Вы находитесь на странице: 1из 8
Negotiations are so common in business that managers often fail to recognize the elements of

Negotiations are so common in business that managers often fail to recognize the elements of negotiations in their proce- sses of interaction. The development of the necessary negotiation skills among managers is also neglected. In the USA and other advanced countries, academics actively study negotiations as an art and a science. Managers take training pro- grammes to improve their negotiating skills. In this article, Bhupindar Singh, based on his study and extensive experi- ence in both the public and private sectors, provides a blueprint for effective trade negotiations. He illustrates the con- cepts and tactics from actual cases.

Bhupindar Singh is Executive Director, Minerals and Metals Trading Corporation of India Limited, New Delhi.

Negotiations are common in life, be it business, trade, or personal matters, agreements and under- standings are reached daily. Often such under- standings are not explicit. In business, explicit negotations are held when trade, personnel, or project finalization mat- ters are involved. This article restricts its scope to trade negotiations. The objective is to reach an ag- reement satisfactory to both the parties, ironing out all the differences. One of the objectives of negotiations should be to build a relationship which will endure over a long period of time, with business coming as a "fall out" of the relationship built.

If you want to deal effectively with people, convince them, persuade them, your approach to people should be based on their needs. And that is what negotiations are all about.

Negotiations cannot be held when terms and conditions are controlled by regulations. We can- not negotiate, for example, in a ration shop, while buying a railway ticket, when paying statutory levies, or while fulfilling the requirements of a wage act. But in competitive markets, where vari- ous alternatives are available, negotiations become the most important aspect of contracting and finalizing agreements. Both parties endeavour to obtain the best possible terms and conditions through negotiations.

Because negotations take place all the time, im- plicitly or explicitly, the skill required for conduct- ing them is not studied and cultivated adequately. The skill involves both the use of data and intui- tion. Personal equations among the negotiating teams also play a very important role. Negotiations lend themselves to intricacies of a game of chess, but unlike chess, negotiations are successful when both parties win. They can be successful when their nature is understood and planning and implemen- tation of strategy and tactics are comprehended.

Negotiation situation is one in which:

• two or more parties have to make a decision about their interdependent goals or objectivies;

• the parties are committed to peaceful means for dissolving the dispute, and

• there is no clear or established method or pro cedure for making a decision.

In other words, are negotiations a dynamic process by which two parties, each with its own objectives, confer to reach a mutually satisfying agreement on

a matter of common iterest.

The process of negotiations takes place within

a defined time scale which imposes limitations on

the objectives of the negotiations. This time scale can include the next occasion when the parties contemplate doing business. In any negotiations, since the time scale is fixed, it is essential to main- tain equilibrium and get increased productivity per unit of time. It should be ensured that the de- sired objectives are reached within time available.

• It must be noted that each party will have its own objective which it must try to achieve.

• The parties must be motivated towards reach ing an agreement which is recognized by both as satisfying their essential needs. Imposition of the stronger party's will on the weaker party, regardless of the latter's interest, cannot be deemed as negotiations.

• The end-product of the negotiations is a matter of common interest.

Types of Negotiations

Negotiations is bargaining which could be of two types, distributive and integrative bargaining.

Distributive Bargaining

It is a process in which two parties bargain over the allocation of a fixed resource between them. Their interests conflict since the gain to one is a loss to the other. Bargaining between an employer and a union over a simple pay increase with no productivity strings attached or between a buyer and a seller for the price of an article are examples

14

of this type.

Integrative Bargaining

When the parties find a solution through a joint exer- cise to a problem which benefits both, integrative bargaining takes place. The negotiations of the Met- als and Minerals Trading Corporation (MMTC) for the sale of iron ore to Japan in 1986 is an example of integrative bargaining. The market for iron ore is a highly competitive market. Steel production in Japan was expected to be lower in 1986 (96 million tonnes) than it was in 1985 (105 million tonnes). The European market had already applied a cut on the prices for procuring ore from Australia and Brazil, the major producers and suppliers of iron ore. Thus, before MMTC began negotiations with the Japanese steel mills, the downward price trend was es- tablished. MMTC, through its negotiations, did ag- ree to reduce the price but only against an increased share of the market when consumption was falling. Both parties gained: Japan, by reduction in the prices, and MMTC, by getting a larger market share. The salient features of these negotiations are given later while discussing negotiating strategies.

Progressive Commitments

Negotiations are an exercise in progressive commit- ment. This is the most interesting part of the negoti- ations. With each move, both parties leave their ini- tial positions. They cannot retrace their steps. Each new position becomes the starting point for the next move. With every move, the area remaining for further movement is reduced; with every step ta- ken, the next step becomes tricky and delicate. As negotiations advance, more caution is needed. Monitoring and review, therefore, play an im- portant part. Each move of the other team has to be thoroughly assessed. Only rarely will a negotiator be able to increase his area of movement while withdrawing from a position he had previously conceded. A step once taken, can be retraced only at the cost of personal and organizational credibi- lity. Each move, therefore, should be made after de- termining the degree to which the company is wil- ling to commit itself.

Planning Negotiations

Success in negotiations depends primarily on the

Vikalpa

skill and care with which the negotiating plan has been prepared. Tactics at the negotiating table help, but they too need to be planned in advance. Planning should commence before making an offer or responding to it. Planning has to continue all the way through the negotiations till a final agree- ment is reached and recorded.

There are three stages in this activity: plan- ning, action (which are successive stages of a single process), and monitoring and review. (Figure 1)

of a single process), and monitoring and review. (Figure 1) In the course of a single

In the course of a single negotiation, the activity cycle will be repeated many times. The review and planning stages may be subjects for formal review meetings held away from the negotiating arena, or there can be quick review meetings, each lasting a few minutes during the adjournments of the negotiation sessions. Whatever the form, the purpose of such meetings must be to ensure that

The timing and extent of movement are in accordance with the degree to which the management of the company is willing to be committed.

At all stages, the moves have been fully pre- pared for in advance, the facts established, and the best strategy selected.

If these cannot be ensured, then the negotiators should not continue negotiations, for if they do, they will be driven into making un- scheduled concessions or creating unwanted prece- dents. A note of caution is needed here. Adjourn- ment during the negotiations should be utilized for discussing and chalking out a strategy for the immediate future. Frequent adjournments may give rise to a feeling that the team is not fully pre- pared or cohesive. The reactions of the other party on such occasions are important indicators for further movement.

Vol. 12. No. I, January-March 1987

Selection of Objectives

The starting point for the preparation of any negotiating plan should be an explicit statement of the objectives. The objectives should be specific in terms of price, quantity, payment terms, shipment schedule, port of arrival and shipment, etc. Select- ing such objectives calls for detailed and careful analysis. For instance, when MMTC had to negotiate for the procurement of copper canalized for import through MMTC, before commencing negotiations, it had to answer the following questions:

• What does it want: a long-term or short-term contract? Does it want producer-trader mix?

• What should be the basis for pricing? Which prices should be used: those for the month of shipment, the previous month, or the follow ing month?

• What should be the schedule of arrivals in the country? At which ports should the goods arrive?

• What is the quantity to be covered by the con tract? (This had to be decided keeping in view the government guidelines, indigenous pro duction, inventories, anticipated demand, and replenishment imports.)

• What should be the preferred payment terms:

cash against delivery, letter of credit, or credit terms?

The objectives decided should be analysed with reference to the factors that will affect their achievement such as the strength of its own negotiating position and that of its competitors and constraints imposed by the government policies or inter-governmental relations and under- standing.

Constraints arising out of governmental policies often reduce negotiating strength, for in- stance, when negotiating for import from rupee payment areas. When a country in the rupee pay- ment area is offering the material, maximum ef- forts have to be made to procure the material from it to save free foreign exchange even if a margi- nally higher price has to be paid because these countries are to be accorded priority as per the government policy. The objective to buy at the most competitive price loses some of its value. Overall interest of the country becomes paramount.

15

Thus, establishing clear objectives calls for a proper definition of one's own needs and the inter- national market trends. Once clear objectives are established, a negotiation strategy can be formulated.

Choice of Negotiating Strategy

The choice of strategy will depend on the business environment at the time of negotiations, objectives to be achieved, the nature of the business to be transacted, and whether negotiations are for purchase or sale. In-the formulation of the strategy information is required on:

• the product,

• competitor's activities; their strengths and weaknesses,

• currency fluctuations,

• future commodity trends,

for the

• terminal

whether

a commodity,

market

exists

• activities of the buyer (in case of exports)~and seller (in case of imports) and trends in their growth,

• buying/selling styles of the buyer/seller,

• domestic production trends,

• demand pattern and future outlook of the con suming industry, and

• government policy on duties, substitute pro ducts, rail freights and port charges and de velopment of infrastructure facilities like rail ways, ports, and mines.

The nature of database and market informa- tion required would depend on the nature of the subject being negotiated. For instance, the data components for negotiating the purchase or instal- lation of a plant would be different from those for a turnkey project. In import and export of com- modities the strategy will depend on whether the contract is for long term, short term, or if it is a spot transaction.

In addition, the strategy chosen will also de- pend upon the relative state of the negotiating party, whether it is dominant, subordinate, or un- certain, in relation to the other. If one party domi- nates, the other would be subordinated; if one party is uncertain, the other party will also be

16

uncertain.

The strategies could be divided broadly into two categories: Quick Kill and Hold Back.

Quick Kill is the strategy of selecting and making an offer which the recipient will accept without further negotiations (or of accepting an offer without bargaining). For instance, if a party is dominant, this is the correct strategy to adopt.

Hold Back is the strategy of selecting an offer which is sufficiently attractive to the recipient for him not to reject it out of hand, but at the same time, it contains an adequate margin for negotiations.

A careful analysis of objectives and strategies -may enable the parties to convert a distributive bargaining situation into integrative bargaining as the case below illustrates.

Export of Iron Ore to Japan

International iron ore trade is around 315 million tonnes. Japan is the largest importer, accounting for about 125 million tonnes, closely followed by western Europe. India is one of the traditional sup- pliers of iron ore to Japanese steel mills.

Iron ore is the fifth largest foreign exchange earner for India (about Rs 480 crore in 1985-86). India has one of the largest resources of iron ore in the world, amounting to approximately 17.5 bil- lion tonnes. Domestic consumption is 16 million tonnes and is expected to increase to about 30 mil- lion tonnes by the year 2000. Taking into account the present plans for domestic consumption and exports, the iron ore resources are expected to last for about 300-400 years. The Bureau of Industrial Costs and Prices in its report of 1984, has conc- luded that iron ore export is profitable to the nation.

With this background, MMTC has been plan- ning its iron ore exports. With western European markets becoming unattractive to India because of the freight disadvantage, Japan emerges as a large, natural market. Of the total export of iron ore by MMTC, Japan takes a little over 50 per cent share. Even while concentrating on Japan, MMTC has been steadily developing new markets abroad.

Vikalpa

Aggressive Strategy. Keeping in view the import- ance of Japan as the main market, MMTC adopted an aggressive strategy in the last three years. MMTC's share in the Japanese market in 1983 was only 6 million tonnes. As against this, during 1986-87 MMTC concluded firm contracts for 13 million tonnes (including 2.5 million tonnes of Kudremukh concentrates).

The objectives selected by MMTC were to:

• increase its share in the Japanese market,

• obtain a share for Indian vessels in shipping, and

• push iron ore concentrates produced by Kud remukh Iron Ore Company which was incur ring heavy losses and was on the verge of closure. Iron ore prices are normally first settled in Europe by Australia and Brazil, followed by a set- tlement in Japan. In the past, India used to follow Australia and Brazil in their negotiations. These negotiations amounted to accepting the Austra- lian prices. The tonnage was what was left un- covered by the Japanese demand for ore after con- tracts for supplies from Australia and Brazil were made. Thus India assumed the role of a follower. It got neither the price advantage nor increase in quantity. This was partly due to the restrictions imposed by port and rail capacities, higher freight costs (because shipment was through small ves- sels), and delays in decision making on objectives and strategies.

Between 1980 and 1982, Japan applied a price cut of about 25 per cent. As a follower and a re- siduary supplier, India suffered on both counts, quantity and price. As a result, MMTC's share in the Japanese market fell from 7.5 million tonnes in 1980-81 to 6 million tonnes in 1983-84.

different

For

1985-86,

MMTC

adopted

a

strategy. It decided to:

• wait for the settlement of prices by Australia and Brazil in Europe,

• accept the increase (decrease) in price finalized in the European markets as the basis for working out the possible increase (de crease) to be negotiated with Japanese steel mills after the European prices were adjusted for freight differentials and for differences in ore quality, and

Vol. 12. No. January-March 1987

• arrive at a range for increase (decrease) and negotiate with Japan as the first party before Australian and Brazilian parties commenced negotiations. Thus MMTC was to assume the role of a leader rather than a follower to get more tonnage rather than accept what was left over.

The negotiations were held as planned. Euro- pean settlement of prices indicated that a reduc- tion was inevitable, and MMTC settled on a reduc- tion within the range derived from Eurpoean prices. The tonnage was increased from 10.5 mil-

lion tonnes to 13 million tonnes. As a result of its aggressive strategy, MMTC's share of the Japanese market increased by more than 100 per cent in a period of three years from 6 million tonnes in 1983

to 13 million tonnes in 1986.

Long-Term Contracts

A number of factors come into play when the

strategy for long-term contracts is formulated. For example, if a five-year contract is envisaged for the export of iron ore, the following assessments will have to be made.

• The requirement of the buyer in the next five years.

• The trend of availability of iron ore.

• Competitors' strategies, their position, and the development of their ports, transporta tion, and mines.

• Requirement of facilities from the ports, rail ways, and mines to meet any long-term com mitment of increased tonnage.

• Government policies regarding development.

• Availability of funds to develop the in frastructure and mines.

• The cost of these developments and the be nefits that will accure.

• Feasibility reports comparing the costs and benefits to derive the internal rates of return for the projects.

• Plans for refunding the loans raised from out side sources.

Thus, the national scene in its entirety has to be studied for long-term trade contracts and negotiations as they are closely linked with the

17

resources available, their utilization, likely return on investment, and the additional direct or indirect employment which they can generate. National priorities play a key role in such negotiations.

Negotiating Teams

Effective implementation of chosen negotiation strategies to ensure achievement of the stated ob- jectives requires a careful choice of a negotiating team and leader.

The formation of the negotiating team is de- pendent on the objectives and chosen strategies of negotiations and people available for implement- ing the agreement. The following guidelines could be kept in view while choosing a team.

• The team should not consist of only one person, nor should it be too large. One person cannot be expected to present the case, listen to the other party's arguments, develop earlier arguments, take notes, and finally, achieve the most favourable bargain. He must have support without which effective negotiating tactics cannot be employed.

• The members selected should form a team. They must be compatible with each other and prepared to work together.

• The team should have a status equal to that of the other party's team.

• Communication is received by the buyer a- bout the status of the seller's team, and ac cordingly, it formulates its own team. Status depends on the size of the contract; in terms of its quantity as well as value, and the nature of the contract; whether it is short term or long term. When long-term contracts are un der consideration, negotiations are done at a very senior level.

• Technical experts, however senior they may be in the organization, should act only as ad visors. It may be advisable that they remain in the background for certain negotiation ses sions since their presence may inhibit the other party from making commercial deals.

Appointment and Duties of Team Leader

One member must be selected to be the team

18

leader. There can only be one leader for any negotiating team. His authority must be accepted by the rest. While every team leader would tailor his duties and responsibilities according to the situation, the broad areas of concern are listed below.

Preparation of the negotiating plan.

Ensuring the availability of necessary data, files, and so on.

Conducting a briefing meeting before the negotiation starts. (He must allow adequate time for such preparation.)

Ensuring that the necessary authority has been obtained from company management and that the individual team members have authority to act for their departments.

Selecting negotiating tactics.

Opening one's own case.

Responding to the other party's case.

Calling upon other team members to make

their individual contributions but personally

summing up each one.

Revising the negotiating plan and obtaining additional authority from the management if necessary.

Allowing necessary concessions.

Making the final bargain.

Ensuring that a written record of the negotia- tions is made and agreed upon by the other party.

Signing the written record.

Reporting on the negotiations to the manage- ment. The report should include a list of follow-up action points.

Stages of Negotiations

In discharging his responsibilities, the team leader may find it useful to divide the core of the negotia- tion process into three stages: the initial or open- ing stage, the resolution stage, and the final stage. The objectives and styles to be adopted during these stages are different as the two parties con- verge towards a mutually satisfying agreement.

Opening Stage

The objective of the opening stage is to expose the

Vikalpa

whole of the area which the negotiator wishes to cover and to identify the strength of the case of the other party, including the degree of its opposition- to or acceptance of his ideas. Until this is done, no concession should be made even if one agrees with the other party's point of view. If it is made, the team would be deprived of a bargaining point needed later in the negotiations.

Negotiations with a Written Statement. A written statement or offer stipulating terms and conditions may be submitted by either party at the opening stage. If a written statement or offer is submitted, the party submitting it is tied down to it. If it takes up a position inconsistent with what is stated, its credibility will be at stake. The written statement becomes a starting point of discussion. The other party would have framed its strategy based OR the written statement, whereas the party making a written statement would have no such basis to formulate its counter-strategies. If one has a writ- ten statement available at the start of the negotiations:

• Each point can be challenged. The party can be asked the reasons for each of the points, but there should be no speculation's or assumptions.

• Justification of the case should be left to the party which has given a written statement. Even when facts are known, a good strategy will be not to admit their knowledge.

• The clarifications given by the other party to the questions asked on the written statement should be noted, and the position to be taken on them reserved.

• When there is a written communication, it is necessary to understand what it is trying to convey rather than interpret the message ac cording to one's understanding.

• If there is a doubt, argument should not be entered into, the statement should be checked instead.

• If during discussions the party appears to be taking a stand contradictory to its written statement, one's thoughts and feelings should not be betrayed by showing surprise or de light. The situation can be used later to ad vantage in strengthening one's case while of fering one's terms.

Vol. 12. No. I. January-March 1987

• If the other party has got the facts of one's case wrong and is proceeding on their basis, the error must be immediately corrected rather than merely recorded.

In the same way, if one has submitted a writ- ten proposal then:

• Answers should be brief, elaborations are unnecessary.

• Since the proposal is in writing, the strength of the objective is to be tested. One should not be drawn into trade-offs before all the points have been discussed.

Negotiations without Written Proposals. Before proceeding, all the points to be negotiated must be identified. The discussion should not concentrate on some points to the exclusion of others, and points must be prioritized so that time is ap- propriately allocated for each of them. The begin- ning of the discussion should be exploratory, and attempt should be made to make the other party comfortable. In the very early stages, one should not get drawn into definite commitments or take positions from which it would be difficult to with- draw later.

The opening phase should preferably be limited to reviewing the trade between the two parties. The movement towards identifying the areas of differences between the two parties should be gradual. This stage must establish the means by which the differences would be resol- ved. The situation at the conclusion of the initial phase can be categorized into three ways:

• The issues are sufficiently simple, the gaps have been identified, and the positions of the parties are specific enough for negotiations to move straight into the decision phase.

• The issues are complex and/or the differences wide so that further discussions are required on specific issues before a final bargaining session can be held.

• The gap is so wide that no bargain can be- made. Or, if an agreement is to be reached, then one—or perhaps both—negotiatior(s) would have to concede more than he is au thorized to do. They would have to refer to the authorities for revised instructions.

Negotiations should produce a good agree-

1 9

ment, if agreement is possible. They should improve, or at least not damage, the relationship be- tween the parties. Building of a mutual relationship and goodwill should be one of the primary objec- tives of negotiations. Business flows as a fall-out of relations built on negotiations.

Resolution Stage

Bridging of the gap between the parties to the point at which a bargain can be identified may be necessary in many cases. This is accomplished by:

• setting up a small working group from each side consisting of one or two experts to deal with specific issues,

• .asking each to study further and prepare draft proposals on controversial issues, (the draft proposals are then exchanged and used as bases for further discussion by the full negotiating teams),

• establishing: informal contact between the chief negotiators of each side or their respec tive specialists, which could be done on an exploratory basis, and

• referring; the issue to a third party whose judgement is respected by both the parties.

In the resolution stage, the team leader must ensure that his members are fully aware of:

• any issue which is so vital that the company would prefer "no bargain" to conceding the present position;

• the relationship between specific issues,

20

particularly if these issues are going to be dis- cussed by different pairs of specialists; and • the limits to which the team leader is willing to be committed on any issue at each stage.

Final Stage

In the last stage of the negotiations the bargain is identified, made, and recorded. Once the two parties have agreed, there should be no room for rethinking. The agreements and minutes of the negotiation must be clear and not vague since they form the basis of the contract. One should never conclude a negotiation without an agreed and written record of the outcome. Negotiations must take into account the long- term relationship to be built up between the indi- viduals and the companies concerned. The credi- bility and trust must be established between the two parties, and at no stage should there be a feel- ing of mistrust or an impression that the vital facts are either concealed or incorrectly presented. One clear advantage of trusting others is that people who do so are themselves likely to be regarded as dependable. International negotiations have further comp- lexities. Human nature varies. There are language barriers. People have different values. Life styles differ, sensitivities differ. Since in the interna- tional trade the interaction is with members of dif- ferent communities, knowledge about the other party's values, beliefs, faith, and styles is essen- tial. Human relations and understanding of human beings are also important.

Vikalpa