How Expensive is a Public Embarrassment?

Posted on November 24, 2007 | Filed Under Leverage | Leave a Comment

Suppose you are a toy manufacturer located in China.  The news is full of stories of contaminated toys.  Plenty of unfounded rumors are tagging along.  One of your key customers is re-negotiating a contract that is important to you, and price (as always) is an issue.  Your customer raises the quality concerns.  The customer talks about the massive financial risks of a public outcry, involving the “health of our most helpless citizens, the children” (as the press would say).  Your relationship has always been good.  None of these problems have been yours.  In the end, the customer asks for a lower price, “to provide additional protection”.  You know that you have the ability to cut the price – there is enough margin in this particular transaction.  What now?

This is an example of a customer using the public embarrassment as leverage in a negotiation.  Their story is plausible, “I must protect myself from this additional risk.”  They know you want the business.  It’s just one example of leverage in action.

A good negotiator will always ask the question, “What problem are we trying to solve?”  In the case above, the problem is not, in fact, money.  The problem is risk – and worse than that, it isn’t even risk that relates to your own performance.  It’s someone else’s risk, passed on to you by association.

One approach is this.  Tell your customer that you understand the risk involved is tremendous for them – while reminding them that your performance has been exemplary.  Offer to add additional risk-related actions to your contract – inspections or an outside audit – whatever it takes to make them feel secure.  Then raise your price – because risk-abatement is not free, and because it has value to the client.  Let the customer decide if the additional actions are worth the price.  In this way, you will uncover the truth.  Was this just a tactic to get a better price, or was the problem a real one, but one which is solved in a different way than the customer proposed?  Either way, your negotiation position is improved, because your knowledge is better.  Plus, you may actually improve your contract position, rather than cut your margin.  It’s Wise Negotiating.  (TD)

Toray Industries (Japan) and Boeing

Posted on November 23, 2007 | Filed Under Leverage | Leave a Comment

How do you act when you are the incumbent?  In a Bloomberg.com article, Boeing is reported to be in talks with Japan’s Toray Industries regarding a possible 40% increase in Boeing’s orders for carbon fiber reinforced materials.  The materials are used in building the Boeing 787 airplane, and are Toray’s most profitable line of business.  This is how the discussions might go…

Boeing: “With our order size increase, you should realize the economies of scale and have reduced manufacturing costs.  This should result in a lower unit price for us.”

Toray: “Our materials are the finest available for your use.  A single-source solution will reduce your build complexity, help your time to market, and accelerate your revenue for this new airplane.”

Toray’s incumbency with Boeing is a powerful, but two-sided position.  Your best clients are often your most demanding ones, and the ones who remind you of your “partnership”.  But discounting to retain the business that you originally won through product and service excellence is a risky negotiating choice.  If you don’t “hold the line” on your price when you have an advantage, you will never be able to hold the line on price.

Incumbency provides negotiating leverage.  When this leverage is used with arrogance, it will drive your client to find an alternative supplier.  But when this leverage is not used at all, it will erode your business now, and going forward to the next transaction.  Use your leverage wisely. (TD)

Cognos

Posted on November 23, 2007 | Filed Under Value | Leave a Comment

If better negotiating is about being better able to express your value, how good are people at expressing value?  Buyers pay for value, which is not to be confused with price.  If you heard, “this is a $40,000 car, but I will sell it to you for $32,000″, what would you think?  You would most likely think it was a $32,000 (or less) car.  Since IBM just made its largest-ever acquisition, Cognos, we thought we’d look at how Cognos expresses their value.  One of their solution overview pages includes this language:

1. “Enables more effective rewards for your workforce, enhancing satisfaction and commitment.

2. Increases customer retention; win more new customers; improve productivity; and raise profits.”

There is a distinct difference between these two examples.  Number 2 follows a recognizable path – customer retention and more customers leading ultimately to profit.  Almost everyone recognizes this value statement as powerful (if believed).  Number 1 seems to be a weaker value statement to most readers.  Employee “satisfaction and commitment” are interesting, but not compelling unless you have a certain role in your organization.  For a Human Resources executive that is measured on employee satisfaction, this is a winning argument.  For the Chief Financial Officer, it probably is not.

This is a very good example of altering your value argument for the audience that you need to convince.  Use of this “flexible” persuasion is a critical negotiating skill.  Is something still missing from these value statements?  Yes – it is the uniqueness of the value that only Cognos can provide.  Without that, Cognos will be selling commodity solutions that are undifferentiated from those offered by their competition. (TD)

About This Page

You are currently browsing the Negotiation and the News blog archives for November, 2007.

Recently


Categories


Archives