can pursue integrative bargaining and ex-
pand the pie available to both parties. Previous research has identified five different
methods for pursuing integrative (win-win) agreements.19
• Expand the Pie. Working closely together, the parties identify creative ways
to expand available resources or generate new value obtained through a nego-
tiated agreement. For example, the seller that offers a buyer early access to
new technology for inclusion in its own new products can help create new
• Assume rigid negotiating positions. • Understand each other’s needs and wants.
• Compete over a fixed amount of value. • Focus on common rather than personal interests.
• Practice strict use of power by one party over • Conduct joint efforts to solve problems and develop creative solu-
another. tions that provide additional value.
• Pursue adversarial relationships. • Engage in open sharing of information.
482 Part 4 Strategic Sourcing Process
value. If the market embraces the new product, presumably sales will in-
crease, and the supplier will receive larger purchase orders. Both parties be-
come better off.
• Logroll. Successful logrolling requires the parties to identify more than one is-
sue where disagreement exists. The parties agree to trade off these issues so
each party has a top-priority issue satisfied. This is a form of compromise in
which each party gets more in those issues that are most important to him
or her while giving up more on those issues that are less critical yet are im-
portant to the other party.
• Use Nonspecific Compensation. With this approach, one party achieves his
or her objective on an issue while the other receives something of value as a
reward for going along. This approach works only when the compensating
party knows what is valuable to the other party and makes a reasonable of-
fer to make the other party whole for agreeing.
• Cut the Costs for Compliance. With cost cutting, one party (usually the
buyer) gets a lower price as the parties work jointly to reduce the seller’s
costs or the transaction costs of doing business together. The buyer satisfies
his or her objective of a obtaining a competitive price while the seller be-
comes more competitive in the marketplace due to a reduced cost structure.
• Find a Bridge Solution. Bridging involves inventing new options that satisfy
each party’s needs. Although bridging solutions will likely not totally satisfy
each party, they are usually satisfactory to each side. As in the third point of
Triangle Talk (propose action in such a way that they can accept it), the ne-
gotiators seek to jointly create solutions that satisfy the interests and needs
of both parties.
A win-win negotiation approach works best for items or services that are impor-
tant to the buyer’s products or business or when the item involves high-dollar items
or services where cost control is critical. It is also appropriate when the supplier adds
a high level of value to the product or service. When variables such as technology, cy-
cle time, quality, and price/cost are important, win-win negotiating may also be the
best approach.
ing process designed to leverage the volumes available through the combined truck units.
Volvo Truck is now part of that process. A central part of this process features negotiation to
help the three combined companies carry out their vision of global procurement.
Step 2 requires a major work effort on the part of engineering. Engineers will examine drawings
in an effort to standardize part specifications among Volvo, Renault, and Mack Trucks. Although
a team may conclude that there is no global supplier, they may be able to standardize design
specifications across the companies.
The Good Practice Example illustrates how a company uses negotiation to add
value to its sourcing process. Without highly skilled and well-trained negotiators, the
development of global sourcing strategies, such as the one illustrated here, would not
be possible. The magnitude and complexity of global agreements, which are usually
longer term in length and address many non-price issues, demand face-to-face
negotiation.
International Negotiation
With the burgeoning growth in international business, especially in outsourcing
and global sourcing activities over the last 20 years, the need to effectively and effi-
ciently negotiate across cultures has increased exponentially. Thomas Friedman gave
us an example of a truly global supply chain in his recent book, The World Is Flat, in
which he describes how Dell sources components for and builds its notebook compu-
ters.20 In a truly global supply chain, Dell utilizes multiple suppliers located in a vari-
ety of countries for different parts and components. If a given Dell supplier is unable
to meet current demand, then Dell can shift its sourcing to another supplier with
available capacity regardless of location. For example, Dell can shift its sourcing of In-
tel microprocessors from factories located in the Philippines, Costa Rica, Malaysia, or
China. Therefore, different negotiation strategies are needed to negotiate purchase
agreements in such diverse cultures as Costa Rica and Malaysia.
Negotiations with suppliers located literally anywhere on the globe take on added
complexity and challenge when the parties have different languages, customs, laws, and
cultures. When preparing for a negotiation with a supplier located in another country,
companies must invest in substantial extra time and effort in planning for the negotia-
tion to accommodate new translation, travel, and other foreign business requirements.
One of the more important considerations in negotiating a global sourcing agreement
486 Part 4 Strategic Sourcing Process
Selected Countries
The following presents a sample of national characteristics when negotiating, ad-
mittedly from an American perspective. However, understanding these profiles can
prove beneficial when developing negotiation strategies and tactics.23 A negotiator
must be aware, however, that there is a danger in stereotyping or oversimplifying char-
acteristics of different cultures. There is always substantial interpersonal variation to
consider within a single culture. However, there are certain tendencies within the cul-
ture of which to be aware.
The following discussion outlines very general observations and guidelines for sev-
eral popular business cultures (shown in alphabetical order) in which a supply man-
ager is likely to negotiate.
Brazil
Although Brazilians are receptive to discussing most subjects, home and family
are private, personal matters and are not appropriate topics for casual acquaintances.
Avoid conversations involving religion or politics. You may speak English or use an
interpreter unless you are conversant in Portuguese. They are generally more analyti-
cal than other Latin American cultures and will look at the particulars of each situa-
tion rather than referring to rules or laws for guidance. They like to bargain and
concede little by little. During negotiations, Brazilians tend to approach problems indi-
rectly, allowing their feelings, passion, and enthusiasm to influence their decisions. Al-
though the presentation of facts during a negotiation is acceptable, these facts usually
will not overrule underlying subjective feelings. The image of the macho male is still
prevalent, although to a lesser extent than in Mexico, for example, and Brazilian men
expect women to be subordinate. There are also large numbers of German and Japa-
nese descendents in Brazil, which may complicate the negotiation somewhat.
China
When negotiating with the Chinese, it is important to avoid slang or jargon and
to use short, simple sentences with pauses to ensure your words are understood ex-
actly. Never do anything that might embarrass your Chinese counterpart. A negotia-
tor should expect to make presentations to many groups at various organizational
levels. Because U.S. managers have a reputation for impatience, the Chinese will ex-
tend negotiations beyond the deadline to gain an advantage. Do not exaggerate your
ability to deliver on your promises. Your counterparts will hold you to your commit-
ments. They may even try to renegotiate previously agreed-upon issues on the last
day, and they will continue to try for a better deal even after signing the agreement.
However, you must be patient in your dealings with Chinese negotiators, who also
prefer to deal with groups, not individuals. Use an interpreter, even if your Chinese
counterpart speaks excellent English.
488 Part 4 Strategic Sourcing Process
France
Given their highly formal and reserved nature, a casual attitude during business
may alienate the French. Allow for sufficient time to conduct the negotiation, as deci-
sions are made slowly and deliberately. During negotiations, arguments are made
from a critical perspective with elegant wit and logic. The French enjoy engaging in
debate, striving for effect rather than detail and facts. You should consider using a lo-
cal agent to assist with the process. Although the French will accept information for
the purpose of debate and may even change their minds, a desire to maintain a
strong cultural heritage often prohibits them from accepting anything that is contrary
to their cultural norm. Because the French are strongly individualistic with a central-
ized authority structure, negotiating with the proper individual can lead to quick deci-
sions. Dress conservatively in well-made clothing.
Germany
Germans are not openly receptive to outside information. Their strict hierarchies
and separation of units often prohibit the sharing of information even across the
same organization. These hierarchies can also slow the making of business decisions.
Germans rarely engage in humor during business activities. During a negotiation, ob-
jective facts form the basis of truth rather than subjective feelings, and Germans are
highly analytical. Nowhere is punctuality more important than in Germany. Arriving
just two or three minutes late to a negotiation can be insulting. During negotiations,
Germans tend to be unemotional because of a high need for social and personal or-
der. German contracts are often more detailed and specific than in the United States,
and documentation and clarity are both very important.
India
English is widely spoken in India among businesspeople and government officials;
therefore, it is less necessary to obtain an interpreter or translate one’s business
cards. Be sensitive of the need to avoid personal questions and talking about religion,
poverty, or politics. It is important to speak with the highest-ranking person possible,
as decisions are made at the highest levels of the organization. Organizations in India
tend to be very hierarchical and autocratic. In addition, Indian bureaucracy is very
burdensome, while the pace of business tends to be leisurely. As a result, delays in
the negotiation are to be expected. Vegetarian diets are typical, and business negotia-
tions often occur in prominent hotels, not in restaurants. Titles are highly valued, so
always address your counterparts by their official titles.
Japan
Japanese culture is vastly different from American culture. Despite such differ-
ences, the extra effort needed to develop mutually satisfying negotiations can result
in an excellent relationship—Japanese firms are dependable and loyal suppliers. They
will treat their customers like valuable family members. The negotiation process with
Japanese companies is unique. For example, the Japanese are comfortable with ex-
tended silence, which is not true with Americans. As members of a collectivist soci-
ety, they are loyal team players concerned with the well-being of their country and
firm rather than themselves as individuals. Politeness is valued above all else. Instead
of saying “No,” the Japanese often say “Hai,” which does not indicate agreement
but merely that they hear or understand. The Japanese don’t like surprises, and
they typically reach decisions through a consensus process, which can often extend
Chapter 13 Negotiation 489
Mexico
As in Brazil, subjectivity is often the basis for decision making. Mexican negotia-
tors enjoy the process of bargaining and exchange. The pace of business activity will
be much slower than what Americans are used to. It is important to develop and
maintain close personal friendships with the right people. Individual dignity is impor-
tant, so be polite and avoid anything that might embarrass your Mexican counter-
part. The foreign negotiator should emphasize the benefits of a proposal to the
individual, his or her family, and pride. Financing is often an issue, so you need to
be creative in offering financial solutions. It is customary for the oldest person to
pick up the tab for a group meal, although it is typical to haggle over the check. It is
important to recognize a person’s title and position.
Russia
Russian negotiators are very patient, as compromise is considered a sign of weak-
ness. However, they tend to make very extreme initial demands and wait for the for-
eign negotiator to concede. Final offers are seldom final during the initial stages of
negotiation. Long-term interpersonal relationships are less important than in many
other cultures. They expect you to walk away from the table and threaten that you
cannot reach agreement with them. However, Russian negotiators often have limited
authority to make decisions at the table and will refer to absentee third-party deci-
sion makers. You need to be aware that some negotiations are designed only to gener-
ate information, not make a deal. End-of-negotiation demands are typical, even
though you may assume that the deal is complete. Because of the inconvertibility of
the ruble, financing may be difficult and require creative solutions such as counter-
trade or third-party financing.
Saudi Arabia
Saudi negotiators are considered astute and perceptive. They may stand very close
to you and place a hand on your shoulder. Concession making is ritualistic and
stems from extreme opening proposals. Decisions take time to materialize from exten-
sive deliberation. Deadlines are made to be ignored. As in many other cultures, devel-
oping and maintaining a strong interpersonal relationship with your counterpart is
important. Social life usually takes place during the day, as there is no nightlife as we
might expect at home. Saudi negotiators rely heavily on their religious beliefs to
make decisions. Also, plan your trip so as not to conflict with religious holidays.
“Yes” generally means “maybe.”
Vietnam
You will need to be patient and wait until your Vietnamese counterpart initiates
the business discussion. Answers to many questions will be broad and not very spe-
cific. A nodding head does not mean “yes,” merely that you are being heard or even
that they disagree with you. Patience is very important and is often used to wear
490 Part 4 Strategic Sourcing Process
down the foreign negotiator into making unreciprocated concessions. Use of a skilled
interpreter is vital as there are various nuances to the words chosen and gestures
made. Speak to the other party, not to the interpreter. Vietnamese typically negotiate
in a group setting, not individually.
CONCLUSION
An organization’s commercial success is partly due to the skill of its negotiators,
from both its buying and selling activities. Regardless of the industry, skilled negotia-
tors share some common traits. They realize that they are not born with the requisite
negotiation knowledge and skills. Therefore, they must study, practice, and train to be-
come more effective negotiators. Research shows that skilled negotiators also have
higher aspirations and pursue more aggressive goals than their less-effective counter-
parts, which they generally achieve. Finally, individuals who are skilled at negotiation
are destined to be among an organization’s most valued professionals.
Professional supply managers must become more effective negotiators by partici-
pating in training, simulations, and workshops that develop these critical negotiation
skills. The difference between a good sourcing agreement and an excellent one is of-
ten more a function of the level of preparation and interpersonal and relationship-
building skills of the negotiator or negotiating team.
KEY TERMS
bargaining, 472 negotiation, 462 settlement zone, 472
Boulwarism, 478 objective, 470 strategy, 473
fact, 472 plan, 470 tactics, 469
interest, 462 planning, 470 wants, 462
issues, 472 position, 462 win-lose negotiation, 481
needs, 462 power, 474 win-win negotiation, 481
DISCUSSION QUESTIONS
1. Why is negotiation such an important part of the purchasing process?
2. Discuss the resources necessary to support effective negotiation planning and
execution.
3. The parties to a sourcing negotiation can discuss many issues besides price. Select
five non-price issues over which a buyer and seller can reach agreement, and ex-
plain why each issue might be important to the buyer or seller.
4. Will electronic purchasing through the Internet increase or decrease the need for
negotiation between buyers and sellers? Why?
5. Develop a profile of a skilled or effective negotiator.
6. Contrast a win-win negotiator with a win-lose negotiator.
7. Discuss different strengths and weaknesses that a buyer and seller might bring to
the negotiating table.
8. What information should a buyer gather about a supplier before entering a
negotiation?
9. What are likely to be the most important sources of power in a buyer-seller
negotiation?
10. Why are concessions important during a sourcing negotiation? How do the par-
ties to a negotiation demonstrate their willingness to compromise?
Chapter 13 Negotiation 493
11. What is the risk of relying too heavily on the typical profiles of international nego-
tiators? Is there a benefit to using these profiles?
12. Why does a negotiator who practices Boulwarism risk sending a negotiation into
deadlock?
13. Give examples of tactics practiced by a buyer or seller that might be considered
unethical.
14. Discuss the concept of BATNA and explain how a negotiator can effectively use
it to plan a negotiation.
15. Describe the technique of using Triangle Talk to plan a sourcing negotiation.
ADDITIONAL READINGS
Acuff, R. L. (1997), How to Negotiate Anything with Anyone Anywhere around the World, New
York: AMACOM.
Anderson, K. (1994), Getting What You Want: How to Reach Agreement and Resolve Conflict Every
Time, New York: Plume.
Bazerman, M. H., and Neale, M. A. (1992), Negotiating Rationally, New York: Free Press.
Burr, A. M. (2001), “Ethics in Negotiation: Does Getting to Yes Require Candor?” Dispute Resolu-
tion Journal, 56(2), 8–15.
Cialdini, R. B. (2001), Influence: Science and Practice (4th ed.), Boston: Allyn and Bacon.
Corvette, B. A. B. (2007), Conflict Management: A Practical Guide to Developing Negotiation Strate-
gies, Upper Saddle River, NJ: Pearson Prentice Hall.
Fells, R. (1989), “Managing Deadlocks in Negotiation,” Management Decision, 27(4), 135–141.
Fisher, R., and Ury, W., with Bruce Patton (Ed.) (1991), Getting to Yes: Negotiating Agreement with-
out Giving In, New York: Penguin Books.
Fogg, R. W. (1985), “Dealing with Conflict: A Repertoire of Creative, Peaceful Approaches,” Journal
of Conflict Resolution, 29(2), 330–358.
Gelfand, M. J., and Brett, J. M. (Eds.) (2004), The Handbook of Negotiation and Culture, Palo Alto,
CA: Stanford University Press.
Ghauri, P. N., and Usunier, J.-C. (Eds.) (1996), International Business Negotiations, Tarrytown, NY:
Pergamon.
Hendon, D. W., Hendon, R. A., and Herbig, P. (1998), “Negotiating across Cultures,” Security Man-
agement, 42(11), 25–28.
Hunt, P. (2000), “Making a Good Deal,” Supply Management, October 5, pp. 37–39.
Kublin, M. (1995), International Negotiation: A Primer for American Business Professionals, New
York: International Business Press.
Lewicki, R. J., Saunders, D. M., and Barry, B. (2006), Negotiation (5th ed.), New York: McGraw-
Hill Irwin.
Lewicki, R. J., Saunders, D. M., Minton, J. W., and Barry, B. (2003), Negotiation: Readings,
Exercises, and Cases (4th ed.), New York: McGraw-Hill Irwin.
Lytle, A. L., Brett, J. M., and Shapiro, D. L. (1999), “The Strategic Use of Interests, Rights, and
Power to Resolve Disputes,” Negotiation Journal, 15(1), 31–51.
McCormack, M. H. (1995), On Negotiating, Los Angeles: Dove Books.
McRae, B. (1998), Negotiating and Influencing Skills: The Art of Creating and Claiming Value, Thou-
sand Oaks, CA: Sage.
Miller, P., and Kelle, P. (1998), “Quantitative Support for Buyer-Supplier Negotiation in Just-in-
Time Purchasing,” International Journal of Purchasing and Materials Management, 34(2), 25–31.
Mintu-Wimsatt, A. (2002), “Personality and Negotiation Style: The Moderating Effects of Cultural
Content,” Thunderbird International Business Review, 44(6), 729–748.
Moran, R. T. (1991), Dynamics of Successful International Negotiations, Houston: Gulf Publishing.
494 Part 4 Strategic Sourcing Process
Morrison, T., Conaway, W. A., and Borden, G. A. (1994), Kiss, Bow, or Shake Hands: How to Do
Business in Sixty Countries, Holbrooke, MA: Adams Media Corporation.
Mortensen, K. W. (2004), Maximum Influence: The 12 Universal Laws of Power Persuasion, New
York: AMACOM.
Shell, G. R. (2006), Bargaining for Advantage: Negotiation Strategies for Reasonable People
(2nd ed.), New York: Penguin Books.
Thompson, L. (2005), The Mind and Heart of the Negotiator (3rd ed.), Upper Saddle River, NJ:
Pearson.
Watkins, M. (2002), Breakthrough Business Negotiations: A Toolbox for Managers, San Francisco:
Jossey-Bass.
ENDNOTES
1. Shell, G. R. (2006), Bargaining for Advantage: Negotiation Strategies for Reasonable People
(2nd ed.), New York: Penguin Books, p. 6.
2. Acuff, R. L. (1997), How to Negotiate Anything with Anyone Anywhere Around the World, New
York: AMACOM, p. 18.
3. Thompson, L. (2005), The Mind and Heart of the Negotiator (3rd ed.), Upper Saddle River,
NJ: Pearson, p. 2.
5. Fisher, R., and Ury, W., with Bruce Patton (Ed.) (1991), Getting to Yes: Negotiating Agreement
without Giving In, New York: Penguin Books, p. 100.
6. Thompson, p. 46.
8. Anderson, K. (1994), Getting What You Want: How to Reach Agreement and Resolve Conflict
Every Time, New York: Plume, pp. 10–15.
9. Waxer, C. (2001), “E-Negotiations Are In, Price-Only E-Auctions Are Out,” iSource, June,
pp. 73–76.
10. Lewicki, R. J., Saunders, D. M., and Barry, B. (2006), Negotiation (5th ed.), New York:
McGraw-Hill Irwin, p. 113.
13. Thompson, citing original work by French and Raven, The Bases of Social Power, in Studies in
Social Power, Ann Arbor: University of Michigan Press, 1959.
15. Lewicki et al., p. 51, citing original work by D. W. Hendon, M. H. Roy, and Z. U. Ahmed,
“Negotiation Concession Patterns: A Multicountry, Multiperiod Study,” American Business
Review, 2003, 21, 75–83.
17. Cialdini, R. B. (2001), Influence: Science and Practice (4th ed.), Boston: Allyn and Bacon.
20. Friedman, T. L. (2006), The World Is Flat: A Brief History of the Twenty-First Century, Release
2.0, New York: Farrar, Straus and Giroux, pp. 515–520.
21. Martin, D., Mayfield, J., Mayfield, M., and Herbig, P. (2003), “International Negotiations: An
Entirely Different Animal,” in R. J. Lewicki, D. M. Saunders, J. W. Minton, and B. Barry (Eds.),
Negotiation: Readings, Exercises, and Cases (4th ed.), New York: McGraw-Hill Irwin, pp. 340–
343.
22. Min, H., and Galle, W. (1993), “International Negotiation Strategies of U.S. Purchasing
Professionals,” International Journal of Purchasing and Materials Management, 29(3), 46.
23. Morrison, T., Conaway, W. A., and Borden, G. A. (1994), Kiss, Bow, or Shake Hands: How to
Do Business in Sixty Countries, Holbrooke, MA: Adams Media Corporation; and Acuff.
25. Atkinson, W. (2007), “Texas Instruments Trains Buyers on Global Negotiating Skills,”
Purchasing, August 16, 16–17.