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NEGOTIATION IN PURCHASING MGT Contents


Introduction
Key terms used in negotiation
Objectives of Negotiation
Content of Negotiation
Negotiation process
Approaches to Negotiation
Negotiation Tactics/Ploys
Qualities of a good negotiator
Bonny Bagenda SEM II 2016/17

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Introduction
QUOTE Whatever business you are in, whether you are an
entrepreneur or a manager in a large company, you
In business, you don't get are negotiating all the time.
Think about your daily responsibilities: How much of
what you deserve, you get what really matters involves negotiating? If you are
like most other business people, you are constantly
what you negotiate negotiating for support and resources internally even
(Chester L. Karrass) as you deal with external constituencies such as
customers, suppliers, investors, banks, and
government agencies.
Negotiation skills are vital to your success.

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Definition of Negotiation
In a general context negotiation is a bargaining
process between two or more parties, each
with its own viewpoints and objectives
seeking to reach a mutually satisfactory
agreement on or settlement of a matter of
common concern.

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Definition of Negotiation Terms Used in Negotiation


The process whereby two or more BATNA (best alternative to a
parties decide what each will give and negotiated agreement)
take in an exchange between them. Positions
Rubin and Brown (1975)
Interests
In a purchasing context it is the process
of arriving at an agreement of the Needs
conditions of a contract through Wants
discussion between the buyer and seller
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BATNA BATNA
The acronym BATNA was coined by Fisher and The BATNA can be identified in any
Ury to represent your main source of power in
negotiation. BATNA stands for Best Alternative negotiation situation by asking the
To a Negotiated Agreement. question what will we do if this
It is what you are going to do if you do not negotiation is not successful
reach an agreement. All settlements must be judged in light of
Your BATNA is your best option outside the all other viable alternatives
current negotiation. If you are negotiating a
deal, it is an alternative buyer or seller. The stronger the BATNA, the greater the
range of alternative courses of action.

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BATNA Positions
The stronger the BATNA, the greater the
Positions are what negotiators say they
ability to walk away from an want. Your position is what you ask for in
unsatisfactory negotiation. a negotiation.
Need to ensure that a negotiators A negotiators opening offer
BATNA is never revealed to the other Represents the optimistic or target value
party of the issues being negotiated
The stated demand at the negotiation
table

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Interests Needs vs. Wants


An interest is why negotiators want what they want.
The unspoken motivation or reason that underlies Needs those negotiated outcomes that
any given position
the negotiator must have in order to
Unlikely to be expressly stated or acknowledged
during the negotiation
reach a successful conclusion
Play detective and try to discern the other partys
interests through a series of open-ended, probing Wants those negotiated outcomes that
questions
a negotiator would like to have
Always focus on the other partys underlying
interests, not his/her stated positions

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Why Negotiate? Why Negotiate?


Some of the common reasons for negotiating in
There are many valid reasons for negotiating at purchasing are;
different stages of the purchase . To clarify issues between the parties
By far the most important of these is that a To develop relationship and deepen understanding
negotiated agreement normally results in between the parties
stronger ownership by the parties than when To improve on the current offer (price conditions,
service levels)
the agreements are forced. As a result a
Where unusual or complex circumstances exist and
negotiated agreement is more likely to be these need to be explored by the parties
successful and enduring in operation When substantial risks are involved in the purchase
and parties look to reduce or transfer the risk
exposure
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Why Negotiate?
When there are concerns over supplier performance
When variations to the contract are contemplated
Total contract value or volume is large
Purchase involves complex technical requirements,
perhaps even product and process requirements and
specification still evolving
Purchase involves capital-intensive plant and
equipment

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Objectives of Negotiation Objectives of Negotiation


(a) Certainty (b)The best deal
The aim of negotiation is firstly to Seeking clarity does not conflict with
achieve certainty, to record what is the view that negotiations should
being supplied, when, in what achieve the best deal, it merely points
quantities and to what standard, and out that both parties to a negotiation
the consequences of delay or failure to have to understand what is that they
meet agreed requirements. have agreed to.

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Objectives of Negotiation Objectives of Negotiation


(c) Creation of long term relationships
between the parties Other objectives include
For example partnering in industries like obtaining the best possible quality,
aerospace and IT is essential, due to the best price and
complexity of the products and related timely delivery
projects.
Such negotiations will focus on the long
aspect of the negotiation so as to create a
permanent settlement to the conflict in place.

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What can be negotiated/Content of What can be negotiated/Content


Negotiation of Negotiation
Negotiating the right deal with your suppliers Delivery schedules and lead times
doesn't necessarily mean getting what you want Expected product and service quality levels
at the cheapest possible price. Performance metrics
You may want to negotiate other factors such as Technological support needed
delivery times, payment terms or the quality of
the goods. Contract volumes
Most business owners would view a good deal as Special packaging
one that meets all their requirements. But there Loss and damage liability
are many other factors to consider, such as Payment terms and currency issues
whether you want to do business with a
particular supplier again.
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What can be negotiated/Content of


Negotiation Stages in the Negotiation Process
Payment schedules
Transportation mode selection
Carrier selection
Warranties and replacements
Penalty clauses
Performance incentives
Contract length
Contract renewal mechanism
Conflict resolution mechanism

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Pre-negotiation QUOTE
Effective preparation is a key aspect of
negotiation; this preparation should It Wasnt Raining When Noah
include research about the company you Built the Ark:
are negotiating with and will include Negotiation Planning Builds
factors such as their market share and Negotiation Success
penetration, financial health and stability, A good negotiator plans a
corporate structure and goals, stock strategic approach but prepares
pricing etc. for the unexpected.
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Pre-Negotiation Phase Pre-Negotiation Phase


Negotiation always takes place within a context : some Key aspects in Preparation for Negotiation
of the important issues to consider in understanding
the context of negotiation include: Setting the Range - How far parties in a
What is the nature of the purchase you are making in
terms of its level of risk, the level of expenditure and negotiation process are willing concede
the complexity of the good or service that is being before they disagree or exit the
purchased?
What is the nature of the supply market - fully negotiation. A skilled negotiator will
competitive, dominated by a few large suppliers etc.
consider a wider range for negotiation
Is this negotiation a one-off or will you need to
maintenance a long-term relationship with this that is twice as much for each issue in
supplier?
Have you ever negotiated with this supplier before?
order to exhaust the available options
What is their typical approach to doing business? and come up with a better deal
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Pre-Negotiation Phase Pre-Negotiation Phase


Key aspects in Preparation for Negotiation Key aspects in Preparation for Negotiation
Differentiating between facts and Perception of strength and weaknesses of
assumptions both parties
Preparation entails gathering and assessing Forming a negotiation team deciding who
as many facts as possible. But time and is to negotiate
resources often make full research
unrealistically cumbersome or impossible. Selecting the negotiation venue
In every negotiation one must assume
certain things about the other person in
order to make progress.
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Pre-Negotiation Phase Actual Negotiation/Discussion Stage


Collecting information (the current Bargaining - at this point, the parties
agreement, delivery, contractual, express the specific terms on which they
financial, specification, personal will settle by looking or stating their entry
information among others) and exit points (range).
Its at this stage that the issues of offer and
Setting objectives
acceptance are handled.
Deciding on Strategy and Tactics
However, failure to agree will see the
Dummy run (testing of the strategies) so parties back to the drawing board (pre-
as to come up with BATNA negotiation phase).
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Actual Negotiation/Discussion Stage Actual Negotiation/Discussion Stage


Avoid destructive debate such as attacking or
Considerations blaming the other party.
Avoiding arguments and instead proposals Suggestion of an agenda if there is none.
should be made to overcome them i.e., Establishment of a rapport with the other side
suggest solutions to settle the arguments. and then watch how they will want to proceed
with the negotiation.
Proper handling of debates to avoid deadlock
deals.

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Rules for bargaining Actual Negotiation/Discussion Stage


Do not indicate that your are prepared to move Deadlocked negotiation
quickly from your position This occurs where parties see no prospects of further
Move slowly making the other party work for every movement or concessions. This could be because;
concession they get Views/positions of the parties involves are
Avoid putting markers down a marker is usually a irreconcilable
figure- price, delivery period, a number of days Personality clashes between the negotiators
which is your ideal position in a negotiation (What
Because a party to the negotiations is taken beyond
figure do u have in mind)
his authority and so can move no further he needs
Get a return for every concession you make to consult

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Actual Negotiation/Discussion Stage How to Overcome Deadlocks

Some techniques to overcome deadlocks Considering the consequences of


include; non-agreement for both parties
Taking a break for each party to refocus. being represented.
Use of humour to lighten up the
atmosphere. Obtaining third party assistance
Breaking down an issue into sub-issues
for easier understanding.

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Post Negotiation Post Negotiation


This is the stage in which parties implement
Implementing the agreement by setting up
was agreed upon during actual negotiation
joint implementation teams and performing
phase. It involves;
obligations.
Producing a report on what was agreed upon .
Seeking commitment to making the
Establishing procedures to monitor the
agreement work.
implementation process and corrective
Preparing contracts in line with the final measures where the process differs from the
agreement of the parties. original plan

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TYPES/APPROACHES TO
NEGOTIATION
TYPES/APPROACHES TO There are four different approaches to negotiation and
the outcome of the negotiation depends on the
NEGOTIATION approach.
AVOIDANCE
COMPETITIVE
COLLABORATIVE
Bonny Bagenda ACCOMMODATIVE

SEM II 2016/2017

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AVOIDANCE APPROACH
If one is able to meet ones needs without
negotiating at all, it may make sense to use an
avoidance strategy.
Avoiding is best when:
The issues are not important.
There are more pressing issues to tackle.
There is no chance of achieving your
objectives.
The potential aggravation of negotiating
outweighs the benefits.
You need time to collect more information.
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ACCOMMODATIVE APPROACH Accommodative approach


Win-lose strategy (I lose, you win) Accommodative Strategy is often used;
The negotiator wants to let the other When the primary goal of the
win, keep the other happy, or not to negotiation is to build or strengthen the
relationship and the negotiator is willing
endanger the relationship by pushing
to sacrifice the outcome.
hard to
If the negotiator expects the relationship
achieve some goal on the to extend past a single negotiation
substantive issues episode.
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Collaborative/integrative/partnership
COLLABORATIVE APPROACH
approach
Integrative Bargaining This is a win-win negotiation approach where
Win-Win Bargaining (I win, you win) there is equal (or balanced) value to both
parties based on their respective evaluations
Is where each party gains without a corresponding
of the variables that were traded.
loss
for the other party.
This type of negotiation usually works when
you have an ongoing relationship with the
counter party.

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COLLABORATIVE APPROACH COLLABORATIVE APPROACH

(i) There are a sufficient amount of With this type of negotiation,


everyone gets something they want.
resources to be divided and both sides can
You are not out to only help yourself,
win but to also help your partner.
(ii) The dominant concern here is to
maximize joint outcomes.
This kind of negotiation helps build
(iii)The dominant strategies include lasting relationships and improve
cooperation, sharing information, and business for everyone.
mutual problem-solving.
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DISTRIBUTIVE/ADVERSARIAL APPROACH Distributive/adversarial approach

This is a win-lose negotiation approach Each party in this negotiation


where one party is considered to have
wants to get as much as he can
gained at the expense of the other.
for his side. For example, if you
With this approach, the assumption is
are buying something, you want
that every time one party wins, the other
loses and this is why the other party is
to pay the lowest price possible
always referred to as an adversary. while the seller wants to get the
highest price possible.
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Distributive Approach Distributive Approach


(i) One side wins and one side loses.
Negotiate in a hurry (ii) There are fixed resources to be divided so
Use when you wont negotiate with these that the more one gets, the less the other gets.
people again (iii) One persons interests oppose the others.
Get the best deal without regard to the other (iv) The dominant concern in this type of
sides win Negotiating is usually to maximize ones own
interests.
(v) The dominant strategies in this mode include
manipulation, forcing and withholding
information.
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Distributive versus Distributive versus


Integrative Negotiation Integrative Negotiation
Aspect Distributive Collaborative

Basic Goal is to win as much as Goal is to achieve mutually


assumption possible agreeable solution

Recognized Maximize tangible resource Maximize returns for


patterns of gains organization
negotiation Makes high opening demands Focus on common interests
Uses threats, confrontation Uses non-confrontational
and argumentation debating techniques

Key Does not consider Considers


behavioural needs/interest/attitudes of needs/interests/attitudes of
elements other side. other side

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Negotiation Tactics/Ploys Negotiation Tactics/Ploys


Negotiation tactics are the detailed methods Mike Tyson once said "Everybody's got a
employed by negotiators to gain an advantage plan--until he gets hit.
over other parties.
In negotiating a deal, there is need for a
A ploy is a manoeuvre in a negotiation process
aimed at achieving a particular result from the
plan that survives the stress of the first
other party. encounter and continues to add value
It is during the actual negotiation process that throughout the negotiation process.
parties will from time to time be faced with one There is need to plan both defensively,
side using a ploy or tactic to try and gain against common ploys, and offensively,
advantage over the other to push our agenda forward.
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Negotiation Tactics/Ploys
Negotiation Tactics/Ploys
Silence
Building block technique
When you have asked a question wait for an
answer. Silence can put a lot of pressure on The buyers will progressively ask for a better
the other party offer step by step e.g. for additional quantities
Never respond too quickly to an offer. during scarcity and an increased range of
Pausing or even suspending negotiations products to be supplied.
can convey that youre not desperate to
close the deal and that you have other For example, the buyer may make such a
options. request, you have charged me a good price
Silence can force a surprising amount of for 1 year contract but what if we extended it
pressure on the other party as well for 3 years.
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Negotiation Tactics/Ploys Negotiation Tactics/Ploys


Recess - When you feel that the
negotiation has reached a standstill or Onus transfer - This tactic is used
may be the other party has offered to obtain empathy.
something you were not expecting, it is
Fore example, if you were in my
advisable to call a recess.
shoes what would you do.
During the recess, have a short meeting
with the team to decide how to move the
negotiation forward.

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Negotiation Tactics/Ploys Negotiation Tactics/Ploys


One more thing Deadlines - Suppliers tend to make
This tactic is used to get the supplier comments such as you must sign the
make a further move when the deal is at contract by the end of the month to get
its conclusion. the 20% discount.
Example
For example, one may make such a I must have your answer before we leave today.
comment well I think we are almost I am talking to Steve later. He will want to know
there, there is just one more thing we what we have agreed.
need to discuss. This may be on delivery, The product will be released at the end of the
terms of payments that have not been week. If you can't deliver by Thursday, it will be
too late.
agreed upon.
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Negotiation Tactics/Ploys e.g


A buyer had agreed to purchase our client at
Bad news/Good news an agreed price, but then learned of a patent
Here, a negotiator outlines a that our client was arguably infringing.
doomsday scenario under which The buyer opened negotiations by describing
a worst case scenario in which the patent
your entire deal falls apart due to owner gets a temporary restraining order and
one major problem... and then puts our client out of business.
proceeds to give you the good news Clearly, he argued, it would be in our client's
interest to cut their price by 30% to
compromise in which you are asked compensate for the patent risk.
to give away substantial concessions.
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Negotiation Tactics/Ploys
Higher authority (I need to talk to my people)
Customer:" I'm not happy with the repair fee.
It is far too high for the amount of work done.
Many people think it shows weakness to say they I refuse to pay this much.
cannot make the decision on the spot and Engineer:" I just work here. If you don't pay,
sometimes agree to deals they later regret. you cannot have your machine. I have no
Master negotiators know that they must always authority to change the costs."
have higher authority in their armory. A neat deferral to higher authority. What can
you do?
It is powerful to place the blame on someone else
Customer: "Who can?"
for not being able to agree to a request, because
The only way to counter this tactical ploy is to
it means you can stay in rapport with the other ensure that you probe for all decision makers
side. It means that they may alert you to other during your information gathering phase.
issues that you have not been aware of.
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Owner: "I am sorry, but I don't want to waste


Negotiation Tactics/Ploys more time on this. I have to go. I just don't think a
Good guy Bad guy (good cop / bad meaningful offer is at hand. See you."
cop) Sales person: "I must apologise. He is a difficult
man. If it were my wish I would like to see you get
With two people in a meeting, one the house. I'll see what I can do."
person is nice, the other person is Buyer: "Do you think you can convince him to do
the deal?"
aggressive.
Difficult and dangerous. The buyer may end up
asking the sales person to negotiate on his behalf
with the owner. The best way to counter is to
simply tell the other party that you know what
they are doing.
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Negotiation Tactics/Ploys
Client: "How much did you say !! $ 2950!
Flinching on the price That's really expensive."
Flinching is jargon in negotiating, for acting The salesperson frequently follows this
surprised when the other side makes an offer. up with a concession.
It comes in all formats. From gentle your
Sales person: "Of course, the price also
joking to the more aggressive outrage that
includes delivery and installation."
some people seem to enjoy.
When someone says, it costs X, you might
Client: "That's still a great deal of
simply squint and draw breath before asking,
money!"
How much? in an enquiring, surprised tone Sales person: "We might be able to to
of voice. include some extra software."
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Negotiation Tactics/Ploys Negotiation Tactics/Ploys


Broken record Nibbling
This tactic is linked to the Just when you think you have got agreement,
conditioning process where it is the other side comes back and ask for another
assumed that when you insist or concession.
keep requesting the same thing over You may have agreed the price and they then
some time, eventually the other ask for another discount. You may have
agreed the delivery date and then they ask for
party begins to believe it e.g. offering it earlier. You may have agreed the payment
products on credit. terms and then they ask for the money earlier
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Negotiation Tactics/Ploys
Sales person: "So with all the features the Surprise !
price is Ugx 10,000,000?" The vendor calls you up and says theyre in
Customer: "That's very good. It's better than I your neighbourhood and can meet now or just
thought." shows up at the reception desk. The goal is to
Sales person: "Naturally, we need to add catch you off-guard and unprepared so they
delivery at Ugx 500,000 and an installation can soften you up for another ploy down the
fee of Ugx1,000,000." road.

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Tactics/Ploys for collaborative Example


Negotiation Two business competitors on an industry
standards committee agree to settle
Expanding the pie differences and promote the standard as this
will help increase the number of total
Here resources are scarce and customers, thereby giving each a greater
parties try to expand the existing market value.
A husband and wife who are negotiating
ones e.g. financial and human about holidays and the ability to take time off
resources, technical resources like work reframe the situation as 'getting away
together' and end up with a decision that
providing equipment to suppliers. when one goes away on business the other
will go along too.
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Tactics/Ploys for collaborative Tactics/Ploys for collaborative


Negotiation Negotiation
Logrolling
Non-specific compensation,
Here several issues are at stake with
Here one party is repaid by the other different priorities, each party concedes on
in some unrelated means in return low priorities in exchange for concession
for compromise eg bulk buying in from the other party on issues of higher
priority.
case of suppliers prices being low or
Eg price, quality between the supplier and
using long term contracts to thank the buyer respectively and give up on
the supplier. delivery, quantity, installation etc.
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Tactics/Ploys for collaborative Qualities of a Good Negotiator


Negotiation Must be prepared and should have done research.
Cost cutting, in return for concessions one You know your goals and have set limits to the negotiation.
You listen carefully and take notes so that there are no
partys costs are reduced or eliminated eg if misunderstandings in the communication process.
the buyer wants low prices he has to Is flexible in dealing with issues as they arise
You close the deal and dont allow the dealer to re-open
collaborate with the supplier and formulate negotiations.
ways of how to reduce costs thus leading to Ability to deal with pressure
low prices. Understands people well
Good observer
Costs may be fuel costs, raw material costs, Ability to handle confrontation
inventory costs, production cost and seek Has sound business judgment
Timely-can handle time effectively
ways for reducing these costs. Creative thinking

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