Power play in a buyer-seller agreement: a case of extreme competition.
The primary subject matter of the case concerns power asymmetries in negotiation. Secondary issues examined include the effect of customer demands on price, time constraints involved in the negotiation and the contrast between distributive and integrative negotiation strategies. The case has a difficulty level of four. The case is expected to be taught in two hours with additional student preparation time of 30-45 minutes. Student preparation may be done inside or outside of the classroom. The case could be used in a strategy course, or as part of a conflict/negotiation module of a general course in business management.
Set in the context of a renegotiation of a sale agreement for equipment, this negotiation exercise explores the dynamics of two companies with power asymmetries. The role play activity highlights the difficulties of negotiating when there are changes occurring in the external and competitive environment. Several other concepts are illustrated including the effect of customer demands on price, time constraints involved in the negotiation and the contrast between distributive and integrative negotiation strategies.
This case was written by: Paul Esqueda, Professor of Engineering, Division Head for Engineering, Business and Computing, Penn State Berks-Lehigh Valley College and Denise T. Ogden, Assistant Professor of Marketing, Penn State Berks-Lehigh Valley Collage. Both professors have experience in practice and teaching negotiation techniques. This case is based on an actual business situation and the story has been slightly changed for pedagogical reasons and to preserve the anonymity of the parties. Following are learning objectives, operational needs and operating procedures for implementing the case in a course. Lecture ideas, discussion questions and an explanation of what happened in the real-life negotiation are also included.
* To understand and gain practice in a conflict in which asymmetries in power exist
* Consider whether integrative potential exists in a negotiation that has distributive features
* Explore the role of power and alternatives in negotiation
* Understand the effect of time demands on price
* Demonstrate the potential for entrapment in a negotiation
* To explore some of the dynamics of trust and suspicion between groups
* Explore the role of ethics in a negotiation situation
Group size: Two small groups are used to role-play the company teams involved in the negotiation.
Time required: About 30-45 minutes to read the case and prepare for the negotiation; 60 minutes to role-play; 50-60 minutes to discuss and summarize and discuss key principles.
Materials: The case must be copied for the class in which the case is to be taught. The instructor should make one copy of each case for each student. Copies are also needed for the confidential information given to each team member participating in the role-play.
Physical Requirements: A room that is big enough where the teams can discuss strategy privately within their teams. Where possible, two "break-out" rooms can be used for maximum privacy.
* Choose two teams (3 to 5 members/team). Each team will role-play either the management team of Fresh Water Mining Co. or the management team of the Dutch Royal Fluorescence X-Ray B.V. company. The teams should sit far enough from each other to allow private meetings. If possible, a breakout room should be used to ensure privacy.
* Have students read the background information for case and answer any preliminary questions. Next, hand out each team's "confidential information" sheets that provide additional information for the exercise.
* Allow each team to read and discuss their negotiation strategy (20-30 minutes).
* Have the teams conduct the role play in front of the rest of the class.
* Class debriefing and discussion of the negotiation exercise will take anywhere from 30-75 minutes, depending on the depth and sophistication of the discussion.
This case provides the opportunity to illustrate many concepts that occur in negotiation that can be highlighted during discussion:
Power--The case illustrates the idea that power in negotiation is a function of alternatives.
Relationships--Past negotiating relationships set the context for the current negotiation.
Time Pressure--Time plays a role in this case because FWMC has placed pressure on Royal X-ray. If Royal X-ray does not agree to the demands, the parties will have to resort to alternatives.
BATNA (Best Alternative to a Negotiated Agreement)--When one party has an alternative, the dynamics of the negotiation can change. In this case, FWMC has been approached by a competitor who is willing to do whatever it takes to win their business.
Anchoring and Adjustment--The initial price set an anchor by which subsequent adjustments in price are measured during the negotiation. Due to changes in the external environment, FWMC is attempting to adjust the price.
Entrapment--There may be some pressure for FWMC to "settle at all costs." This perspective may lead to entrapment. In this scenario, Royal X-ray feels compelled to give in to FWMC demands regardless of potential losses. The time and effort already invested in the deal makes it more difficult for FWMC to back out.
Ethics--In many negotiation situations both parties practice bluffing. Although this practice is widely practiced and accepted, some believe this is lying and this practice may raise ethical questions.
Several models may be applied to this situation, suggestions are as follows:
* Integrative vs. Distribution Negotiations--This case provides an opportunity to discuss distributive vs. integrative negotiations and the mixed-motive characteristics of a negotiation.
Thompson, L. (1998). The mind and heart of the negotiator. Upper Saddle River, New Jersey: Prentice Hall.
* Seven Elements of Successful Negotiation--The seven elements as described by Fisher and Ertel are interests, options, alternatives, legitimacy, communication, relationship and commitment. A lecture is appropriate and can be done before of after the role-play.
Fisher, R. and Ertel, D. (1995). Getting ready to negotiate: The getting to yes workbook. New York: Penguin.
* Five Forces Analysis--The analysis of Porter's five forces that drive competition can be used as a basis for discussion:
Threat of new entrants
Threat of substitute products or services
Bargaining power of suppliers
Bargaining power of buyers
Rivalry among existing firms
Porter, M. E. (1980). Competitive strategy, techniques for analyzing industries and competitors. New York: The Free Press.
* Ethics--Wokutch and Carson view analyze bluffing from an economic gain perspective. Reitz, Wall and Love describe questionable negotiation tactics and ethical criteria. Both articles provide a base for an ethics-based discussion.
Wokutch, R. E.& Carson, T. L. (1981). The ethics and profitability of bluffing in business. Westminster Institute Review, 1(2), 77-83.
Reitz, H.J., Wall, J.A. & Love, M.S. (1998). Ethics and negotiation: Oil and water or good lubrication? Business Horizons, (41), 5-14.
The following discussion questions may be used for discussion:
1. What potential problems did Royal X-ray identify prior to the negotiation? What problems emerged during the negotiation?
2. What did each side bring to the negotiation as factors with which to negotiate?
3. How effectively did the Royal X-Ray team approach the negotiation?
4. How effectively did Fresh Water Mining Company team approach the negotiation?
5. What are the interests, goals, and alternatives of the parties? What is each party's BATNA (best alternative to a negotiated agreement)?
6. What effect did competition have on the dynamics of the negotiation?
7. How did asymmetries in the power relationship between the two companies effect the negotiation?
8. Was this an integrative negotiation or a distributive negotiation? Why? Were there any attempts at creative problem solving?
9. Did you reach an agreement in this negotiation? If so, how satisfied are you with the price? If not, is there anything that could have been done to reach agreement?
10. If you reached a settlement, how does the settlement price compare to the initial contract agreement? Who "won" in this exercise?
11. What areas involved ethics in the negotiation? Is bluffing an accepted practice? When does bluffing cross the line into unacceptable behavior?
This case is based on an actual business situation and the story has been slightly changed for pedagogical reasons and to preserve the anonymity of the parties. The main outcome of the meeting between FWMC and Royal X-Ray after the latter won the bid was that Royal X-Ray conceded to all the requests made by FWMC with very little gain for the Royal X-Ray negotiating team. Royal X-Ray opted for a strategy of preserving such an important customer at all cost in light of a very aggressive competition. In essence, Royal X-Ray accepted changes in the order that resulted in a drastic reduction in their profit margin.
The general manager of Royal X-Ray for the Latin American region was highly distressed by the outcome of this negotiation. Although, he understood the entrapment situation, he questioned the negotiating skills of his sales force. As a consequence of his disappointment, Royal X-Ray organized a one-day negotiation workshop during the three-day annual meeting for its Latin American sales force in Amsterdam. This simulation case was commissioned to one of the authors of this paper and it was given to the participants during that workshop as a final case.
Three teams (A, B and C) of six negotiators were set up to negotiate the same case. The teams were further subdivided so that both FWMC and Royal X-Ray had three negotiators. Table 3 summarizes the results of the simulation.
It is evident from these results that the party with the upper-hand exercised all its power, despite both parties having full knowledge of the outcome of the real-life situation. Royal X-Ray conceded in all three simulations with slightly different gains in cash flow in each group for the whole project.
The general manager had been assigned the role of FWMC in one of the negotiating tables (A) since he had complained bitterly about the outcome of the real-life negotiation. During the debriefing period of the simulation, he was asked why he had not been more magnanimous to Royal X-Ray and he replied that they had not made a compelling case. In the real situation it could have been an issue of not framing the negotiation properly. The similarity of outcomes in the three cases reveals that an excessive power asymmetry provides strong leverage and allows the dominant party to impose its will upon the other. In this particular case, the power asymmetries arise from FWMC being the dominant customer in that market and for having a solid BATNA (Japanese X-Ray).
ADDITIONAL READING RESOURCES
Bazerman, M. & Neale, M. (1992). Negotiating rationally. New York: Free Press.
Bowen, D.D., Lewicki, R.J., Hall, D.T. & Hall, F.H. (1997). Experiences in management and organizational behavior, (Fourth Edition). New York: John Wiley.
Brockner, J., Shaw, M. C., & Rubin, J. Z. (1979). Factors affecting withdrawal from an escalating conflict: Quitting before it's too late. Journal of Experimental Social Psychology, 15, 492-503.
Fisher, R. & Ertel, D. (1995). Getting ready to negotiate: The getting to yes workbook. New York: Penguin.
Kristensen, H. & Garling, T. (1997). The effects of anchor points and reference points on negotiation process and outcome. Organizational Behavior and Human Decision Processes, 71, 85-94.
Lax, D. A., & Sebenius, J. K. (1986). The manager as negotiator: Bargaining for cooperation and competitive gain. New York: Free Press.
Rubin, Jeffrey Z. (1981). Psychological traps. Psychology Today, (March), 55- 61.
Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of Management Review, 6, 577-587.
Teger, A. I. (1979). Too much invested to quit: The psychology of the escalation of conflict. New York: Pergammon Press.
Paul Esqueda, Penn State Berks-Lehigh Valley College Denise T. Ogden, Penn State Berks-Lehigh Valley College
Table 3: Summary of agreements between FWMC and Royal X-Ray (Simulation in Holland, January 2004) Team A Team B Price Same as original quote Same as original quote Delivery time 8 weeks 10 weeks Down payment 20% at signing order 68% at signing order 30% with delivery of equipment 50% acceptance test Others Down payment check paid today Down payment check paid today Team C Price Same as original quote Delivery time 10 weeks Down payment 50% at signing order Others Down payment check paid today
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|Title Annotation:||CASE NOTES|
|Author:||Esqueda, Paul; Ogden, Denise T.|
|Publication:||Journal of the International Academy for Case Studies|
|Article Type:||Case study|
|Date:||Mar 1, 2005|
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