Question

In the fall of 1999, a group of managers met in Scandinavia for the first of three negotiations involving four companies from three different countries and a family of products. The situation was a common one: a buyer tells a supplier it wants prices reduced by 10 percent and, “Oh by the way, we’ll also be soliciting quotes from your major competitor.” At the heart of the meetings was the buyer’s corporate agenda to cut costs. Cost-cutting is a common theme among large corporations. Even in good times, they have been known to pressure their vendors to lower prices and to play vendors off against each other. This case illustrates what actions a supplier might take in this situation. Other vendors who may find themselves in similar situations can take these actions as well. BACKGROUND FD is a Dutch manufacturer of filtration products. Rather than selling directly to end customers, throughout the 1970s and 1980s, FD sold oil filters and oil filter cartridges (replacements) to Swedish and Finnish heavy equipment manufacturers who, in turn, branded and sold the products to their own customers. In the late 1980s the Scandinavian market for oil filters began to change. The Finnish government consolidated many of the region’s heavy equipment manufacturers into one company, Conquip. About the same time, FF, a Finnish competitor of FD, began supplying filters to Conquip that were similar to those supplied by FD. Because the Finnish government had a stake in both FF and Conquip, FF was able to gain market share quickly. As a result, entire divisions of Conquip began replacing FD as their supplier of filters in favor of FF. By the late 1990s, only Conquip Truck, a Swedish division of Conquip, remained as a dedicated customer of FD filters in the region. FD was determined to keep Conquip Truck as a customer. Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 2 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett In the mid-1990s FD had introduced a new filter cartridge design called LEIF (Low Environmental Impact Filter). FD had hoped that the LEIF products would block further FF inroads into the market for oil filters. The patented LEIF product family, which included LEIF filter housings and LEIF replacement cartridges, was designed to fill increasing demand for environmentally friendly products and to tackle the problem of imitators such as FF. LEIF’s new technology meant that LEIF cartridges were cheaper to produce than the old filters, and so could be offered at a lower price. In the environmentally conscious Scandinavian market, LEIF was the product of choice. Conquip Truck started purchasing LEIF replacement cartridges from FD and prepared to begin purchasing LEIF filter housings as well. But before LEIF could be widely adopted and marketed, Conquip Corporate launched an initiative aimed at reducing supplier costs within its divisions. In 1999, Conquip Corporate sent FD a list and asked FD to quote its best prices for these filters. This RFQ (request for quote) seemed like an ultimatum. If FD did not quote competitive prices, Conquip might force its Conquip Truck division to stop buying from FD. FD had been aware of Conquip’s supplier cost initiative, but the RFQ came rather earlier than FD had hoped, as even within Conquip Truck LEIF still had not been widely adopted. THE NEGOTIATIONS Marc de Winter, the FD marketing and sales director, studied the product list in the RFQ and proposed a meeting in Finland to discuss this request. This meeting turned out to be the first in this case’s series of three meetings and negotiations. Meeting 1: Information Exchange and Relationship Building FD’s goals for the first meeting were to develop a relationship with the Conquip representatives and, in the process, find out about Conquip’s objectives, positions, and interests. Developing personal rapport and trust with Conquip’s corporate office would be extremely important in any future negotiations. FD attended the meeting along with FILTECH, its Swedish distributor. The discussion helped reveal Conquip’s goal: reducing prices on all filtration products supplied by FD and FF Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 3 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett over the next three years. At the meeting, Conquip offered to retain FD as a companywide, primary supplier if FD could meet its price demands. However, de Winter was suspicious of this offer because of the close relationship between Conquip and FF. He thought that it would be difficult to hold Conquip to its promise. Moreover, many of FD’s highvolume products were conspicuously missing from Conquip’s RFQ. De Winter concluded that Conquip just wanted quotes from FD on products that competed directly with FF products, no doubt for the purpose of reducing FF’s prices. Despite his suspicions, de Winter promised to prepare a quotation based on the information given, and a second meeting was scheduled for later that fall to discuss and negotiate pricing options. In a side discussion after the first meeting, FD and FILTECH came to the conclusion that Conquip was trying to replace FD with FF throughout the company. It was a tough situation: unless FD was able to meet Conquip’s demands and convince them to keep FD as a supplier, FD risked losing all of its business with this major Finnish customer. Meeting 2: The Negotiation Before the second meeting de Winter assessed the situation. There were three main issues to discuss: pricing; product type; and volume of sales to Conquip, including to how many and which of Conquip’s divisions FD could sell its LEIF product range. FD and FILTECH’s highest priorities were to maintain positive margins and a long-term sales relationship with Conquip. FD also had some sense that Conquip was interested in sales in the high-margin aftermarket (the market for filter replacement cartridges) and to ensure low procurement costs from FD. Conquip’s interest in scope of sales (number of products), however, was not as clear. FD walked into the negotiation with a poor BATNA: no agreement meant FD risked losing all its Conquip business to FF. FD was aware of this poor BATNA, but did not want to make concessions too easily and look weak. Meanwhile, Conquip seemed to have a strong BATNA: the company could easily switch to FF filters. However, if de Winter could convince Conquip of the value of LEIF’s innovative technology, Conquip’s BATNA would weaken: it would have no supplier of a product that would be equivalent to the patented LEIF product. Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 4 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett Both FD and FILTECH enjoyed sizeable margins on filter sales to Conquip Truck. They knew they could meet Conquip’s 10 percent price cut demand over three years and still enjoy healthy margins. The negotiation began with an almost exclusive focus on the price. The sides haggled over de Winter’s prices on items in Conquip’s RFQ. As a result of this focus on one issue, negotiations proved to be difficult. De Winter did offer a series of different proposals that incorporated different levels of pricing, different product lines, and so on, but Conquip rejected all these proposals, insisting on a 10 percent discount across all products. Conquip would not discuss any other issues without an agreement first on price. It seemed like an impasse until de Winter began to focus on Conquip’s aftermarket sales. He guessed that Conquip might be willing to accept smaller price cuts if it could increase aftermarket sales. Unknown to de Winter at the time, in the aftermarket for FF replacement cartridges, Conquip was losing market share to its competitors. De Winter explained that LEIF’s patents would ensure a strong position for Conquip in the aftermarket. (Customers with LEIF filters would demand LEIF replacement filters manufactured by FD, which only Conquip could supply.) This meeting ended with Conquip agreeing to commit Conquip Truck to LEIF products at prices reduced by 7 to 9 percent (depending on the product) over three years. Conquip also promised to seriously consider FD as a supplier for its other divisions. Meeting 3: Post-Agreement Negotiations Several days after the agreement resulting from meeting 2, de Winter received a phone call from Conquip Corporate indicating that the pricing was not acceptable after all. Conquip Corporate wanted to renegotiate prices before signing the final agreement. De Winter made clear that he was not coming to Finland or Sweden again to renegotiate a deal in which all parties had already come to a verbal agreement. He invited them to Holland if they wanted to renegotiate. Ultimately a meeting was set up between Conquip Corporate and FILTECH in Sweden. This final negotiation resulted in Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 5 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett an extra price decrease that would be shouldered by FILTECH (not FD) and a promise to give FILTECH more business at another Conquip division in Sweden where business had been lost previously.

DISCUSSION QUESTIONS 1. Why did Conquip send an RFQ with a 10 percent price reduction requirement rather than calling de Winter in for a negotiation? Is there any downside to having run the negotiation this way?

2. At the first negotiation meeting, Conquip made a threat disguised within an offer. The offer was to retain FD as a companywide, primary supplier if FD could meet its price demands. A. What was the threat embedded in this offer? B. Why was this offer not credible to de Winter?

3. If FD could have reduced prices by the 10 percent requested by Conquip and still have a positive and reasonable margin, why negotiate? Why not just reduce the price to save the business?

4. How did Marc de Winter improve his bargaining position at meeting 2? What general negotiation principle did he employ? How well did it work?

Answer 1

1. Why did Conquip send an RFQ with a 10 percent price reduction requirement rather than calling de Winter in for a negotiation? Is there any downside to having run the negotiation this way?

Conquip meant to put time pressure to bear on FD. It can be seen as Conquip sent the RFP to FD for the commodity, LEIF filter which Conquip does not yet have widely embraced. Much of an intrinsic limitation to FD, this weight. Based on the principle, the constraint excludes what can be called an desirable choice for FD to compromise in an effort to strengthen the various terms of the agreement. For this option, it allows FD to come up with a double option where they should accept or reject on Conquip's demanded deal. This may sound like a smart idea before Conquip discovers there's no difference and FD will place pressure on them on time as well. There could be a case in which the deadline was closing on both sides. In this case, the one with the greater power is the one with several alternatives and can use time pressure but the other side with few alternatives has the least control which is expected to resist time pressure and achieve consensus before the deadline.

2. At the first negotiation meeting, Conquip made a threat disguised within an offer. The offer was to retain FD as a companywide, primary supplier if FD could meet its price demands. A. What was the threat embedded in this offer? B. Why was this offer not credible to de Winter?

(A) The hazard contained in this bid was that de Winter is wary of Conquip 's friendship with FF. He came to find that a quote was expected in as well as Conquip; the RFQ skipped a large percentage of the FD items. This made de Winter highly skeptical because he assumed that Conquip required quotations from FD on goods that were specifically competitive with FF goods for the main purpose of lowering FF costs.

(B) De Winter's bid was not convincing because De Winter found the RFQ was a template for FD. Framing is a mechanism in which individuals try to analyze and make sense out of problems that could lead to acts being taken and stopped later on. Conquip wanted to provide a solution in this particular situation and to describe it in the way it was useful and focused on the concern of the FD's. At the other hand, after realizing that they were being framed, de Winter may have realized what Conquip was up to. Learning all about the mechanics of framing allowed de Winter to deliberately manage the framing process.

3. If FD could have reduced prices by the 10 percent requested by Conquip and still have a positive and reasonable margin, why negotiate? Why not just reduce the price to save the business?

Conquip needed to bargain as the number one goals for FILETCH and FD were to maintain a long-term business alliance and good profits. Upon learning that Conquip wanted to use FD to their benefit, FD was unable to deliver false hope. This had to be inferred in spite of the essential details conquip had not provided the value on the selling of a variety of goods, for instance. Noticing however that FD came with an unsuccessful BATNA, de Winter steered off making compromises quickly because it would make them appear bad. A negotiator had to accept the agreed deal because it was stronger than his BATNA, or suggest withdrawing from the talks in a attempt to find a viable solution. He decided to stick with the deal just as far as de Winter did not have a great BATNA. Despite that, giving that idea made Conquip believe that next to them, FD had a better solution. De Winter may have developed a reverse psychology on Conquip framing.

4. How did Marc de Winter improve his bargaining position at meeting 2? What general negotiation principle did he employ? How well did it work?

The explanation the second meeting changed was that de Winter came up with a plan that would create a good result while the two organizations were working together. De Winter has moved his overall stance from position-based talks to interest-based. Conquip 's focus was primarily in the the cost of production while FD wanted to start with the good margins and a long-term business partnership with Conquip. Thus, as all companies look above the price to get to know the organizations' long to short-term needs, they followed a win-win approach to this solution.

They came up with a compromise because Conquip did not need to check for alternatives to find the least possible one, so they can focus on providing the FD products consistently at a reasonable price, with an added premium being given for the FD products inside the package. In the other hand, FD prevailed because it had a buyer showing value for its commodity, guaranteeing a stable cash flow, consistent activities, and steady jobs. All businesses may have arranged for a committed alliance that should take into account the value of a long-term friendship.

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