L4M5 Commercial Negotiation Questions and Answers

Both organisational and personal power have the ability to influence the outcomes of negotiation. Good negotiators recognises the different sources of relative personal power they possess in a negotiation. There is no one superior source of personal power; they will vary in their effectiveness based on the situation. The more personal sources available the better, even if some not used, these can be used as a fallback.

LO 1, AC 1.3

Commercial negotiation objectives should bedriven by the business needs of the organisation. Organisations are made up of different stakeholder groups, some of whom may have different, even conflicting objectives. From a negotiation perspective, stakeholders can be defined as persons or groups thathave interest (or stake) in the outcome of the negotiation you are leading or participating in.

CIPS distinguishes between 3 sets of stakeholders:

- Internal stakeholders

- Connected stakeholders

- External stakeholders

End-users are examples of internalstakeholders. They are the people who will benefit from the purchase of a product or service. However, their interest may conflict with other groups, i.e. the budget controllers whose objective is minimising the expense. In negotiation perspective, procurement should involve different groups of stakeholder.

LO 1, AC 1.1

In order to estimate the gap and the progress towards desired level of support, a stakeholder support scale can be used by the procurement internally. The support level scale measures stakeholder commitment. Current support level for the procurement/negotiation objectives should be gained from engagement with key stakeholders. The following is an example of stakeholder support level scale:

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LO 1, AC 1.1

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Asking questions the right way is both an art and a science. Ask the question the wrong way, and the other negotiator might act like a turtle, becoming defensive and withdrawing into their shell. Ask the question the right way, and the other negotiator might “spill the beans.”.

Closed Questions: How and when to use them?

Closed questions are those thatrequire a short and focused answer, and are especially helpful in the beginning stages of the negotiation to encourage interaction. They can be used to clarify a point, or to reconfirm certain facts. For example, you can use a closed question to confirm the amount of units the company can produce in a week, or to clarify that what they are really saying is that they don’t feel comfortable outsourcing their accounts to India. Most closed questions only require a simple “yes” or “no” response, so there reallyisn’t much room for misinterpretation – great for finding out where both you and they stand.

Listening is a hugely important skill in the world of work. It’s a key part of effective communication [...].

Regarding active listening, there is a model called 'The SIER Hierarchy of Active Listening'. It details four key stages required for effective listening. As with all models associated with active listening, its purpose is to help the listener be a better, more effective listener who really hears what is being said, connects with the individual with whom they are communicating andbuilds effective relationships.

The model is a hierarchical model meaning that each stage builds on the stage before it. While the model is sometimes used for training in the sales arena, it is helpful in all walks of life. The stages of the model are: Sensing (including hearing and watching body language), Interpreting, Evaluating and Responding.

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The earlier procurement get involved in the procurement processes, the better. If procurement are involved in design at the specification stage they can feed in prices and costs to designer so they know the likely budget implication of choices made. Sending in a procurement team to negotiate at or close to the end ofthe procurement process effectively ties their hands and limits their negotiation leverage. This is illustrated in the graph below:

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LO 2, AC 2.1

In order to identify opportunities where you can increase your leverage with supplier, you need to understand your spend. Undertaking spend analysis of your accounts payable (AP) data is an essential first step here.

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Anorganisation's expense can be categorised into three groups:

Fixed Costs – costs that do not change with output.

Variable Costs – costs that vary in direct proportion to output.

Semi-variable costs – costs that are a combination of the above, with both a fixed and variable element.

Among the four options:

"Land rental paid in advance": This is fixed cost. The rental won't increase when the production increases.

"Additional pallet hires due to higher demand in year-end season": This can be identified as semi-variable cost (or step cost).

"Governments taxes": The taxes are often levied by a percentage of income or revenue. Therefore, it is variable

"Raw materials for next year production": This is obviously variable cost.

A shift in demand occurs when an influencing factor other than price changes. Those factors are:

- The income ofbuyers

- The tastes and preferences of buyers

- The prices of other goods and services, especially substitutes and complements

- Expectations of buyer about the future

In this question:

- 'Prices of complementary goods decrease' will lead toquantity demanded for that complements rising, then demand for consumer good will increase accordingly.

- 'Price of the consumer good decreases' will increase the quantity demanded for that good, but it will not shift the demand curve

- 'Customers' expectation of higher prices in the future': in this scenario, customers tend to buy more to store in present, which leads to demand curve shifting to the right

- 'Consumer tastes shift toward substitute products': Demand for substitutes will rise, so demand forthat consumer good will decrease and the demand curve shifts to the left.

LO 2, AC 2.2

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According to the book 'Influencing: Skills and techniques for business success' by Fiona Dent and Mike Brent, there are two major influencing styles. Push tends to be directive. It tells, and is clear and resolute, but needs to be employed in situations where firmness is required because of difficulties that exist or weakness is evident. Pull is more participatory and collaborative. It seeks to incorporate everyone’s perspective. It can appear wishy-washy if not skilfully employed. That approach should be followed which is most likely to secure commitment and not mere compliance.

The two divisions can be further divided into four style categories: directive; persuasive reasoning; collaborative – team oriented, people oriented to inspire them with a vision. The directive style relies on your expertise and reputation being respected by others, and where there really does seem to be one answer. It is "I" driven whereas persuasive reasoning is more "we" and issue driven. Directive styles can make the user appear as "a bull in a china shop"; persuasive reasoning can be portrayed as tough guy.

Collaborative influencing takes the "we" element further and seeks to mobilise everyone’s ideas in a journey of discovery. It may have the flavour of "I’m your best friend", which may not go down too well. Visioning style is concerned to stir people’s emotions in support of achieving an objective. This last one has been used by demagogues to stir people’s hearts and minds for evil purposes as well as good.

A useful table offers the benefits, problems, words and body language associated with each style along with advice on when to use and when to avoid each. Cases and exercises illustrate these styles.

Empathy comes in for extended treatment with the definition of "standing in the other's shoes". This does not necessarily happen just intuitively, and therefore before a specific influencing effort there should bean intense effort to think about the other person or persons and to sense what it might feel like to be them – their hopes, fears, concerns, what turns them on, what turns them off, where are they coming from.

There are many factors that can influence the balance of power in a negotiation. These factors are classified into 3 levels:

- Macro level: STEEPLE framework: social, technological, economic, environment, political, legal and ethical

- Micro level: Porter's five forces:

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- One-to-one buyer-supplier dynamics.

The question asks about the micro factors that increases buyer's bargaining power. Among 5 answers, only 2 are likely to increase buyer'spower:

- JCB's switching costs are low: Buyer may easily switch its suppliers anytime

- These components are highly standardised: The products are not different any more, buyer may choose to buy from any supplier available.

Other answers cannot be correctbecause:

- Suppliers are more concentrated than buyer: Suppliers are forming oligopoly market, their bargaining power tend to be greater.

- Eruption of epidemic in supply market: this is a macro factor. Eruption of epidemic may cause factories closed and disruptions on supply chain.

- Buyers purchase in small volumes: Buyer will be seen as less potential to suppliers. Buying organisation may have difficulties to deal better price with suppliers.

LO 1, AC 1.3

The question asks about negotiation techniques which are not present in the book. In this question, there are only 3 recognised techniques:

- Framing and reframing: A frame is an assumption, or set of assumptions, that guides our attention and behavior. Reframing is the ability to identify and significantly change assumptions or perspectives. Framing has a significant impact on the effectiveness of negotiation outcomes and negotiator working relationships. You can read more on framing and reframing here.

- Anchoring: Anchoring bias is well-known cognitive bias in negotiation and in other contexts. The anchoring bias describes the common tendency to give too much weight to the first number put forth in a discussion and then inadequately adjust from that starting point, or the “anchor.” We even fixate on anchors when we know they are irrelevant to the discussion at hand. You can read more on anchoring here.

- Pacing and leading: Pacing and leading is a two-step lever of persuasion. First – You “match your pace” to the person you want to influence in as many ways as possible. You can do this by mimicking the way the person talks, stands, their appearance, etc. You can also mimic less tangible aspects like the way they act, or their emotional state.Second – Once you’ve set your pace with someone, lead them to whatever decision or behavior you want them to take! You can read more on pacing and leading here.

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Contribution = Price - Variable cost

Break-evenpoint (volume) = Fixed cost/Contribution

A monopoly exists when only one company can supply an essential product or service in a givenregion because of significant barriers to entry for any competitor. The barriers can be legal, regulatory, economic, or geographic. Ma Bell case is an example of monopoly. The company was broken up in 1982.

A monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers.

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

- All firms sell an identical product (the product is a "commodity" or "homogeneous").

- All firms are price takers (they cannot influence the market price of their product).

- Market share has no influence on prices.

- Buyers have complete or "perfect" information—in the past, presentand future—about the product being sold and the prices charged by each firm.

- Resources for such a labor are perfectly mobile.

- Firms can enter or exit the market without cost.

Monopolistic competition characterizes an industry in which many firms offerproducts or services that are similar, but not perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect those of its competitors. Monopolistic competition is closely related to the business strategy of brand differentiation

An oligopoly exists when there are small number of producers that exert a significant influence in the market. Oligopoly's main characteristics are discussed as follows:

- Interdependence

The most important feature of oligopolyis the interdependence in decision¬-making of the few firms which comprise the industry. This is because when the number of competi¬tors is few, any change in price, output, product etc. by a firm will have a direct effect on the fortune of its rivals, which will then retaliate in changing their own prices, output or products as the case may be.

- Importance of advertising and selling costs

A direct effect of interdependence of oligopolists is that the various firms have to employ variousaggressive and defensive marketing weapons to gain a greater share in the market or to prevent a fall in their market share. For this various firms have to incur a good deal of costs on advertising and on other measures of sales promotion. Therefore, thereis a great importance of advertising and selling costs under conditions of market situation characterised by oligopoly

- Group behaviour

Another important feature of oligopoly is that for the proper solution to the problem of determination of price and output under, it analysis of group behaviour is impor-tant.

- Indeterminateness of demand curve facing an oligopolist

In this question, 'Prices in oligopoly are predicted to fluctuate widely and frequently' is an incorrect statement as producers in oligopoly often try to set up price. Prices fluctuate more frequently in perfect competition.

LO 2, AC 2.2

There are many macro economic factors that could influence procurement in general andcommercial negotiation in particular. Below are six factors that are agreed to be fairly significant:

• Economy growth rate

• Inflation rates

• Interest rates

• Currency exchange rate

• Unemployment rate

• Protectionism

LO 2, AC 2.2

A useful and simple shorthand for preferred negotiation styles is summarised by four simple descriptor: 'warm', 'tough', 'logical' and 'dealer', which can beapplied to describe individuals' dominant preferred style in most circumstances.

Warm - a people person

Tough - a hard-nosed negotiator

Logic - a numbers person

Dealer - a trader who loves bargaining

Strengths, weaknesses of dealer style are described below:

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LO 2, AC 2.4

Avoiding is unassertive and uncooperative. When avoiding, an individual does not immediately pursue his or her own concerns or those of the other person. He or she does not address the conflict. Avoiding might take the form of diplomatically sidestepping an issue, postponing an issue until a better time, or simply withdrawing from a threatening situation.

LO 1, AC 1.1

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Integrative, interest-based negotiation can facilitate constructive, positive relationship and establish contracts between parties on a foundation of goodwill. It is important to note it can only facilitate these positive outcomes, it does not guarantee that the other party will not seek to be opportunistic at a later time during the life of the contract. Previous knowledge of the behaviours of the other party regarding honouring contractual and other commitments will be useful here in predicting long-term outcomes, not ensuring that they will not leverage their advantages.

Essential goods andservices such as electricity, fuel, basic food stuffs, commuter transport and habitual products such as tobacco, alcohol and sugar-based drinks are often sited as facing a relatively inelastic demand curve. This means when the price goes up, the quantity demanded does not decrease very much and so they are often the target of government taxation.

LO2, AC 2.2

Trust may create value as following:

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LO 1, AC 1.4