Case study 2 - Optimizer, Motorpart

General information
1 This negotiation covers the import and distribution into this country of a fuel-saving
device called Optimizer. The sellers, Auto Accessories Ltd (AAL), are sole importers
of the product, which is manufactured in Japan. The buyers are a chain of motorist
discount stores called Motorpart. When AAL first brought Optimizers into this country
more than a year ago, they were monopoly suppliers. The negotiation takes place
six weeks from the end of the second contract between AAL and Motorpart.
Motorpart know AAL have just made a new agreement with the Japanese, but do not
know the terms of it.

2 The existing agreement between AAL and Motorpart is:

Price: €77.50 per unit

Volume: 15,000 units per month

Terms: 14 days

Delivery: Buyer (Motorpart) collects from the docks - this costs them an
additional €1 per unit

Contract length: 6 months from completion of the original contract period.

.
3 Current situation - demand is still firm, but prices are weaker because of increasing
competition from new products which began to enter the market a month ago. While
competition had been expected, it arrived three months earlier than predicted. The
maximum price at which Optimizers are now being sold is €99 per unit, compared with
the €108 per unit which some distributors were charging six months ago.

4 Returns of faulty Optimizers have increased - up to 3% of Optimizers sold are being

returned because of cracks in the main chamber. This damage seems to be caused
either by rough handling at the docks or in the distribution network. The cost has so far
been paid by Motorpart, but it is a matter of contention which needs to be resolved.

5 The current players in the market are:

• Travelsave - selling at €88.50

This is a good product with slightly better performance than Optimizer on long runs
(manufacturers claim 15% overall savings). However, market penetration has so far
been slow and the company seems to be short of capital for expanding production.
The presentation of the product is poor and the company has spent very little on
advertising.

• Economite - selling at €88.50

This is a well-packaged product which performs slightly less well than Optimizer
.
but, as the product of a major manufacturer, it is receiving heavy advertising and
marketing support. This product is likely to emerge as the major competitor.
 Case study 2 - Optimizer, Motorpart
• E.S. 200 - selling at €80.50
This is a middle-of-the-road product launched to cash in on the market. There is little
evidence of any real long-term investment going into this product or its promotion.
Deliveries have been poor. It seems likely that the life of this product will be limited.
• Optimizer - selling at around €99
It is the clear market leader at present with a track record of success behind it.
Motorpart are currently selling this product
Further independent tests have proved that Optimizer's claims are not
exaggerated. It saves 7-11% of fuel costs.
6 With the arrival of these competitors the number of units reaching the market is
increasing rapidly. If the present rate of increase continues, total supply could reach
60,000 units per month within about six months. There have been hints in trade
papers that supply could increase to 90,000 units per month in the next two years.
These same reports predict an over-supply situation developing in the market of up to
15% within eighteen months.
7 A number of electronics companies have also shown interest in the Optimizer
market. With the way in which micro-electronics has transformed so many other
products and markets, who knows what will happen over the next few years if they
seriously decide to exploit this market?
8 The meeting was called by Motorpart and is being held on their premises.
9 For the purpose of the exercise, please assume that economic conditions - for
example interest rates, inflation and the price of fuel - are those that currently apply.
Case study 2 - Optimizer, Motorpart
Buyer brief
1 The competition in the Optimizer market has arrived earlier than expected.
The strongest seems to be Economite, which is better packaged and promoted and
looks a very professional product. However. r, Travelsafe got the best report in a
consumer magazine, especially in terms of fuel saving.
The same magazine article gave Optimizer some bad press about the number--
of damaged units which were having to be returned. This latter item wasn't new to
you, as you have had a regular flow of returned units for this reason.,
2 You are presently engaged in serious negotiations with two large companies who
have 18,000 and 12,000 vehicles respectively. They are interested because of
reduced petrol costs and because they would make an even greater profit where
travel is charged to clients on a fixed price per mile basis. However, both companies
are pushing for bulk discounts of 15% and have now requested guarantees (such as
re-fitting within eight hours at your expense) because of the quality rumours about
Optimizers. Both customers have indicated that they would require delivery over no
more than a three-month period.
3 As other distributors are increasingly entering the market (now that supplies are more
available); marketing has to be taken seriously. You plan to launch a big advertising
campaign to coincide with the summer peak motoring season. This will probably add
1.5% to your retail price of Optimizers unless you absorb these costs and reduce .
your profit margins.
4 You have begun to stock all three of the competitive units on a trial basis in different
shops. Currently, you are selling each product as follows:
• Travelsave 1,500 per month at €88.50 (cost to you is €69 per unit)
• Economite 1,750 per month at €88.50 (cost price is €67.50 per unit)
• E.S. 200 1,250 per month at €80.50 (cost price is €66 per unit)
(All prices include delivery, payment terms thirty days)
The margin on E.S. 200 is small and these cheaper priced units have not been selling
as well as you expected, mainly because the claimed petrol savings were not
substantiated by the consumer report. Recently, you have been discounting these by
10% to clear stocks. You do not intend to continue to sell this line.
5 A large rival motorist discount chain has made a bid to become sole distributors for
Economite, and it looks as if this might succeed.
6 Your business is in a healthy position at present; indeed, you are cash-rich. This
seems a good moment to examine your business plans.
 Case study 2 - Optimizer, Motorpart Case study 2 - Optimizer, Motorpart

Notes page Some suggestions

There's never enough time to prepare and plan properly! Working in groups can cause
additional problems, but there are some advantages, too. In order to avoid some of the
problems, we recommend the following list of 'dos and don'ts':

DO:
• Assign an individual to manage the process.
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• Allocate time slots to each of the major elements of preparation and planning and
assign another individual to monitor progress.

• Follow the broad sequence described on the 'Negotiation Organiser', from setting
your objective through to marshalling the arguments. Consider the tips on doing this
which are at the bottom of each column.
• Put yourself in the other party's shoes - at every stage of the process

• Constantly ask yourself questions:

"What other issues might I raise if I were them?"

"What would help them to accept this offer?"

"Suppose they said ... what would we say?"

"What levers can we use to achieve our main aim? How?"

"What if ... ?"

• Leave time at the end of your planning period to allow for role planning with
your negotiation partners.

DON'T:
• Overrun your preparation time - it's crucial that you allow enough time for planning.

• Be constrained by your own experience and market when considering issues and
creative options.
• Make prejudiced assumptions about how the other party will behave.

• Sequence Plan!

FINALLY
Remember lessons from the Red/Blue exercise.