Course: Strategic Procurement in SCM Lecture / Week #.

7 (23rd September, 2011) Lecture Contents about: Negotiation and Pricing Book Chapter #. 9

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Today, we will cover:

1. 2. 3. 4. 5. 6. 7. 8.

Reasons of Negotiation; Basic Principles; Characteristics of an effective negotiator; Negotiation types in business management; Alternatives and Consequences; Personality Traits; Negotiation Strategies; Pricing Strategies.
SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Negotiation:
We do it every day

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Negotiations:
Negotiations occur for several reasons:
To agree on how to share or divide a limited resource To create something new that neither party could attain

on his or her own To resolve a problem or dispute between the parties

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Defined :
Negotiating is the process of communication. PURPOSE: Reaching a joint agreement about differing needs or ideas. A negotiator may be a buyer or seller, a customer or supplier, a boss or employee, a business partner, a diplomat or a civil servant. On a more personal level negotiation takes place between spouses, parents or children.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Basic principles common to all forms of negotiation

There are minimum 2 parties involved in the

negotiation process. There exists some common interest, either in the subject matter of the negotiation or in the negotiating context, that puts or keeps the parties in contact.
Though the parties have the same degree of interest,

they initially start with different opinions and objectives which hinders the outcome in general.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

 In the beginning, parties consider that negotiation is

a better way of trying to solve their differences.

Each party is under an impression that there is a

possibility of persuading the other party to modify their original position, as initially parties feel that they shall maintain their opening position and persuade the other to change.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

 During the process, the ideal outcome proves

unattainable but parties retain their hope of an acceptable final agreement.

Each party has some influence or power real or

assumed over the others ability to act.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

CHARACTERISTICS OF AN EFFECTIVE NEGOTIATOR

He should be a good learner and observer.
Should know the body language of the people at the

negotiation process. Should be open and flexible and yet firm. Exercise great patience, coolness and maturity. Should possess leadership qualities.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

 Should control emotions and not

show his weaknesses. Should know and anticipate the pros and cons of his each move and its repercussions. Should know how to create the momentum for the negotiations and must know when to exit and where to exit by closing the talks successfully.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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 Should build trust and confidence.

Should be confident and optimist. Should have clear cut goals and objectives.

Should be able to grasp the situation from many

dimensions. Should know human psychology and face reading

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Managerial Negotiations
Types
Day-to-day/ Managerial Negotiations

Parties Involved

Examples

1. Different levels of 1. Negotiation for Management pay, terms and working 2. In between conditions. colleagues 3. Trade unions 2. Description of the job and fixation of responsibility. 3. Increasing productivity.
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4. Legal advisers

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Commercial Negotiations
Types Parties Involved
1. 2. 3. 4. 5. 6. 7. Management Suppliers Government Customers Trade unions Legal advisors Public

Examples

Commercial Negotiations

1. Striking a contract with the customer. 2. Negotiations for the price and quality of goods to be purchased. 3. Negotiations with financial institutions as regarding the availability of capital
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SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

Legal Negotiations
Types Parties Involved Examples

Legal Negotiations

1.Government 1.Adhering to 2.Management the laws of the local and 3.Customers national government.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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 Alternatives:
If you do not reach the agreement with him/her,

what alternatives you have? Are these things good or bad alternatives? How much it matters if you do not reach the agreement? Will the failure to reach the agreement cut out future opportunities? What alternatives may the other person have?
SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM
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 The consequences:
What are the consequences of winning or

losing this negotiation by you? What are the consequences of winning or loosing by the other person?

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Negotiating and individual personalities

Autocratic managers typically hold the view that they are going to get what they want when they interact with subordinates, because their inherent authority precludes the need to negotiate.
These managers do not realize that, in the process of handing out orders, they are engaged in a kind of one-sided negotiation that can upset others, with the result that the tasks they wish to see completed may be carried out improperly or not at all.
SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM
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The Accommodating manager is more concerned with what others want than with their own needs.
In order to avoid conflict, they do not negotiate at all and often end up overriding their own interests.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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 Most of the negotiation literature focuses on two

strategies, although they call them by different names.

One strategy is interest-based(or integrative, or

cooperative) bargaining, while the other is positional (or distributive or competitive) bargaining.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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INTEREST-BASED BARGAINING /WIN-WIN BARGAINING

Integrative bargaining in which parties collaborate to

find a win-win" solution to their dispute. This strategy focuses on developing mutually beneficial agreements based on the interests of the disputants. Interests include the needs, desires, concerns, and fears important to each side.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Positional Bargaining
Often describes the competitive, win-lose situation.
Positional bargaining is one that involves holding on to a fixed idea, or position, of what you want and arguing for it and it alone, regardless of any underlying interests.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Approach to the Subject

Difference between Bargaining and Negotiation:
Bargaining: often describes the competitive, winlose situation
Fixed pie

1-23

Negotiation: refers to win-win situations

Creating more value jointly than by ourselves

Dispute Resolution
Arbitration / Litigation

Mediation

Negotiation

Mediation
Interest-based Mediation Mediator is a facilitator Focus on interests, not legal rights or obligations Options for creative solutions Evaluative Mediation Neutral evaluation Based on legal rights & obligations

Mediation
Qualities of a successful mediator: Subject area knowledge Negotiation & mediation process skills Lets parties make key decisions Creative, problem-solving approach. Patience

Mediation
A Mediator with Decision Making Power.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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1) Prepare, prepare, prepare

2) Pay attention to timing 3) Leave behind your ego. 4) Ramp up your listening skills. 5) If you don't ask, you don't get

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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6. Anticipate compromise
7. Offer and expect commitment

8. Don't absorb their problems

9. Stick to your principles

10. Close with confirmation.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM
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SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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 Speak more quietly than them.

Have more space in between your words than them. If they interrupt, pause for a few seconds after they

finish. Be critical of foul language. Do not rise to a bait if they attack or blame you. Ignore all threats.

SZABIST. MBA Fall-2011. Instructor: Faisal Abubakar, Strategic Procurement in SCM

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Pricing Strategy
Price is one the elements of the marketing mix

that generates revenue, while the other elements generate costs. It is one of the easiest elements to adjust. It takes a lot of time and money to adjust the other elements like product features, channels and even promotion.

Pricing Strategy
Traditionally, the price of a product was a major

determinant of buyer choice. Although non-price factors have become important, still price remains as the most important determining factor of market share and profitability.

Pricing Strategy
Companies do their pricing in a variety of ways. In

small companies the prices are often set by the Boss or the Owner of the company. In larger companies the price is handled by division and product-line managers. Even here the top management sets the general pricing guidelines and policies which the managers should keep in mind while pricing their product.

Pricing Strategy
Setting the price The company must set is price in accordance with the value delivered and perceived by the customer. If the price is higher than the value then the company will miss potential profits and if the value is higher than the price, then the company will fail to harvest potential profits.

Pricing Strategy
Selecting the price objective The company should first decide where it wants its position in the industry. The clearer a firms objectives the easier it is to set the price.

Pricing Strategy
Determining the demand: Each price will lead to a different level of demand and therefore have a different impact on a companys marketing objectives. The relation between alternative prices and the resulting current demand is captured.

Pricing Strategy
Determining the demand (Contd) In normal conditions, demand and price are inversely proportional, the higher the price the lower the lower the demand and the higher the demand the lower the price. Companies want to work with customers who are less price-sensitive.

Pricing Strategy
Determining the demand (Contd) The internet on the other hand has increased the price sensitivity of people. If shopping online if one visits two or more websites, then looking for the same product, he will buy from that website which sells the product for the lowest price.

Pricing Strategy
Estimating costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The companys costs take two forms fixed and variable. Fixed costs do not vary with production or sales revenue. But, variable costs vary with the production. The more the company produces the more the variable costs.

Pricing Strategy
Analyzing the price of the competitors A company must always keep in mind the price of its competitors. Before changing its price a company must consider the possible outcomes of the price change. It should consider whether the price change will initiate a price-war.