Practical Negotiation - The Process for Creating and Sharing Value

Author(s):

Norbert J. Ore, C.P.M.
Norbert J. Ore, C.P.M., Director of Purchasing, Sonoco Products Company, Paper Division, Hartsville, SC 29550, 803-383-7738

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

INTRODUCTION
When we think of negotiation, we usually focus on the implicit, two or more parties sitting across a large mahogany table rather than the informal, daily occurrences involving those we can't command, but whose cooperation is necessary to our success and happiness. A key to successfully conducting the implicit negotiations is mastery of the informal day to day negotiations. The implicit negotiations will get you through major contracts or disputes, but establishing ability in the informal negotiations will help you succeed in life.

Each day, we negotiate with customers, suppliers, other employees, friends and family; though unique as they may be, most are completed quickly and uneventfully. We find ways of reaching agreement on many issues. There are wins and losses. But we do have to negotiate on an informal basis quite often and through informal negotiations we satisfy our own needs and those of others in relatively simple fashion. It is only when we think in terms of the "across the table" relationship that we begin to make negotiation complicated.

NEGOTIATION MODELS
Negotiation is defined in many ways. A diplomat, a car salesperson, and a business unit manager would all define it differently. The two major schools of thought to this point have focused on Traditional versus Win-Win. The Traditional view of negotiation results from zero sum theory, best explained as the way children's games are played. If I win, you have to lose. The Traditional view of negotiation is to take a strong, one-sided position, concede on issues slowly, exaggerate the value of any concessions you might make, minimize the value of your opponent's concessions, conceal information that might have value to your opponent, engage in trickery when possible, argue often and aggressively, and then as if the above isn't sufficiently destructive out wait the other party.

The Win-Win process is based on effective planning and development of relationships. The relationships emphasize the human needs of the parties. Win-Win encourages visualizing a successful agreement and directing all efforts toward that outcome. Win-Win works on the belief that there is always a good deal available to the parties if they are willing to trust each other. Win-Win is obviously much more acceptable than Traditional.

Practical Negotiation, the means by which we negotiate our way through each day, is the basis for recognition of process in all negotiations. It is the process that creates and shares value between parties. It is the recognition that we are dependent upon others to help us accomplish our goals. One's gain doesn't have to result in another's loss. Practical Negotiation involves many of the things we do as part of our daily lives:

  • supervising subordinates
  • interviewing for a job
  • buying at an auction
  • checking competitive prices
  • teenager wanting the family car
  • buying a house
  • establishing new work procedures
  • project management

PRACTICAL NEGOTIATION - RECOGNIZE VALUE
Through Practical Negotiation, we want to recognize that it is always possible to bake a larger pie if we just add more ingredients. Each negotiator can and should do better by joint action, cooperating and creating value, than he or she could do otherwise certainly better than the alternative provided by no agreement at all.

An illustration of "value creation" dates back to the early part of this century. Henry Ford, having conceptualized and built the first assembly line auto, decided it was necessary to double all of his workers pay. Needless to say, he stirred up a great deal of controversy, but he stayed the course and implemented the pay increase. His logic was partly to get the best workers, but mostly because his new product, the Model A, required masses of buyers, and it was no good if the masses couldn't afford it. He set a new standard and the rest of industry had to follow. Perhaps no one before or since has understood creating value better than Henry Ford. He produced a car that transformed the world by creating the opportunity for affordable, convenient transportation.

Practical Negotiation recognizes the necessary effort that goes into developing informal skills and the process through which they are learned. These skills are based on both science and the humanities; areas basic to our educational system. From science we find that the study of statistics, decision analysis, game theory and economics are the foundation of all negotiations and play a significant role in learning to negotiate, while the study of psychology, anthropology, sociology and behavior are the finishing touches that help create successful agreements. Much that transpires in negotiation is based on statistical probability, economic theory, and the understanding of people and their needs based on their culture.

CREATING VALUE
Creating value can be done in a number of ways. We are restricted only by our own self imposed limits as to ways value can be created. Take an input, improve it, and ship it to a customer - value is created. There are many ways to add value and the following are among the most effective.

Risk sharing - willingness or refusal to accept risk can result in greater or lesser value. Obviously, the more risk you accept, the greater your reward should be and vice versa. Risk sharing quite often is more important to sellers than buyers in that the seller may have more cumulative liability with regard to a certain product or circumstance. Therefore, any buyer willing to accept a greater than typical share in the risk can create value for the seller. A firm contract price places the risk on the seller, whereas a cost plus contract places the greater risk on the buyer. Value can be created by changing the value of risk acceptance as perceived by each.

Time requirements - the most precious of commodities, time has an impact on cost, quality, and quantity of inputs and outputs. Faster or slower payment schedules can increase or decrease value for the parties. Time can also have an impact on the quality of goods or services, particularly when it isn't sufficient.

Compatible capabilities - Joint gains can be found in each party's strengths and weaknesses. A software manufacturer may find a great deal of technical assistance from a hardware manufacturer. A consumer packaging company may find new ways of tooling for production through a machinery builder. The possibilities are endless for two businesses to find synergism that has escaped them in the past. Exchanging information and visits can encourage new ideas by focusing on the opportunities that two groups can develop versus those only one will pursue. Joint ventures are common when two groups combine strengths to produce something that would have been more difficult for one to go it alone.

Share interest - the basis for Practical Negotiation is found in the sharing of interests. When common interest can be developed and advanced, each party will take more with them.

Learn together - parties often find that they can create value simply by learning together. Many of the partnerships formed among companies today involve sharing learning experiences, using the same consultants, or integrating the efforts of technical staffs. Some of the high tech companies have even had their suppliers move their engineering departments into shared facilities.

Competitive supply chain - though the antitrust laws keep sellers from Combining their efforts in some instances, there is always an opportunity available to willing buyers and sellers to combine their abilities to compete for new business or markets. Together they can pursue an objective that will have positive results. The buyer and seller have a co-destiny as is the case Of suppliers to the automotive industry where the success of the auto assembly operation determine the ultimate success of many sub-suppliers.

Combine resources - two parties, each doing $50 million in sales, can find value in their combined assets and approach the marketplace as though both have greater resources. A joint venture would be viewed by the financial community as a more attractive proposition when they see combined sales of $100 million. The parties share their good financial record to bolster the confidence of not only their creditors but the other stakeholders in the business.

SUMMARY
Practical Negotiation subscribes to abundance as opposed to scarcity. There is always an opportunity to create value in any relationship. Once value is created, it also acceptable for the parties to claim, but it should not be at the expense of cooperation. Practical Negotiation recognizes the way we negotiate in the typical work environment. By recognizing the existence of the natural way we tend to negotiate, we can apply the things we learn to more formal situations. In either circumstance the principle of value creation and sharing applies. The parties determine how and when to create or claim value. Learning to create and claim value will improve your ability to negotiate.

REFERENCES

  1. J. Keith Murnighan, Bargaining Games, William Morrow and Co., 1992.
  2. Mary Walton, The Deming Management Method, Putnam Publishing, 1986.
  3. David A. Lax and James K. Sebenius, The Manager as Negotiator, The Free Press, 1986.
  4. Roger Fisher and William Ury, Getting to Yes, Penguin Books, 1981.
  5. William Ury, Getting Past No, Bantam, 1993.
  6. H. James Harrington, Business Process Improvement: The Breakthrough Strategy for Total Quality, Productivity, and Competitiveness, McGraw-Hill, 1991.

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