Past Examination Papers Negotiation December 2003

Past Examination Papers – Negotiation December 2003

Examination

Case Question

Case Study: ‘Only a penny’

Abdul Razak, general manager of Shorts Distributors, has had several meetings recently with the new owners of Allnights, a large chain of convenience stores which sell newspapers, magazines, books, sweets, tobacco, drinks, and numerous grocery items. Allnights has grown rapidly by the acquisition of smaller chains and dozens of individual corner shops (‘Mom and Pops’). It carries a large debt both from the costs of recent acquisitions and from renovating and re-branding its shops. Shorts Distributors is the sole wholesale source of newspaper and magazine deliveries in most areas of the country and it supplies Allnights and its rivals with all their requirements. It also supplies some rival stores with free display cabinets, gives them better terms for returns of unsold papers and in other areas.

Dr Bhagwatti, managing director of Allnights, discovered that one of his recent acquisitions had a particularly attractive supply contract which gave it an extra penny discount per newspaper over the best deal Allnights had been able to negotiate with Shorts for its larger shops. Such an extra discount spread across all of its newspaper sales could be worth around €1000 a day. This would go a long way towards calming the increasingly anxious financial backers of Allnights who saw its debt exposure threatening to imbalance the enterprise. The backers favoured a sharp cut in debts and a drive for higher profits per outlet rather than further expansion into new acquisitions. Dr Bhagwatti favours expansion to build market share and to benefit from larger cash flows that also earn interest before they are paid to suppliers under the normal 45 days credit allowed.

The problem for Dr Bhagwatti is that Mr Razak has rejected his request to extend the extra discount to the rest of his group. Indeed, he gave notice that when the current contract with the formerly independent chain was renewed in five months time, Shorts would withdraw the extra discount and apply the standard discount already agreed for Dr Bhagwatti's group.

Dr Bhagwattii has asked what you would advise him to do to negotiate a better deal from Mr Razak.

Required:

1. What is the consequence of approaching the negotiation of the extra penny discount as a purely distributive bargain for Dr Bhagwatti and Mr Razak?

(8 marks)

2. Which interests of Shorts and Allnights are not in conflict but what might change them into conflict? (8 marks)

3. How would you advise Allnights to develop negotiable tradables to aid their negotiations with Shorts?

(8 marks)

4. Compose a conditional bargain for Mr Razak linking any of the negotiable tradables available to him.

(8 marks)

5. Considering Dr Bhagwatti's and Mr Razak's BATNAs, which of them appears to have the upper hand in the negotiations and why?

(8 marks)

Essay Questions

Essay 1

Negotiations had deadlocked because of the complete incompatibility between the strong- minded personalities leading each side. Both were implacably determined not to give way and concede any more ground to the other, though each was determined to gain more concessions, which the other party was equally determined to block. Attempts at prolonged strikes had failed in the past to move the employers, and judicial measures, including the arrest and detention of militants through ‘cease and desist’ orders, had failed to break the strikes. Both sets of actions had only served to drive the sides further apart. The stand-off was weakening the economic viability of the industry and the town and impoverishing the employees and their families, with no end in sight to the growing misery of everybody involved.

How might you apply the four prescriptions of Principled Negotiation to the scenario and how might Rackam's and Carlise's behaviourist advice help?

(20 marks) Essay 2

Quickfit, a firm of regional tyre distributors for popular motor vehicles, has received an offer from Fasterfit, a rival firm, to buy its business for €400 million. The buyer's main areas of operation are to the south of the country while the firm it wishes to buy operates in the north of the country. The joint company would make a good fit, with only minor cases where they have overlapping territories. The buying firm is determined to establish a national tyre selling business and purchasing an existing distributor is the first option it is exploring.

How might Atkinson's Power Ratio help to influence the situation faced by the regional firm when it considers the cash offer from the potential buyer?

(20 marks)

Essay 3

Henri told Jacques that his negotiating stance for the sale of the Malaysian franchise had too small a margin over what the business was worth. ‘Whatever you put to them they will push for more,’ he said ‘so you might as well demand more to start with.’ ‘Yea, I thought of padding the price,’ replied Jacques ‘but because the business has a calculated cash value based on its costs, turnover and profit, I have reflected it in the price and only added a small margin. To demand yet more, or a silly price, will only waste time better spent educating them on its real value.’

How might a knowledge of ploys and bargaining behaviours help Henri and Jacques decide on the right entry price for the Franchise?

(20 marks)

(Total of 100 marks)

END OF PAPER

Solutions

Note from the Examiner: Please note that these solutions are for guidance and students are not expected to supply word-for-word answers. Their answers should contain the points identified here, though their modes of expression of them will vary for each person. Good examples that illustrate a student's answer normally attract extra marks.

Solutions to Case Questions Case Solution

1. What is the consequence of approaching the negotiation of the extra penny discount as a purely distributive bargain for Dr Bhagwatti and Mr Razak?

(8 marks)

Demonstration of the distributed bargain diagram:

Figure 2.4 The negotiators exit prices overlap

Text Reference: Module 2.2, pp. 2/3–2/7.

2. Which interests of Shorts and Allnights are not in conflict but what might change them into conflict?

(8 marks)

Interests defined as the motives of the parties that lead them to prefer this solution over others; the hopes fears and concerns of the parties.

Interests of Shorts to remain profitable, remain the dominant wholesaler. Interests of Allnights to increase revenues, remain profitable and then expand.

For Shorts to remain the dominant wholesaler and for Allnights to expand are not in conflict but if Shorts exploits its monopoly of distribution and prevents the expansion of Allnights they may go into conflict.

Text references: Module 3.3, pp. 3/7–9.

3. How would you advise Allnights to develop negotiable tradables to aid their negotiations with Shorts?

(8 marks)

Define a negotiable tradable as anything within the discretion of the parties that is valued differently by them and can be employed to facilitate agreement.

Give an example of how negotiable tradables assist in making progress towards agreement (Israel-Egypt Sinai negotiations from Text Module 6.3, pp. 6/9-10, or candidate's own example). List possible tradables for Allnights, such as the amount of discount, the net amount paid by Allnights, when it is paid, the credit terms, including differential credits, duration between payments, minimum regular payments, minimum order quantities, range of newspapers and magazines supplied, specialist titles, returns policy (unsold or damaged), delivery times, penalties for late deliveries, exclusivity agreements, promotion discounts, promotion aids and displays, merchandising and positioning.

More such tradables enable compensatory exchanges for agreement.

Text reference: Module 3.9, pp. 3/9–24.

4. Compose a conditional bargain for Mr Razak linking any of the negotiable tradables available to him.

(8 marks)

Define conditional bargains as specific conditions linked to specific offers in the purple conditional format as: ‘If you – then I’.

Suggest (example) because Allnights wants a bigger discount, which adds to its profits and reduces Shorts, and Shorts wants earlier payment (under 45 days) which cuts Allnights' access to interest on deposits, he should explore other tradables to construct a conditional bargain to put to Dr Bhagwatti.

A suggested Bargain: ‘If you make a regular weekly payment of the average of 75 per cent of your purchases of newspapers weekly by Friday noon and the balance in 14 days, then we will increase your wholesale discount by one penny a morning daily national paper credited in arrears.’ (Or similar such linked bargain.)

A suggested counter-bargain: ‘If you extend the one penny discount to cover evening and weekend newspapers, amend the return policy to allow late returns after 5 days and supply us with space saving display stands for all our stores, then we will agree to regular pre-payment at 50 per cent of the average weekly purchases, and the balance within 28 days. (Or similar such linked bargain – content less important than format.)

Text reference: Module 6.2, pp. 6/3–6/6.

5. Considering Dr Bhagwatti's and Mr Razak's BATNAs, which of them appears to have the upper hand in the negotiations and why?

(8 marks)

Define BATNA as ‘best alternative to a negotiated agreement’ and state it is not merely another proposal in the current negotiation.

Dr Bhagwatti's BATNA is limited because Shorts are in a monopolist position. If the negotiations with Shorts fails, it can only continue with the current discount policy, which deprives it of additional revenues to address its other problems.

Mr Razak's BATNA is to continue with its current discount policy and to forego any possible benefits he might obtain by re-arranging aspects of Allnights's payments arrangements. The status quo possibly suits Shorts but by how much would depend on the detailed calculations and the probability of a negotiated settlement succeeding. If the disadvantages accruing to each party from failure to agree are different, then the party with the worst disadvantages is weaker than the other. Allnights is facing a debt burden that threatens to curb its expansion; Shorts is not reported to be facing a similar burden. Stalemate will lead to a withdrawal of its higher discount to the shops recently acquired by Allnights, which will improve Shorts's margins and squeeze Allnights.

Text reference: Module 8.9, p. 8/30.

Solutions to Essay Questions

Essay 1

How might you apply the four prescriptions of Principled Negotiation to the scenario and how might Rackam's and Carlise's behaviourist advice help?

(20 marks)

The Four prescriptions: separate the people from the problem; focus on interests not positions; generate options for mutual gains; insist on objective criteria.

‘ Separate the people from the problem’ applies to the personal animosities of the two negotiators. If the participants cannot bring this about, perhaps a third party can broker it, or time may be needed to allow feelings to cool, or one or both leaders to be changed.

‘Focus on interests not positions’ is often difficult in near intractable disputes. The conflicting interests drive the parties into intransigence. To focus on the causes and their motives may exacerbate the problem rather than relieve it. Experience suggests that low level negotiations on the issues in these conditions may be more productive. Even talks about talks may be useful (the agenda, who conducts them, rules of debate, when and where they meet, policies on public statements and private off-the-record conversations).

‘Generate options for mutual gains’ would be welcome in all negotiations but the process by which this can be managed jointly requires a great deal of trust building measures first. Perhaps some lower level personnel could work in joint teams on separate subjects, chaired by representatives of the third party acceptable to both sides.

‘ Insist on objective criteria’ is another difficult prescription in intractable disputes. The ‘objective criteria’ that each party would choose would be the criteria that leads to their preferred solution and excludes others. This does not solve the problem of intractability; it exacerbates it. However, it may be that criteria acceptable to a third party, representing a neutral view might be used as a basis for an eventual compromise when emotions have cooled and trust has built up. It may also be the case that the application of criteria to the lower level issues can assist lower level solutions.

Text reference: Module 8: 8.7–8, pp. 8/18–8/30. Conducting negotiations in these circumstances requires a toning down of rhetoric and provocative language – in other words constructive rather than destructive debate. Rackham and Carlisle research on how negotiators behave provides guidance on how destructive debate can be avoided – mainly by substituting it with constructive debate behaviours.

Their research showed that below average negotiators use negative behaviours to a greater extent – sometimes much greater – than above average negotiators.

Table 4.1 Variances in behaviours between skilled and average negotiators

Behaviour Comments Measured Differences

Average Skilled

Irritators gratuitously favourable statements about Use per hour one's own positions or offers (‘generous’,‘fair’, ‘reasonable’, etc.)

10.8 2.3

Counter-proposals immediately counter-proposing, which Frequency per hour isperceived as blocking, being unreceptive and disagreeing

3.1 1.7

Defend/attack spirals ‘Can't blame us’, ‘It's not our fault’, ‘You Percentage of screwed up, not us’ comments

6.3 1.9

Argument dilution Using too many reasons to support a case – Average number of weak arguments diluting strongones reasons given to back their case

3.0 1.8

Behaviour labelling ‘Can I ask ’, ‘If I may make a suggestion’ – Percentage of all permits a formality that keeps debate behaviours unemotional preceded by a label

1.2 6.4

Labelling ‘I disagree’, ‘You're wrong’ followed by Percentage of all disagreement reasons, in contrast to explaining first then behaviours labelling preceded by a disagreement label

1.5 0.4

Testing for Checking if previous statement has been Percentage of all understanding and understood and compact restatements of behaviours summarising previous debate Testing understanding

4.1 9.7

summarising

4.2 7.5

Seeking information Skilled negotiators seek significantly more Seeking information information than average negotiators. as percentage of all Information is needed for the debate and for behaviours bargaining

9.6 21.3

Stating feelings ‘I feel some doubts’, ‘I'm very worried’,‘I'm not Giving internal sure how to react’, rather than expressing information as opinions, remaining silent percentage of all behaviours

7.8 12.1

(Extracted from Rackham and Carlisle, ‘The Effective Negotiator – part 1: the behaviour of successful negotiators’, Journal of European Industrial Training, Vol. 2, no. 6, pp. 162–65).

(Candidates are not expected to reproduce this table in detail but some extracts of typical destructive and constructive behaviours, with broad indications, such as ‘greater nor lesser’ use, would be sufficient.)

Destructive behaviours include using ‘irritators’, indulging in ‘defend/attack spirals’, ‘labelling disagreement’ and instant ‘counter-proposals’ will be present during intractable negotiations in the scenario and by reducing the use of such behaviours the conditions become conducive to using constructive behaviours. These include ‘Behaviour labelling’, ‘testing for understanding’ and ‘summarising’ (the SAQSS sequence). While by no means decisive in securing a solution, trained negotiating behaviours are not going to make the problem worse. Ultimately, of course, the content of the proposed solution is decisive but negative behaviours prevent acceptable solutions from being discussed or considered. Tempers are never calmed by being tested. Constructive behaviours in debate help create the atmosphere in which traded solutions may be seriously considered, given the poor BATNAs available in this types of disputes.

Text reference: Module 4: 4.3 Rackham on Effective Behaviour, pp. 4/5–4/8.

Essay 2

How might Atkinson's Power Ratio help to influence the situation faced by the regional firm when it considers the cash offer from the potential buyer?

(20 marks)

Atkinson considers that the other party's proposal is the background against which the power of the two parties is assessed.

The key decision to be made on receipt of any proposal is whether to accept or reject it.

His power ratio tries to capture the essence of the disadvantages of choosing either option.

Negotiation power consists of the ratio: disadvantages of rejecting the proposal/disadvantages of accepting the proposal. The ‘disadvantages’ may be quantitative or qualitative, and can include subjective as well as measurable costs arising from rejection or acceptance.

The lists of disadvantages are accorded a numerical assessment of their seriousness (1 – 10) from least harmful to most harmful and a probability of them occurring (0.0 – 1). By multiplying the index of harmfulness by the probability of it occurring, a numerical assessment of the aggregate disadvantages of rejecting or accepting the proposal is produced as a ratio. Depending on the ratio, an assessment of power balance is indicated. Ratios showing their disadvantages of rejecting over their disadvantages of acceptance are above 3:1 show you have negotiating power (but if less than 3:1 it is ambiguous), and ratios showing their disadvantages of accepting exceed their disadvantages of rejection by more than 3:1 show you don't have negotiating power (but if less than 3:1 it is ambiguous).

Applying this crudely to the scenario (a detailed worked example is not required as the data is insufficient) we could summarise it by asking: if this is Fasterfit's first option, what others might they have in reserve (what is their BATNA?). The scenario says: ‘Fasterfit is determined to establish a national tyre selling business and purchasing an existing distributor is the first (cheaper) option it is exploring’. This implies that organic growth is more expensive than buying Quickfit.

What happens if Quickfit refuses to sell? Fasterfit would have no choice, if it is determined to become a national distributor, to do other than rely on organic expansion of its own distribution depots, either at new in town sites or, by following an aggressive location policy, at the same out of town sites as Quickfit's sites (or at least close to enough of them to damage their business). Whatever the details of the costs of this policy and its sources of funds, this must be added to the costs of rejection of Fasterfit's proposal (times its probability), raising the disadvantages to Quickfit of rejecting it.

It is from examining Atkinson's ratio in detail that the negotiator can decide whether to adopt policies to exacerbate the costs of rejection (including by increasing the probabilities of the events occurring) and to reduce the disadvantages of acceptance (including by decreasing the probabilities of the events occurring) that it proves its usefulness.

Text reference: Module 10: 10.6 Atkinson on power, pp. 10/12–10/15.

Essay 3

How might a knowledge of ploys and bargaining behaviours help Henri and Jacques decide on the right entry price for the Franchise?

(20 marks)

The Entry price is the price at which the negotiator opens and it normally is (and ought to be) different from the price at which a settlement is possible. The relationship between Entry and Exit prices can be illustrated from the distributive bargaining model.

The settlement range is formed by the overlap in the negotiators' Exit prices.

Choosing the Entry price is subject to certain ‘rules’. It should be credible and defensible. Padding Entry prices in anticipation of challenges to them (especially the ‘Krunch’ ploy) is self-defeating. Because price is only one of several tradables, it is subject to opportunities for trade. Moving down on a padded price when challenged is unassertive and confirms the use of the Krunch ploy, and refusing to move on a padded price leads to deadlock. It is much better for credibility to defend an Entry price based on firm foundations and trade movement on price for other tradables.

Hence, Jacques is better prepared for the negotiations with the buyer of the franchise that Henri. People who use manipulative ploys in their negotiations have a ‘streetwise’ view of doing business and sacrifice relationships for results, though their ploys do not always produce the results they intended. For every ploy there is at least one counter and even recognising a ploy neutralises it. A reputation for ploy manipulation undermines relationships and destroys trust.

Ploys are recognisable by experienced negotiators. They aim to influence the perceptions of the other negotiator of the power balance and thereby reduce the other side's expectations.

Padding an Entry price is a Shaping ploy and often found in Red prone business sectors (construction, for example, or second-hand car dealing). Reciprocal padding and stripping becomes endemic. It wastes a lot of time and energy. Jacques is right. It would be better to spend time and energy on the basis of the price calculation.

Text reference: Module 2: 2.2, pp. 2/3–2/7; Module 9: 9.6, pp. 9/9–9/17.