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)