Exercise 7

Knight Engines/Excalibur Engine Parts

NEGOTIATION 7e
LEWICKI ▪ BARRY ▪ SAUNDERS

Confidential Role Information for Excalibur Engine Parts

The Excalibur Engine Parts Company has been involved in the production of advanced
engine parts for little over a year. It seems that the demand for their specialized pistons has not
been as great as anticipated, and some shareholders are beginning to become concerned about the
company's disappointing revenues. It appeared that the situation was about to improve six months
ago, when the government of Switzerland placed an order for 20,000 of their Series 2.1 Intensaflux
(Class "A") pistons. This contract with Switzerland was considered a real coup, because there are
several other more established companies that produce the same type of piston. Unfortunately, the
contract in question was not approbated by the Swiss legislature and was therefore considered to
be null and void under Swiss law. By the time that Excalibur learned of the contract's
imperfections, 10,000 pistons had already been produced and packaged. Since Excalibur had no
legal recourse, it was stuck with an extra 10,000 pistons in a market that already had a very
dissatisfying demand. Financial analysts were predicting that this latest setback would lead to a
major loss in this quarter unless Excalibur's management acted quickly.

As fate would have it, a representative from Knight Engines Inc., contacted Excalibur
recently and asked whether it would be possible for them to process a rush order for 8,000 of their
Series 2.1 Intensaflux (Class "A") pistons within two weeks. Representatives of Excalibur stated
that this might be possible, but that certain conditions would have to be attached to such a rush
order. First, in order to get some free advertising, Knight would have to agree to indicate on the
chassis that their engines were fitted with Excalibur pistons. Second, a rush fee of at least 5% over
the selling price would be charged for the extra costs involved for the processing of such an order.

Excalibur's random testing program ensures the maintenance of the high quality of their
products. However, even with their strict standards, tests have revealed that 4 to 5% of pistons
manufactured contain some sort of defect. Excalibur does offer an excellent quality-control
insurance program that guarantees that all pistons delivered will be free from defects. Under the
conditions of this guarantee, all pistons are individually tested before delivery. Due to the extra
costs involved, Excalibur charges an extra 10% over the selling price for this service. If this
particular guarantee is not purchased, defects in the products delivered are the responsibility of the
purchaser. As well, prospective customers are usually asked whether they require additional units,
in order to provide for situations where replacements are required urgently.

You are the VP of Sales for Excalibur, and it is your responsibility to negotiate a contract
with Knight for the sale of the pistons that they desire. In order to determine the contract price, the
following should be kept in mind:

1. The Swiss government was willing to pay $600 per piston before that particular contract
was annulled. If the Swiss thought that this was a fair price, shouldn't Knight find it reasonable as
well?
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2. The total cost to produce this type of piston at Excalibur is $480 per piston. Excalibur's list
price for this type of piston is $560.

3. You are aware that some of your competitors sell inferior pistons of the same size for as low
as $400 per piston. You believe that Excalibur's prices are justified due to the higher standards of
quality that are maintained at your plants. However, there is a rumor that Knight will be using your
company's pistons in order to build engines that will be sold to the government under government
contract. If the government could be made aware of the high quality of your pistons, it might work
to your advantage the next time the government requests submissions for the supply of engine
parts. Obtaining such contracts would certainly quell the complaints of Excalibur's rather timorous
shareholders. This goal could certainly be achieved if Knight were to indicate that their engines
were fitted with quality Excalibur parts. It is likely that Knight will not to do this without some sort
of concession on the part of Excalibur. Perhaps a cut in the profit margin today would reap greater
benefits in the future.

4. As mentioned before, the market for this type of piston does not seem to be as large as
originally projected. If this Knight deal falls through, Excalibur might be forced to sell its pistons to
the only other prospective customer who has shown any interest. Hank's Super Monster Tractors
Inc., has offered to take all the Intensaflux pistons off Excalibur's hands for a paltry $100 per piston.

Your success during the negotiation process will be determined by the total score that you
achieve. The score is determined by multiplying the number of pistons sold by the price per piston
that was negotiated.