D4 Exam Questions Flashcards

Question

Explain the term ‘balance of power’ in commercial negotiations (5) November 2013, January 2014 (LO2)

Answer 1

**Explain the term ‘balance of power’ in commercial negotiations (5)** One of the main reasons for entering into a negotiation is to achieve better results than would be possible without negotiating. The stronger the BATNA, the greater the range of alternative courses of action and the greater the ability to walk away from an unsatisfactory negotiation. Paradoxically, one of the greatest dangers in a negotiation is being too committed to reaching agreement without sufficient consideration of one’s BATNA! If you are unaware of your BATNA, you are in danger of entering into an agreement that you would be better off without. Other uses of the BATNA will be explored later in this Guide. The balance of power will sit with the Purchaser, because of large buying power The balance of power will sit with the supplier if he has an actual monopoly, a geographical monopoly or a virtual monopoly position in the market. Any market power must not be misused to damage, eliminate or exclude competitors from the market. Purchasers can increase their negotiating power by identifying a number of alternative products/services and by having a range of possible suppliers Buyers should never enter a negotiation without knowing the alternatives that are open to them.

Answer 2

**Discuss how the balance of power may affect commercial negotiations (10)** Five different sources of power organisational relationships were identified by French and Raven 1. Legitimate Power legal/rational - ability exert influence is based on others' belief in the legitimacy of the authority 2. Expert Power - expertise/knowledge is recognised and valued by others - so willing to be influenced by experts 3. Reward power - recognised control over resources and recognised by others as having value - so they are willing to be influenced in return for rewards 4. Referent Power - emenating from the attractive/inspiring personality ie interpersonal skills, communication and influencing skills. 5. Coercive Power - power to threaten sanction, hand out punishments or intimidate others if compliance is not obtained

Answer 3

Explain why negotiators may develop a BATNA when planning for a commercial negotiation (10) 1. Having a **back up plan** (the BATNA - Best alternative to a negotiated agreement) as an acceptable alternative to a negotiated agreement: 2. Enables you to **be more assertive during negotiation**, because you can use the availability of a good BATNA as leverage ( especially if the other party is anxious to conclude a deal) 3. **Protects you from feeling that you 'have to' accept terms** that are too unfavourable (below your minimum acceptable position). Once your resistance point/walk-away position is reached, the BATNA offers a better outcome - rather than making further concessions to 'reach a deal' (taking the agreement below the outcome available through the BATNA), it will be better to walk away 4. **Provides decision rule**, if negotiations reach a point where the other party is saying: "Take it or leave it" - by identifying exactly what the alternative is if you decide to "leave it"

Answer 4

Discuss FOUR differences between distributive (win-lose) and integrative (win-win) approaches to commercial negotiation (16) 1. Key Attitude * D: We win, you lose * I: How can the goals of each party be achieved so that both win? 2. Approach * D: Hostile and aggressive - us against them * I: Positive, assertive but not aggressive, supportive - we are in this together 3. Impasse Options * D: The negotiation may be terminated * I: Impasse is regard as just another issue to be solved, possibly by internvention of higher management, mediator or arbitrator 4. Tactics * D: Use threats, bluffs and ultimatums to keep other party on defensive * I: Parties refrain from threats because they are viewed as counter-productive to the rational solution of issues and problem

Answer 5

**Suggest THREE situations when a distributive approach may be appropriate for commercial negotiations (9)** 1. A point is **non-negotiable** ie HSE commitments 2. When **one party has high bargaining power over the other** (and it would represent poor stewardship of the shareholder's resources not to reap benefit from that advantage) 3. When maximising **benefit from a transaction is more important than developing the potential in a relationship** (usually high volume, routine purchases that can be purchased from any supplier)

Answer 6

Describe THREE sources of personal power that can be used in a commercial negotiation (15) 1. Informational * Resources for rational persuasion based on * Information: the accumulation and presentation of data intended to change the other person's point of view or position on an issue * Expertise: an acknowledged accumulation of infromation, or mastery of a body of information, on a particular problem or issue 2. Personality and Individual differences * Power derived from differences in * Pshycological orientation (greater willingness to use power) * Cognitive orientation (ideology and understanding of power) * Motivational oerientation (satisfaction and rewards of using power) * Dispositions and skills (behavioural tendencies and skills favouring co-operation or competition) * Moral orientation (ethical values around use of power) 3. Position-based power * Power derived from a position of formal authority or influence in an organisation or communication structure, leading to * Legitimate power, or formal authority, derived from occupynig a key position in a hierarchical organisation * Resource control: control over the deployment of moey, raw material, labour, time and equipment, which can be used as incentives to encourage compliance or as a sanction for non-compliance

Answer 7

Explain the reasons that lead to a monopoly supplier having high power relative to a purchaser in a commercial negotiation (10) * Only one supplier of the goods exists. It may be a single organisation, or a group of producers acting together to control supply ( eg a cartel such as theOrganisation of Petroleum Exporting Countries , OPEC) * There are barriers to entry, preventing other firms from entering the market (eg high set up costs, high customer loyalty to the existing producer, or the existing producer monopolising sources of supply and distribution channels) * There are no substitutes for the goods being produced (which would enable buyers to switch suppliers)

Answer 8

Explain how negotiation could be used during THREE different stages of the sourcing process (15) A typical sourcing process with its stages would be: * Identify and define needs – at this stage procurement can be involved in **challenging requirements and specifications** using negotiation to challenge elements of the specification. Procurement might want **to achieve the most open requirements to enable** negotiation with a range of suppliers and **allow options and innovation** to be part of a supplier proposal. * Contract management – Contract performance and relationship management **may create problems and conflicts** that Procurement should try to **resolve through negotiation**. Suppliers will have **obligations** to perform under the contract and if performance levels fall, this should be addressed. Requirements and **circumstances may change** and might need to be accounted for in the contract. **Non-conformance or breaches of contract** may also arise and need to be resolved within the terms of the contract. * Develop contract terms – While procurement may issue standard terms and conditions, it is likely that there will be **discussion and negotiation about some terms and other specific commercial requirements** for the purchase. * Negotiate best value – Procurement might choose to negotiate with external organisations to **ensure prices are competitive, to ensure the best mix of requirements is achieved** if price is not the only distinguishing factor. * Source the market – RFI/RFP/RFQ - Proposals are requested from a number of suppliers as a basis for negotiation. * Post tender negotiations – after receiving tender responses but before contract award negotiation may be required for clarification of elements of the submission.

Answer 9

**Explain how stakeholders can contribute to a commercial negotiation (10)** 1. Negotiator(s) – directly responsible for the process and outcome. 2. Contract Managers – responsible for managing contract performance. 3. Implementation personnel – responsible for supply arrangements, payment etc. 4. Users of the products and services - specifications and Service Level Agreements (SLA) are important to users. 5. Budget holders – interested in the value outcome of the deal. 6. Senior management – interested in the risks and effectiveness of any agreement and how it might affect profitability overall. 7. The suppliers - interested in gaining the business. 8. External bodies - this could include government agencies, local councils etc.

Answer 10

Explain FIVE ways a buying organisation can improve its leverage with suppliers in a commercial negotiation. (25) 1. Increasing expert and informational power * Gathering market intelligence and networking with key information holder * Assemble and organise strong data to support your position, arugements or desired outcomes * Appealing to relevant expert opinion to support your position or arguments * Offer and share information and expertise sparingly and only when relevant 2. Increasing resource power * Secure authority to negotiate to higher levels of expenditure * Negotiating integratively to 'increase the pie' * Devising negotiating currencies which are of high value to the other party but relatively low cost to you to offer * Emphasising the value of offers and concessions to the other party 3. Increase legitimate power * Appealing to your own legitimate authority (status, position, election by stakeholders) or a higher authority respected by the other party * Appealing to accepted decision rules, such as the rightness or fairness of your position or solution * Appealing to the necessity of your position or solution: need, urgency, force majeure 4. Manipulating structural factor in buy-supplier power * Consolidating and aggrgating demand, or engaging in a buying consortium to increase the size and value of hte requirement and its significance to the supplier * Ensuring that your party is an attractivecustomer/supplier to the other * Netogtiating in advance of demand - leverage is not compromised by urgent requirement * Emphasising the availability of substitute producte and other suppliers and making it clear you have an advantageous BATNA 5. Using effective persuasion methods and influencing techniques * Use proactive influencing tactics such as rational persuasion, INspirational appeal, consultation, ingratiation, exchange, etc

Answer 11

Using FIVE characteristics compare collaborative (integrative) negotiation with adversarial (distributive) negotiation. (25) - Emphasis - integrative negotiation aims to achieve goals common to both parties, distributive negotiation aims to achieve goals at the expense of the other party. - Strategy – integrative is based on openness, information sharing and trust whereas distributive is based on secrecy and low levels of trust - Desired outcomes – in integrative, desired outcomes are expressed early so all parties understand. Distributive outcomes are often misrepresented so the other party is not clear of what they are. - Strategies – integrative strategies are flexible and aimed at reaching an agreement whereas distributive strategies are Inflexible and uses ploys to gain advantage. - Tactics – integrative has rational solutions and no threats whereas distributive has threats and ultimatums. - Positions – integrative has flexible positions, creative options and a desire to understand underlying needs versus fixed positions defended by logical or irrational argument. - Approach – integrative approach is cooperative, assertive but not aggressive versus hostile and aggressive. - Logical extreme – integrative approach is what is good for either party is good for both parties whereas distributive seeks to block the other party from reaching their goal. - Key Attitude – integrative attitude, 'how can the goals of each party be achieved so that both win' (‘win/win’) verses distributive attitude, 'we win, you lose'. - Options in case of impasse – integrative negotiation seeks to create new options or introduce intervention whereas distributive opts for termination.

Answer 12

Examine FIVE types of supplier relationships, within the ‘relationship spectrum’, that can impact on commercial negotiations. (25) 1. Adversarial * Buyer and supplier are opponents - each striving to obtain advantage at the other's expense * There is alittle trust, communication or co-operation and there may be open conflict, coercion in pursuit of leverage * The potential for ongoing future transactions is not taken into account 2. Arm’s length * A distant, impersonal relationship where the buyer does not need close, frequent or collaborative access to the supplier. * Purchases are generally infrequent and of low volume and value - investment in closer relationship not justified * IMpersonal, efficient multi-sourcing methods are used (ie e-auctions/spot purchases 3. Transactional * More regular dealings may be established with a supplier but are still seen in terms of multisource, one off commercial transactions * Generally aimed at securing competitive price and transaction efficiency rather than a relationship 4. Closer tactical * The buyer wants to secure quality and continuity of supply in addition to cost efficiency, and therefore seeks a degree of mutual commitment eg using fixed/call off contracts and collaboration in a ongoing relationship with selected reliable suppliers 5. Single-sourced * Supply continuity and quality are a key priority for the buyer * it seeks to control by securing the commitment and collaboration of a single, highly trusted supplier - granting exclusivity in relation toa particular item/range of items * This implies a high level of trust, mutual commitment and collaboration * In practice, the risk of dependency on a single supplier may be too high and the buyer may share the requirement between two suppliers (dual sourcing) 6. Outsourcing * An organisation selects an external supplier to provide goods.services previously produced in-house * allowing to focus its resources on its own core competencies and access external expertise that will enable the requirement to be met more efficiently or competitively than was possible in house. * An even higher level of trust, commitment and collaboration is required 7. Strategic Alliance * Two (or more) organisations identify selected areas in which they can collaborate to deliver a joing offering. * For example, a software developer form an alliance with a training firm, the trainer provide accredited courses in using the software 8. Partnership relationship * Buyer and supplier agree to collaborate closely for the long term, sharing infromation and ideas for development. There is a very hgh level of trust, mutualty and equitable sharing of gains and risks 9. Co-destiny relationship * An even closer relationship, in which the buyer and supplier link their businesses together strategically for long-term mutual benefit Collaborative relationships are the ones towards the bottom of the above list. They seek to find and develop longer term mutually beneficial outcomes as well as working on ways to jointly add value in the supply chain. Here, relationships should develop trust and obligation; sharing information and improvement targets. In these relationships, parties are treated equally. This is an equally effective relationship type for a) suppliers with potential to improve profit for the procurement organisation as well as b) suppliers who pose a real risk and need to be closely managed. Adversarial relationships, towards the top of the list are characterised by the desire to ‘win’ even at the expense of the other party. In such relationships there is a lack of trust and a focus on short-term transactional deals. Cooperation is limited and mutual interests are not recognised.

Answer 13

Outline FIVE pre-conditions that are necessary for an integrative (win-win) negotiation to be successful. (15) 1. Both parties believe that there isa greater likelihood of benefit from working together than from competing or working separately: ie there is a strong motivation to work together 2. There are broadly common, shared or joint goals between the parties 3. Both parties are prepared to let go of ht eneed to pre-paln or control the outcome, and are open to emerging problem re-definition, options and solutions 4. Both parties are relatively confident in the process, their own problem solving abilities or the help of a third party facilitator or mediator 5. There is trust between the parties (at least sufficient and within the negotiation process and a willingness to question, exchange information, clarify, check perceptions and challenge assumptions)

Answer 14

Explain, with examples, TWO circumstances when a distributive (win-lose) approach to a commercial negotiation may be appropriate. (10) 1. A point is **non-negotiable** (eg on health and safety commitment 2. When one party has **high bargaining power** over the other (and it would represent poor stewardship of the shareholder resources not to leverage, or reap benefit from, that advantage) 3. When **maximimising benefit** from a transaction is more important than developing the potential in a relationship (eg for routine, high volume purchases which can be procured from many suppliers)

Answer 15

**From a buyers’ perspective, outline FOUR different market structures on commercial negotiations. (20)** ## Footnote **Perfect competition** The price of goods is determined by total market supply and demand with no one supplier able to influence that price. In such a market many suppliers of homogeneous goods exist. Features of such a market are: - The buying organisation is in a powerful position because it can switch easily between the many suppliers and standard products. - There is no real distinction between suppliers and products - The buyer will hold a high level of information about products and suppliers - Competition remains because the normal profit level is visible and if a supplier makes less than this it will leave the market. If higher profits are made then everyone will know and existing and new suppliers will want a share in that market. - Buyers might be more willing to encourage suppliers to compete and drive prices down because if this puts a supplier out of business there are still many more suppliers left. - A distributive approach to negotiation by the buyer is possible **Monopolistic Competition** Here, a large number of suppliers exist supplying slightly differentiated goods and services, which allow suppliers to vary prices. Many buyers also exist in this type of market and typical features of such a market are: - The structure is more complex and allows suppliers to differentiate on other offerings as well as price. Examples of this include quality levels, delivery times and the possibility of service aspects such as economies of scale. Buyers, therefore, need to be clear about requirements across a range of variables to negotiate. - Priorities need to be set against these variables to select the right suppliers and the right package of benefits in a deal. - The power base is not so clear as in a perfect competition market and can change over time with some suppliers possibly leaving the market and others entering it. - There remains the opportunity to negotiate and find a balance. **Oligopoly** This is seen as competition between smaller numbers of large suppliers of differentiated products. Each supplier risks losing market share if it increases pricing in isolation and it would risk a price war if it reduced prices. - Buyers can focus on negotiating to gain the best value through non-price benefits because the supplier avoids price competition. - The ability of suppliers to collude (form cartels) will keep prices high and reduce a buyer’s bargaining strength. - Buyers will need to be skilled and well-prepared to achieve benefits from negotiations with suppliers in this type of market. - If buying consortia are developed, they can restore some of the power balance. **Monopoly** There is a single producer/supplier and no competition exists at all. The supplier can set prices to maximise profit. Barriers to entry might exist but no substitute products are available. - The monopoly supplier has absolute power and can dictate the terms of contract. - The only point of leverage for a buyer is to find or develop alternative sources of supply or products. This is easier said than done, however. - Prices in this type of market are usually higher and the buyer will have little leverage to reduce them because each buyer is likely to represent a small proportion of the supplier’s revenue - The supplier has no incentive to tailor products to the buyer’s specification, which will add complexity and cost to its production. This reduces innovation, which is difficult for buyers if the buyer’s market is dynamic. - An integrative approach to negotiation might be more appropriate here. - Monopoly suppliers may have the option of reducing prices if cost savings are derived from economies of scale, savings in their own bulk purchasing, production techniques and financing. Also monopoly suppliers have more resources that they could use to support customisation in return for even higher prices.

Answer 16

Outline the risk that exchange rates present when negotiating for an international purchase (5) ## Footnote Foreign exchange fluctuations are a financial risk and if the buyer must pay in the supplier’s local currency there is a risk of paying more if the buyer’s currency weakens before purchase. But also a risk for supplier as they may have to reduce their prices, sacrificing profit There is a risk that, if the buyer’s currency weakens, then less currency can be acquired and so the international purchases become more expensive.

Answer 17

Discuss resourcing consideration when organising a negotiation with an external organisation (15) 1. There are six main resources required to support a negotiation * Personnel * Finance * Time * Information * Space and facilities * Information and communication technology (ICT) resources 2. Decison about the deployment of these resourced in the negotiation process should take two basic considerations into account * The resources required to achive desired negotiation outcomes. * What amount and mix of resources will enable you to negotiate effectively (eg to prepare adequately) * to protect and further the bext interests of your firm and stakeholders(eg to add value, meet business needs and achieve objectives) * to follow through on the deal (eg by meeting agreed commitments) * The opportunities for conditioning (psychologically preparing the other party party to be open to persuasion) arising from the deployment of resources * Putting them in an appropriate frame of mind for te negotiating approach you intend to use * This may be collaboartive, positive, problem-solving frame of mind for integrateive negotiation - or an impresse, weakened or accommodating frame of mind for distributive bargaining * The user of resources such as 'home advantage' venue location, room surroundings and layout, and negotiating and support personnel, can be used to 'set the tone for the negotiation and create and reinforce desired impressions

Answer 18

Explain the importance of setting objectives and defining variables when preparing for a commercial negotiation (10) Objectives are targets for negotiation outcomes, clearly defining the point at which the negotiator will be satisfied and ready to move to agreement - and representing the yardstick by which the sucess of the negotiation will be measured. Effective objectives for negotiations are characterised by being: * Specific - clear and well defined * Measurable with a clear yeardstick to identity achievement * Acceptable - taking into account the interests of key stakeholders, in th elight of the negotiator's responsibilities towards them and their power to support or resist the negotiated agreement * Realistic (attainable) - the negotiator may start with an unrealist entry point in order to leave room for downward adjustment during bargaining but there is no point in setting unrealistic objective. * Tentative (or provisional) - objectives are invariably based on assumptions made on the basis of the limited infromation gathered during negotiation planning. This provides the negotiatos with a range within they work as they dont know what is fact and what is assumption. It is a good idea to use the 3 point range of objectives: a) a maximum or best case position b) a minimum acceptable or worst case position c) an objective, realistic or most likely position Variables are the currencies that will be traded or exchanged in the negotiation bargaining or moving phase 1. What does your party have to offer that will be valued by the other party? eg the supplier's ability to offer an nehanced payment terms, or discounts in exchange for higher volume order 2. What can you offer that will be valuable for the other party to receive (eg a hgh priority in the objective list) while not costing you very much to give? 3. What does the other party have to offcer you, that you want? What value or priority do you place on this, and what would you be willing to trade in return for it?

Answer 19

Identify THREE macro-economic factors and explain how each can influence a commercial negotiation (15) * Macro-economics’ relates to the overall amount of a country’s economic activity (which determines the wealth people and corporate entities) which influences the amount of disposable income as well as the demand for goods and services and the prices. * There may therefore be pressure on commercial negotiation processes to reduce costs or prices or to retain service levels in the face of falling purchase volumes. Examples of macro-economic factors would be: * Economic variables determine the strength of an economy and the extent of business confidence in spending and investment. Changes in levels of investment are major causes of upswings and downswings in economic activity which are often referred to as business cycles. These are often referred to as ‘boom’, ‘bust’, ‘depression’ or similar. Such ‘swings’ may affect the financial stability of suppliers and bring a different dynamic in the terms of negotiating long term supply agreements. For example, it may not be a good idea to negotiate a long-term agreement during times of depression. * Employment and unemployment levels might affect the availability of labour for suppliers and buyers and affect the cost of labour. An appropriate method of price adjustment may have to be negotiated should employment levels increase or decrease. * Rates of inflation affect processes and therefore suppliers’ costs and pricing. An appropriate method of price escalation or formulae may have to be negotiated. * The overall rate of taxation affects the levels of demand in an economy. Tax incentives or penalties may influence negotiations in terms of organisational policies. * Exchange rate fluctuations create risk in international sourcing, potentially making foreign currency purchases more expensive. Negotiations between customers and suppliers will clearly have to identify who bears exchange rate risk and how it can be minimised or even shared. *If the buyer’s country’s currency’s exchange rate fell in value, items purchased from abroad would be more expensive and that the reverse might be true if it increased in value. Potential resolutions may be negotiating and agreeing that payment for the goods in the contract should be in a ‘third’ (and more stable) currency or that a ‘firm’ exchange rate between the two currencies should be agreed.* * Interest rate fluctuations create risk for corporate finance potentially making loans for the purchase of capital equipment more expensive

Answer 20

Suggest FIVE sources of information (10) 1. Forecasts, reports and statistical surveys on the economic & labour markets, business, monitoring etc Analysis published in mainstream and financial media 2. Data published by financial institutions and analysts (e.g. exchange rates) 3. Data published by the financial markets and stock exchanges 4. Published economic indices like the retail price index or equivalent 5. Websites and information services of organisations promoting trade and exports/chambers of 6. Commerce etc. 7. Published and online macro-economic analysis (Gallup, MORI etc.) 8. Other valid sources were accepted including generic types such as the internet.

Answer 21

Explain, using examples, how a purchaser might define the variables required when preparing for negotiation. (15) ## Footnote Variables are the currencies that will be traded or exchanged in the negotiation bargaining or moving phase What does your party have to offer that will be valued by the other party? eg the supplier's ability to offer an nehanced payment terms, or discounts in exchange for higher volume order What can you offer that will be valuable for the other party to receive (eg a hgh priority in the objective list) while not costing you very much to give? What does the other party have to offcer you, that you want? What value or priority do you place on this, and what would you be willing to trade in return for it? Examples: • Price variables: unit prices; payment terms; discounts; past price adjustment clauses • Delivery: lead-times; SLAs and/or KPIs; delivery windows; inspections requirements; transport methods • Contract: type of contract preferred; termination rights; warranties; possible use of subcontractors • Quality: specification, complaints, standards A purchaser may need to consider one variable if hte negotiation relates to a particular problem arising (eg poor quality products being delivered) or may variables if renewing a contract. This total package of variables is called the bargaining mix.

Answer 22

Explain how a purchaser might establish a range of acceptable positions for the negotiation of variables (10) ## Footnote Variables are the currencies that will be traded or exchanged in the negotiation bargaining or moving phase What does your party have to offer that will be valued by the other party? eg the supplier's ability to offer an nehanced payment terms, or discounts in exchange for higher volume order What can you offer that will be valuable for the other party to receive (eg a hgh priority in the objective list) while not costing you very much to give? What does the other party have to offcer you, that you want? What value or priority do you place on this, and what would you be willing to trade in return for it? Commonly accepted three scenarios to consider: the best case (like to achieve), the worst case position (must achieve) and a realistic option (Intent to achieve). This is commonly known as MIL. The purchaser should know its own best and worst outcome for each variable and can estimate the other party’s best and worst positions. The range where these overlap indicates that there is room for negotiation and the purchaser can prepare for this negotiation. If there is no range of variables, the negotiation will fail unless an alternative concession is found which might change one party’s range of acceptance. For example, a shorter lead-time might encourage a purchaser to consider an increase in price. e.g. price or delivery - to illustrate the points made. They might also reference theory sources Bailey et al, Gavin Kennedy etc and might explain BATNA as part of the answer. The purchaser may collaborate with other stakeholders such as users and senior managers in order to identify important variables and why they might be important

Answer 23

1. Explain the following TWO approaches that a supplier might use when calculating its costs prior to negotiation 1. Marginal ( or variable ) costing 2. Absorption costing 1. **Marginal Costing** Marginal Costing (sometimes known as ‘variable costing’) is used as an approach where only the variable costs of each unit of production are considered. This is the cost of producing one more unit and represents the cost that would be avoided if the item was not manufactured. These costs are directly proportional to output. Fixed costs are not considered as part of the marginal costing method. An additional amount of mark-up would be added to the marginal cost in order to provide for fixed cost recovery and profit. 1. **Absorption costing** Absorption costing is the costing method that attempts to calculate the total cost of producing a product. There is an element of overhead recovery included in each item of production. These overhead costs are either allocated or apportioned to the product. Mark-up added to this cost will be to achieve profit. This method is also referred to as ‘full-cost recovery’. Overhead absorption calculations are required in order to identify the total cost. When considering the two methods above in a negotiation, it may allow greater flexibility where a supplier is using marginal costing as the basis of their cost structure rather than absorption costing.

Answer 24

**Explain THREE reasons why a procurement organisation might attempt to analyse a suppliers cost structure when preparing for a commercial negotiation** * It may be useful for the buyer to **identify elements** of the supplier’s price t**hat might be negotiable**. Cost elements may be used as ‘**variables**’ in negotiation * It can help ensure that the supplier is **not making more than a reasonable profit** and if it appears that they are, this can be used as a major negotiation point * Using this method allows the buyer to be able to identify how much **leverage can be applied** before risking the supplier’s potential financial or supply failure * The buyer can identify areas for **future cost reduction** and/or development in the product or service to be supplied and this information could be used to provide incentives for future dealings that could be part of the current negotiation * **Parameters and a range** can be developed for use in negotiations in areas of the supplier’s costs that can be influenced by the buyer * The buyer will know the costs at which the supplier cannot negotiate further (the supplier’s resistance point) * Understanding variable costs can help set minimum order quantities and economic order quantities. These can be used as part of the basis for negotiation * The level of profit identified can be compared with industry standards and individual competitors and if it appears to be too high, this could be a major negotiation point or be used to help develop a BATNA * The buyer could use the information to estimate the relative value of the business to the supplier to determine bargaining strength and dependencies

Answer 25

**Discuss resourcing considerations when organising a negotiation with an external organisation (15)** 1. Personnel * Sufficient staff with the right experience and skills must be available for all stages of the negotiation 2. Finance * There must be adequate budget for the essential costs that will be incurred * during negotiation - fees for expert advisers, costs of breakaway events ie transport and accommodation * finances availabel to buy the actual goods agreed upon 3. Time * Set aside sufficient time (ie availability of staff/facilities lead time while reaching agreement) * adequate time for full preparation and planning prior to the meeting 4. Information * about the supplier, the market, environmental factors, bargaining positions, etc 5. Space and facilities * if face to face select a suitable venue ie businesslike if relevant 6. Information and communication technology resources * if virtual meeting, select appropriate equipment for teleconferencing ie phone, screen, projector, computer, internet access

Answer 26

**Explain the importance of setting objectives and defining variables when preparing for a commercial negotiation (10)** Variables are the currencies (tokens of value) that will be traded or exchanged in the negotiation bargaining or moving phase. They are the issues/matters that need to be addressed to determine the scope and focus. Objectives are the targets for negotiation outcomes, clearly defining the point at which the negotiator will be satisfied and ready to move to agreement as well as the yardstick to measure performance. Examples are: competitive or lower price, a reduction in supply lead times, one supplier to manage various tasks Objectives should be Specific, Measurable, Acceptable, Realistic and Tentative It is important to distinguish between objective you must achieve, intend to achieve and what you would like to achieve.

Answer 27

**While preparing for a commercial negotiation with a supplier for a particular product, the supplier has provided the following pricing and costing information to the purchaser to support the negotiation.** **Selling Price per Unit:$10.00** **Variable cost per unit:$6.00** **Fixed cost for production:$80.00** 1. **Explain the meaning of the terms ‘Fixed Cost’ and ‘Variable cost’ in this context. (6)** A) Fixed cost – costs that are fixed in relation to output. Changes in the output do not cause a change in the fixed costs. These costs are often related to other factors such as the passage of time. Examples of fixed costs would be rent and rates as well as salaries for managers (excluding bonuses) where a fixed amount is paid per month. Variable cost –costs that do change in relation to output or activity. These costs are related to production, output or activity within the factory or business. Examples of this type of cost would be raw materials and wages paid to production staff, where the basis of payment is related to units produced, activity or output. These costs could be explained using diagrams. Fixed costs would be shown as a horizontal line parallel to the x axis, variable costs would be shown as an inclined straight line starting from 0. **B. Calculate, based on the data provided, the breakeven point of the suppliers production of this product. (5)** The contribution per unit = $10.00 - $6.00 = $4.00 per unit. The breakeven point is fixed costs divided by contribution per unit: $80,000 /$4.00 = 20,000 units. The same answer may be expressed in value of sales which would be 20,000 units multiplied by $10.00 per unit and would be $200,000 **C. Explain the meaning of the term ‘Margin of Safety in this context. If the predicted order volume is 50,000 units, calculate the suppliers margin of safety in terms of units (6)** Margin of Safety’ is the difference between the breakeven quantity (20,000 units) and the actual production. Therefore, if the potential order volume is 50,000 units, the margin of safety for the supplier will be (50,000 – 20,000) units which equals 30,000 units. **D. Explain TWO impacts on the supplier if the order volume is much higher than the 50,000 units predicted. (8)** D) there could be many potential impacts on the supplier if the order volume is much higher than the 50,000 units predicted. Such impacts could include: - An increase in the supplier’s profit resulting from the additional volume creating greater income but not increasing the fixed costs. As the predicted additional quantity is already above the breakeven point, and fixed costs are already paid, all additional items only incur variable costs. - The supplier may also choose to sell the additional volume at a reduced price. The only cost incurred is the marginal cost as all fixed costs have been paid. - The ‘Margin of Safety’ will increase which will mean that it is operating even further away from the breakeven point – the point at which if production falls then losses begin to be incurred. - If the volume increases significantly above the budgeted position, then additional impacts on fixed and variable costs may become apparent. Variable costs per unit may begin to fall as economies of scale and/or the learning curve begin to take effect. E.g. larger batches of raw materials purchased by the supplier may result in reduced unit costs. - Fixed costs on increased volume may possibly not remain static. Changes in fixed costs are likely to be ‘stepped’ at a given volumes of production. There are potentially some non-financial impacts of increased volume such as: - The supplier may become over-dependent on the buyer and therefore lose leverage in negotiations. - The supplier may find it difficult to manage significantly increased volumes in terms of their current processes and systems such as available machinery and/or personnel. - The supplier may begin to encounter material shortages due to the increased volumes required.

Answer 28

**Explain, with examples, the following terms:** 1. **Direct costs** 2. **Indirect costs** 3. **Fixed costs** 4. **Variable costs (16)** (i) Direct costs - can be identified directly with a specific saleable unit of output. For example raw materials and direct labour. (ii) Indirect costs - otherwise known as overheads are the costs that cannot be identified with a specific saleable unit of output. For example administration and selling costs, machine parts. (iii) Fixed costs - costs that do not vary as output (production) might increase or decrease. Examples include factory rent and salaries of (e.g.) managers. (iv) Variable costs - costs that will vary as production volumes change such as raw materials. Hourly paid labour related to output is another example.

Answer 29

Suggest THREE reasons why it is important for a purchaser to understand a supplier’s fixed and variable costs when preparing for a negotiation. (9) * Understanding the costs can help to set the parameters for price negotiation. * Other negotiation variables can be calculated such as cost reduction initiatives and supplier development targets. * Understanding a cost per unit could give a common base to compare with other suppliers' prices. * Understanding variable costs will help to understand and agree economic and minimum order quantities, as well as economies of scale. * Understanding costs can help to analyse the justification for price increase requests. * Understanding fixed costs is important to understand the suppliers 'walk away' position which is usually where fixed costs cannot be covered. * Understanding fixed costs can help to calculate profit. * The buyer would be able to understand the supplier's breakeven point.

Answer 30

Examine FIVE resources required for an effective face-to-face negotiation meeting. (15) 1. Personnel: Any negotiation requires sufficient staff with the right skills for each stage of the meeting including participants and support staff (personnel that can provide relevant data). Facilities staff might also be required to provide (e.g.) refreshments. Answers could focus on negotiations by individuals or by teams. In the latter, roles the team might play should be explained. 2. Finances: A budget is required for items such as room hire, refreshments, travel to a negotiation that is not ‘at home’ and any conferencing facilities that may be required. Answers might also discuss fees for support staff providing expertise or for mediators in negotiations where conflict is to be resolved. 3. Time: Sufficient and appropriate time should be set aside for a single meeting or series of meetings, as required. A single meeting can also be broken down within a day if work/options are to be reviewed. Allocation of time for preparation and for follow-up work and/or follow-up meetings will also need to be considered. 4. Information: This is a key resource for communication within the meeting. It is also an activity in preparation for the meeting such as market analysis, supplier, market, environmental factors, bargaining positions etc. Such information can help the buyer have some insight into what the supplier’s pricing structure and negotiation objectives might be. 5. Space: The venue should be selected to suit the requirements of the negotiation. This could ‘home’ or‘away’ or on neutral territory. It should be suitably set up and equipped. This is the opportunity to create the appropriate layout and surroundings to suit the negotiation. Equipment including visual aids, breakout rooms and refreshments should be made available. 6. Information and communication technology: In ‘virtual’ negotiations, where participants are able to see and interact with each other, telephones, tele-conferencing, web conferencing, information access/sharing equipment, etc. might be required.

Answer 31

Suggest FIVE points that should be considered when preparing for a telephone negotiation compared with a face-to-face negotiation. (10) 1. Prepare timing of the call by pre-arranging a suitable time for both parties and ensure you have the correct, preferably direct telephone number to call. 2. Prepare an agenda for the call and share the agenda – by (e.g.) sending it by e-mail before the call – if appropriate. 3. Prepare questions to ensure the understanding of issues by both parties and to overcome the lack of non-verbal cues. ‘Open’ questions are considered to be useful here. 4. Make a note of all conversations that have taken place between both parties prior to the call. 5. Prepare to listen carefully to the other party’s tone and intonation, and be ready to check understanding of both parties, as they will not be able to seek non-verbal feedback. 6. Ensure that there are minimal environmental distractions such as background noise if you are making the call in a busy office. It is best to take the call in a private office. 7. Prepare stronger cases or arguments as they may prevail to a greater extent in telephone negotiations. 8. Take steps to initiate the call as there tends to be a power advantage to the party who makes the call. 9. Prepare yourself psychologically as telephone calls create psychological pressure to conclude a deal before hanging up. 10. Problems with technical, environmental or background noise may interfere with telephone negotiations so precautions should be taken before the telephone call. This includes ensuring that the equipment and telephone line are working appropriately.

Answer 32

**A.Explain variables that can be discussed in a commercial negotiation. (15)** 1. Price, fee or margin (how much will be paid). 2. Volume (how many, how much, or what types). 3. Delivery (when, where, response times). 4. Contract period (when it will start, how long it will run for, under what circumstances it will or can be terminated, when it will be reviewed etc). 5. Payment terms (when, how, currency etc). 6. Specification (what product, service or agreement will include, the quality or how it will be supported). 7. Health and Safety **B. For ONE of the variables in the answer to part (a) explain how a purchaser might set their objectives for the negotiation. (10)** Our company decided to issue a tender to suppliers who will be able to manage the following work on our sites: Cleaning, Hygiene Services and Pest Control. Our objectives were to get one company to manage various services on all our sites. We would have only one contact person to deal with who will make sure that all services take place as per a predetermined schedule, adequately, safely and conform to all our policies and procedures. We attempted to set SMART objectives Specific - clear and well defined Measurable - yardstick to identify achievement Acceptable - the tasks to be completed were simple and was the core business of the incumbent Realistic - the tasks were not overwhelming in the quality and quantity we required Tentative - we made assumptions that the suppliers would be ablet o supply the specific services we wanted ie according to the supplier of the coffee machine in our canteen the unit must be cleaned daily - we assum that the new incumbent has the capacity to clean the coffee machine by following manufacturers instructions We looked a tasks they had to be able to achieve: * The supplier must be able to provide suitable staff that can clean adequately, * provide cost effective hygiene services We intended to achieve * fair wages above minimum wage for cleaners We wanted to achieve * pest control and hygiene services that were environmentally friendly and sustainable

Answer 33

Discuss FIVE phases of a negotiation and suggest the activity that might take place at each stage. (25) 1. Identification of need: working closely with stakeholders to establish exactly what is required. The Procurement function may be able to input supply market knowledge but the user dept. will need to have the major say in the final decision. 2. Information gathering: this could be about agreeing the specifications preparation. It could also involve (e.g.) finding out what other suppliers might be able to offer to provide a ‘fall-back’ position in case the current negotiation does not provide a successful outcome. It might also involve trying to find out, prior to the negotiation, what the supplier has to offer. 3. Information using: exploring the facts and data contained with the supplier’s proposal, evaluating statements and looking at assumptions. It should also involve using the information gathered (above) to develop a negotiation strategy and tactics. 4. Negotiation/trade/move/bidding: this is where the actual discussion and negotiation with the supplier takes place. For the buyer it will involve putting their case forward, reflecting on any statements/offers, etc. mjuly ade by the supplier and carrying out any bargaining that might be necessary. 5. Agree/summarise: here, good summarising and its impact on the outcome should take place. It should involve reaching agreement with the supplier and developing a written summary of this which both parties can sign. 6. Finalise/implementation: this is putting the contract in place and embedding the decision so that both parties know what is expected of them. It might also involve agreeing the next meeting particularly if it is recognised that performing the contract might have difficulties which will require resolving

Answer 34

Identify THREE types of non-verbal communication and explain why each is important in negotiation (9) 1. **Kinesic behaviour** - movements such as gestures, facial expressions, eye contact and body posture * slight nodding of head, murmurs of approval or interest, hand gestures encouraging the speaker to continue can all all convey agreement or at least engagement with the other party 2. **Proxemics** - how near you stand/sit to others, whether you lean toward or away, what space barriers you put between you. * adjusting the body position suggests that you show attention, it is important to adopt an appropriate body position, slouching suggests lack of attention or interest, turning away indicates rudeness 3. **Eye contact** - failing to make consistent eye contact suggests dishonesty, but it would be inappropriate to stare which may be perceived as threatening. It is importantant to make eye contact when delivering the most important part of a message.

Answer 35

Explain the use of FOUR different types of questions in a negotiation (16) 1. Open Questions * leaves the answer completely open and encourage communication by the other party eg "When can you deliver?","What can I do to improve that?") * 'Why' questions are discouraged as they demand interpretations and may elicit a defensive response * What, how, when, who are more productive * Open questions elicit more information but may not be the most effective technique where specific information is needed 2. Closed questions * Gives a specific choice of answer ie Yes or No or either/or options eg 'can you deliver by 20/10/2018?' * May be helpfull in pinning down evasive, unclear or waffling answers * less productive that open questions * it shows down the discussion 3. Probing questions * asking for more details, clarification or explanation especially if hte other part appears reluctant ("What specific tests do you use to ensure consistent quality?") * More challenging probing questions may be used to challenge generalities and assumptions, especially global statements ie "THis always happens". "Always?" 4. Multiple questions 1. covering more than one issue, perhaps to put the respondent under pressure. "How can we ensure fixed prices and how will that affect quality and delivery?" 2. this may be deliverability used to put the other party under pressure 3. May have to remind other party to answer all parts of the question

Answer 36

**Discuss THREE persuasion methods that can be used in a negotiation (15)** **Persuasive argument** * a facilitative approach - each step is clearly explained and linked - the other person should be convinced in order for the penny to drop **Persuasive communication** * The effectiveness of persuasion depends on the ffectiveness of communication * The target of persuasion must be (a) motivated and (b) able to carefully process the communication 'message' being sent * Influence can only be ontained by carefully planned, structures and delivered communication messages * Techniques to use: open/positive body language, building rapport, appeal and interest **Persuasive styles** * threat * The effectiveness of these will depend on the context of the negotiation ie the relationship between the buyer and seller, buyer's oreintation to the negotiation and the balance of power between the buyer and seller

Answer 37

Explain the following tactics and how they might be used in a commercial negotiation: 1. The add- on 2. Good cop/bad cop 3. Split the difference (15) The add-on comes right at the end of the negotiation usually in the form of an ‘extra’ e.g. ‘by the way, we haven’t included maintenance as that’s extra’. Typically it is the supplier who insists that what the buyer thought was an ‘all-in’ price did not include various extras, all of which have to be paid for separately. 2. Good cop/bad cop – Two people in the negotiating team. One takes on the role of the ‘easy to do business with’ persona and is likely to show sympathy with your view, whilst the other is deemed to be more difficult. It could also be (e.g.) the ‘sympathetic’ supplier having a much tougher boss who won’t allow any leeway. 3. Split the difference – The negotiator knows that the mid-point between two positions is favourable to their needs and uses this tactic to persuade the other party it is a fair solution.

Answer 38

Explain how each of the following might impact upon a commercial negotiation: 1. Non- verbal communication 2. Culture (10) 1. Non-verbal communication is communication without words and it is said that we convey more than 50% of our meaning via non-verbal signals. In negotiation it helps us receive feedback from listeners; recognise the other party’s real feelings and generally ‘read’ interpersonal situations so that we can modify our communications accordingly. It is important to realise, however, that we need to be aware that no single non-verbal cue is sufficient to make an accurate diagnosis of what the other party is thinking/deciding, etc. 2. In terms of culture, different countries have different cultural norms, values and assumptions which influence how they do business and manage people. Such differences can lead to different negotiating styles; differences in conflict handling styles; language differences with potential for misunderstanding and differences in non-verbal cues

Answer 39

**Explain FOUR tactics that may be used in a commercial negotiation (16)** 1. ‘**Salami**’: This is used when the supplier cannot persuade the buyer to concede on a large issue and so ‘slices’ it up into a collection of smaller issues and then tries to gain concession on each. This is done because agreement on each small issue is more likely to happen than if the whole issue is discussed at once. 2. The ‘‘Salami’: This is used when the supplier cannot persuade the buyer to concede on a large issue and so ‘slices’ it up into a collection of smaller issues and then tries to gain concession on each. This is done because agreement on each small issue is more likely to happen than if the whole issue is discussed at once. The ‘**nibble**’ (also known as ‘add-on’) might be used when the deal being negotiated is almost concluded and the supplier asks for one more (small) concession that has not previously been discussed. The purpose of this is to build up the supplier’s gains from the negotiation. 3. ‘**Split the difference**’: is where the supplier knows that the midpoint between its position and the buyer’s is favourable to itself and uses the tactic to persuade the buyer that it is a fair solution. This is a ploy aimed at deceiving the buyer to some extent. 4. ‘**Good Cop/Bad Cop**’: one interpretation of this tactic is where the supplier appears to sympathise with the buyer and their requirements but 'unfortunately', the supplier has a much tougher boss/manager who doesn't allow much leeway. However, it should also be noted that more generally good cop/bad cop refers to a situation in a team negotiation where one negotiator is friendly and the other is not.

Answer 40

Outline THREE examples of ‘active listening’ that may contribute to effective commercial negotiations (9) ## Footnote Building rapport: this is creating a supportive listening and relational environment. • Signalling attentiveness and interest: this involves using non-verbal encouragement such as alert posture; leaning forward, appropriate eye contact and physical encouragement (e.g. nodding the head). • Signalling empathy: this is seeking to understand the other party’s perspective and to demonstrate this to them. It might involve summarising what the other party has just said or maintaining a facial expression appropriate to what the other party is saying.

Answer 41

Describe FIVE proactive influencing tactics that might be used in negotiation. (25) 1. Rational persuasion * Logical argument and evidence, designed to demonstrate credibly that your position or solution is desirable and feasible * It fosters agreement and commitment rather than mere compliance * May be difficult or ineffective if the argument is weak, or up against genuine conflicts of interest or ideology 2. Inspirational appeal * Appeal to the influencee's ideals, values and aspirations, and/or statements of belief and encouragement, arousing confidence and enthusiasm * Addresses powerful and positive motivating factors * Suits values based culture * Can be perceived as shallow and manipulative, especially if promised outcomes do not accrue 3. Consultation * Inviting the influencee to particpate in developing the solution, or demonstrating willingness to take the influencee's ideas and concerns into account * Input may enhance a decision, ownership and implementation * It fosters communication and co-ordination * It is time consuming * Allows divergent interests and conflicts to emerge 4. Ingratiation * Getting the influencee to think well of you, or to be in a co-operative frame of mind, before a request or demand is made (sometimes know as buttering up) * Repays investmentment in trust, rapport and relationship building * Helps to condition responses * Can be transparent, perceived as manipulative and treated with suspicion 5. Personal appeal * Appealing to personal friendship and loyalty between the influencer and influencee * Repays investment in rapport, trust and relationship building * Can be perceived as or lead to, unethical lack of objectivity * Ineffective where no trust or rapport exists

Answer 42

Explain FIVE ways to analyse the process or outcomes from a commercial negotiation. (25) 1. Personal development journal * Work experience as outlined in writing, together with a brief analysis of: the outcomes of the experience and how they compare to the desired outcomes or targets * what happened and why * what could be done differetly or better next time 2. Critical indcident analysis * Similar process to PDJ where critical incidents (conspicuously successful/unsuccessful incidents, negotiations or behaviours in negotiation) are analysed to establish what went wrong and what learning can be derived from the incident * May be done in writing as part of PDJ or via discussion with the negotiation team or a coach/mentor in negotiation 3. Post negotiation review and evaluation * In a meeting with negotiation participants (from your party) and key stakeholders. * In addition to initial review it may be possible to see feedback and evaluation from the other party (eg in the context of ongoing, trusting supply relatonship) * perhaps during early contacts between the contract or relationship managers on both sides 4. Seeking of feedback (formal/informal) on your own performance in a negotiation, from other participants in the negotiating team. * You might intentionally request a colleague to monitor your performance and give you feedback, as part of your own personal development planning 5. The monitoring of post negotiation behaviour * and the efficienty and effectiveness of the agreement in practice, which may indicate both the quality of the negotiated deal and attitude, satisfaction and commitment of both parties and their stakeholders

Answer 43

**Outline THREE elements of the opening stage of a negotiation. (15)** Usual ‘key’ elements (which sometimes include behaviours) in this context are: * Rapport building: attempting to ensure that the negotiation proceeds in an integrative way rather than in a distributive way. * Assertive communication: clearly stating your opening position as well as your desired outcomes in a non-aggressive way. * Using questions to elicit information from the other party as well as clarification of issues. * Listening actively and efficiently in order to gain maximum information from the other party in order to understand (e.g.) their body language, tone of voice, feelings, etc. as well as the content of what they are saying. This would give a good idea of their negotiation objectives and how they will pursue them. * Using facilitating behaviours to check understanding as well as clarifying any issues, asking for information and summarising sections of the discussion. * Utilising verbal and non-verbal ‘signals’ to condition the other party. This would include setting the tone, signalling confidence and intentions, etc. * Creating an atmosphere conducive to agreement. This might involve social interchange; expression of shared goals; avoiding issues that might irritate the other party and emphasising common ground.

Answer 44

**Explain the closure phase of a commercial negotiation. (10)** * It ensures that the final summary is as agreed in the negotiation meeting(s). This is a process known as ratification. * It provides a foundation for the ongoing buyer-supplier relationship, based on mutual commitment to formally and mutually agreed terms and conditions. * It provides a tool for gaining stakeholder 'buy in' to the agreement, on the basis of the authority of the ratifying parties. * It provides an agenda for action and allocation of responsibilities and accountabilities, so all parties know what they have to do when the contract operation starts. * The minutes or summary acts as a written record and confirmation of the agreement, should this be required for follow-up, control and/or dispute resolution. * Formally and mutually agreed points can be incorporated into the development of contracts without further discussion. * Follow up of any outstanding points from earlier stages in the negotiation. * Evaluation of the negotiation process, activities and outcomes.

Answer 45

Explain FIVE cultural differences between the parties to a negotiation that may impact on the negotiation process or outcome. (25) 1. **Power distance:** the extent to which the unequal distribution of power is accepted by members of a society or organisation. Cultures with greater power distance will concentrate decision making at the top level meaning that all decisions will have to be finalised by the leader. This tends to lead to a slower negotiation process. 2. **Uncertainty avoidance:** how much members of a society or organisation are threatened by uncertain and ambiguous situations. If a negotiator comes from a culture with high uncertainty avoidance, they are likely to seek stable rules and procedures for the negotiation. 3. **Individualism/collectivism:** this relates to the tendency to take care of oneself versus the tendency to work together for the collective good. Some cultures tend towards individualism and others tend towards collectivism. In a collectivist culture, negotiations with the same party can continue for years and a change of negotiator may mean a change in the relationship. In individualistic societies, negotiators are considered to be interchangeable. In commercial negotiations, negotiators from individualistic cultures are likely to negotiate on their own whereas those from collectivist cultures are more likely to want to negotiate on a team basis. 4. **Masculinity/femininity:** this relates to the extent to which highly assertive masculine values predominate as opposed to sensitivity and concern for others' welfare. Negotiators from 'masculine' cultures are more likely to favour distributive negotiations over integrative negotiation. Potentially, this is important because a negotiator needs to be in a position of knowing whether the other party is likely to take a distributive or integrative approach so that a suitable strategy, along with suitable tactics, may be developed. 5. **Long-term orientation:** the extent to which thrift and perseverance are valued (long-term orientation) over respect for tradition, fulfilling solid obligations and protecting one’s ‘face’ (short-term orientation)

Answer 46

**Explain the term ‘influencing’ in the context of a commercial negotiation using examples to illustrate your answer. (13)** Influencing is the process of applying some form of power or pressure in order to change the other negotiation party’s attitude or behaviour. This would include securing their compliance (with requests), conformity (to norms or expectations), concession (to demands), agreement (with positions or propositions) or commitment (to a shared vision). A simple dictionary definition is that influencing is ‘the power to have an effect on someone without the use of direct force or command’. Examples: persuasion, exchange, coalition, and pressure and Characteristics of influencing include that it is not a single event but a continuous process. Influencing may be intentional or unintentional. Influencing may not in itself produce a conclusion but it may help to move a negotiation closer to finality. * Desired outcomes of influencing are, for example, compliance, conformity, concession, agreement and commitment. They then supported this by explaining that all of these outcomes of negotiation are desirable because, if achieved, they should mean that the* * negotiation has been successful. Better answers also emphasised the point that ‘influencing’ is a continuous process that should last quite a long time and thus relates to positive relationships between buyer and supplier. Better answers also gave descriptions of the types of ‘power’ that could be used to influence theother negotiation party. Examples included ‘expert’ power and ‘logic’ as well as ‘referent’ power.*

Answer 47

Explain TWO characteristics of a ‘push’ approach to influencing used by a negotiator in a commercial negotiation. (12) 1. A ‘push’ approach to influencing aims to secure compliance from the other party in the negotiation. 2. It is based on a power imbalance and is a directive or power-based approach (the ‘push’ negotiator has more power). Authority is used in pursuit of the ‘push’ negotiator’s goals at the expense of the other party. ‘Push’ behaviours in negotiation are broadly associated with a distributive approach (winlose) to the negotiation outcomes. 3. The ‘push’ negotiator uses the power to offer (or withhold) something that the other party values, in order to achieve compliance. 4. The party being ‘pushed’ will be aware of the process, which is overt. This can cause resentment or resistance, and can be a barrier to collaboration

Answer 48

Identify THREE macroeconomic factors and explain how each can influence a commercial negotiation. (15) 1. Labour costs * In NZ the minimum wage is set to increase to $20 ph by 2020 * When negotiating with suppliers this will affect their costs and has to be considered 2. Technological * Technological macro environment factors can influence how an organization does business. * A new type of machinery, computer chip, or product created through research and development can help a company stay modernized and ahead of the market curve. * When negotiating with suppliers it is important to move with the times, ensuring that the supplier will be able to provide services that are technologically capable of transitioning in the future 3. Sustainability/Environment * Procurement departments need to plan ahead to manage resource scarcity and spread out their suppliers to minimise the disruption in the event of a natural disaster. Avoiding high risk zones is also advised. * Businesses may have an interest in ensuring that their supply chains are not destroyed by unsustainable practices. * The 2014 FM Global Resilience Index recently identified the Dominican Republic, Bolivia and Venezuela as three of the riskiest countries for supply chains, due to their exposure to natural hazards, political risk and economic instability

Answer 49

Suggest FIVE sources of information on macroeconomic factors. (10) 1. **Forecasts**, report and statistical surveys published by the government and government agencies 2. **Analysis** published in the mainstream and financial media (eg Financial Review or Financial Times) 3. Data published by **financial institutions and analysts** eg data on exchange rates published by banks 4. Data published by financial markets (incl. London Stock Exchange and intl equivalents) 5. Published economic indices such as retail price index (RPI), labour market index and commodtiy prices indices

Answer 50

**Explain THREE ways in which parties to a negotiation might reflect on their performance in the negotiation.(9)** 1. Personal development journal * work experience as outlined in writing, together with a brief analysis of: the outcomes of the experience and they compare to the desired outcomes or targets * what happened and why * what could be done differetly or better next time 2. Critical indicdent analysis * Similar process to PDJ where critical incidents (conspicuously successful/unsuccessful incidents, negotiations or behaviours in negotiation) are analysed to establish what went wrong and what learning can be derived from the incident * May be done in writing as part of PDJ or via discussion with the negotiation team or a coach/mentor in negotiation 3. Post negotiation review and evaluation * In a meeting with negotiation participants (from your party) and key stakeholders. * In additional to initial review it may be possible to see feedback and evaluation from the other party (eg in the context of ongoing, trusting supply relatonship) * perhaps during early contacts between the contract or relationship managers on both sides

Answer 51

Discuss FOUR tactics that could be used to influence the other party during a negotiation. (16) 1. Rational persuasion * Logical argument and evidence, designed to demonstrate credibly that your position or solution is desirable and feasible * It fosters agreement and commitment rather than mere compliance * May be difficult or ineffective if the argument is weak, or up against genuine conflicts of interest or ideology 2. Inspirational appeal * Appeal to the influencee's ideals, values and aspirations, and/or statements of belief and encouragement, arousing confidence and enthusiasm * Addresses powerful and positive motivating factors * Suits values based culture * Can be perceived as shallo and manipulative, especially if promised outcomes do not accrue 3. Consultation * Inviting the influencee to particpate in developing the solution, or demonstrating willingness to take the influencee's ideas and concerns into account * Input may enhance a decision, ownership and implementation * It fosters communication and co-ordination * It is time consuming * Allows divergent interests and conflicts to emerge 4. Ingratiation * Getting the influencee to think well of you, or to be in a co-operative frame of mind, before a request or demand is made (sometimes know as buttering up) * Repays investmentment in trust, rapport and relationship building * Helps to condition responses * Can be transparent, perceived as manipulative and treated with suspicion

Answer 52

**Describe THREE attributes of a negotiator who seeks to take an integrative (win-win) approach (9)** 1. Excellent **listening** skills (including ability to indicate empathy or understanding of the other person's viewpoint) 2. A holistic or **systematic** orientation: sseing the 'big picture' of supply chain performance, synergy, relationlationships, competitive advantage and added value - rather than just the best deal for a single transaction 3. **Maturity and** **assertiveness**: being able to stand up for one's own needs and values, while being able to recognise that others' needs and values are equally valid

Answer 53

Assess FOUR potential risks when adopting a win-lose (distributive) approach to negotiation. (16) 1. The risk that **unfeasible or unacceptable concessions** will be made, which will cause economic loss, conflict and other negative impacts if followed through 2. **Adversarial relations** with the other party, if negotiations have been win-lose in style this may have critical secondary risks (eg if key suppliers/employees are alienated and cooperation is damaged) 3. **Ethical and reputational risk** eg if negotiating power is used for personal gain, or there is a breach of confidentiality during or following negotiations 4. **Compliance risk** eg statutory procedure ( eg competitive tendering under Public Sector Procurement Directives) are not complied with

Answer 54

Describe FOUR situations in which the bargaining power of a supplier is likely to be relatively high compared with that of a procurement organisation in a commercial negotiation. (16) 1. Suppliers are limited in number (there is little choice of alternative suppliers for the procurement organisation). In effect, this is a ‘monopoly’. 2. The available suppliers are much larger (and therefore, more powerful) than the procurement organisation. This would almost certainly mean that the supplier would not be over-interested in the procurement organisation’s business. 3. There are few substitute products or services available in the market meaning that the procurement organisation doesn’t have any realistic option to using the supplier. 4. The supplier’s product or service is highly differentiated and offers unique features not offered by other suppliers. This has a similar result to the point above. 5. The volume that the procurement organisation wishes to buy is small and is not important to the supplier in terms of its total business. 6. The supplier’s product or service forms an important element of the procurement organisation’s business (e.g. the procurement organisation may have specified a particular supplier’s component). 7. The supplier has specialised processes, equipment or expertise that are not readily available from other suppliers in the market. This means that the procurement organisation would have no realistic option of using another supplier. 8. The switching cost of the procurement organisation is high (e.g. the procurement organisation may have entered into a long term arrangement or contract with the supplier and the supplier is aware of this). 9. The procurement organisation’s requirement is urgent and cannot be postponed; this supplier can provide the product or services in the required timescales, and others cannot do this. 10. The supplier is ‘attractive’ because of its reputation for quality, reliability, sustainable supply, or ethical trading practices; this has the potential to enhance the procurement organisation’s brand by association. 11. The supplier has managed to obtain good information about the procurement organisation and its likely negotiation positions before the negotiation.

Answer 55

**Information is a key resource in establishing leverage during a commercial negotiation. (9)** **Outline THREE ways in which a supplier might gather information on a procurement organisation when preparing for a commercial negotiation** 1. The supplier may **initiate discussions in advance** of the formal negotiation meeting in order **to establish the needs, variables and positions** of the other party. 2. The supplier may try to **obtain information from the non-commercial staff** in the procurement organisation (e.g. engineers), who may then not be aware that this is happening. 3. The supplier may **analyse financial information from the procurement organisation’s published accounts**, or it may obtain a **credit rating report** from an independent credit reference agency. 4. The supplier may check out **published information** on the procurement organisation that is available in the **public domain**, such as **news reports, websites** (including the procurement organisation’s own website), investment reports, or legal judgements. 5. The supplier may **speak to other parties who have had dealings** with the procurement organisation, including its competitors, suppliers and customers. 6. The supplier may **review the outcomes and processes of previous negotiations** with the procurement organisation, in order to establish its likely priorities and approaches to the negotiation.

Answer 56

Explain the following terms highlighting the differences between them (10) i. Direct costs ii. Indirect costs Direct costs are the costs that are directly associated with a particular unit or batch of product or service. Examples would include raw materials, direct labour and direct expenses. Indirect costs (also referred to as overheads) are the costs that cannot be directly attributed to a particular batch product or service and need to be spread across the overall output or production. Examples would include rent and rates, administration salaries, indirect materials such as consumables. Direct costs can be attributed whereas indirect costs need some form of absorption applied.

Answer 57

**Outline FIVE reasons why a buyer might analyse suppliers' costs to support price negotiations. (15)** 1. To identify any difference between the supplier’s cost breakdown and the buyer’s own analysis or estimate of the supplier’s costs can be examined to arrive at an agreed cost figure, as the basis for negotiation 2. Buyers can identify (and demonstrate in negotiation) when suppliers are claiming higher than average or unjustifiable profits 3. Buyers can calculate a target price or price range for use in the negotiation 4. Buyers can identify where (and how far) the supplier has room to make a concession on price 5. Buyers can establish how much leverage to apply to force the supplier’s price down without making the contract unsustainable

Answer 58

**Explain the characteristics of FOUR different purchaser–supplier relationships from the 'relationships spectrum'. (16)** 1. Adversarial – Both parties compete or coerce to try to find advantage over the other. This relationship lacks trust or co-operation. This is a very negative relationship and is often short term and conflict can occur. 2. Arm’s length – A distant and impersonal relationship. Here, the frequency of purchase is low so there is no need to build a close relationship. A good example of a situation where this relationship may emerge is ‘spot buys’. 3. Transactional – Interaction may be more regular than in the previous two relationships but purchases remain multi-sourced, one off purchases and competition is encouraged. Typically in such situations the relationship is of low priority compared to obtaining a competitive price. 4. Closer tactical – This is a more mutual approach looking for commitment from both parties to gain good supply quality and continuous supply but there is still a focus on cost-effective supply. This is represented by longer relationships with reliable suppliers. 5. Single sourced –This is a situation where the buyer has chosen one specific supplier for a particular requirement and quality and continuity of supply are priorities so that the close relationship between the parties is important. There should be a strong level of trust and mutual commitment. 6. Outsourcing – A very high level of trust and commitment is required when an organisation decides to change from an in-house operation to allowing external resources to provide the goods or services. One of the reasons that trust and commitment are important is that the outsourced services are often provided on the buyer’s premises and so issues such as health/safety and confidentiality can be very important. 7. Strategic Alliance – High level of collaboration when two or more organisations join forces to deliver a product or service. For example a software developer and a services company who can implement and train staff to use that software. 8. Partnership – This is close collaboration on a long term scale. Commitment and trust are high sharing ideas and information. Risks and rewards are also shared. 9. Co-destiny – This is the closest relationship. It is a long-term commitment strategically linking the two organisations for mutual benefit. An example might be aircraft manufacturers and aircraft engine suppliers both of which would need to work very closely together so that (e.g.) innovations were included in the dealings whenever possible

Answer 59

**Explain the potential impact of the 'relationship spectrum' on commercial** **negotiations. (9)** Areas of impact are likely to include trust, information sharing, lenabsorptiongth of relationship, use of power, degree of cooperation and search for mutual benefits. The two extremes of the spectrum are adversarial and collaborative and these two approaches to relationships will have a direct impact on the negotiation style adopted. It may be suggested that there is not always a direct correlation but usually there will be a link between adversarial relationships and adversarial negotiations. At the adversarial end of the spectrum there may be little negotiation or a focus on one negotiation variable (particularly price). This approach is likely to lead to a win/lose negotiation. At the other (collaborative) end of the spectrum it is more likely that lengthy complex negotiations can take place including many variables. This approach is likely to lead to positive outcomes with a win/win conclusion. At the more distant, transactional end of the spectrum (i.e. not quite in the adversarial position), little negotiation may be used (where competition or other mechanisms can secure basic supply efficiency) and any negotiations may be more or less exclusively focused on price leverage. At the collaborative end of the spectrum, organisations will be looking to co-operate to find joint benefits and combinations of solutions to complex problems. There is likely to be more trust between the parties in the negotiation with increased collaboration and this should lead to a joint problem-solving approach. Candidates may use a wide range of examples to illustrate these differences

Answer 60

Discuss THREE persuasion methods that can be used in a negotiation (15) Threat - explicitly adversarial - used in distributive negotiations only - veiled or explicit statements of negative consequences, risks, penalties or sanction arising from failure to move or comply Emotion - appeal to supplier's goodwill or emotions about the issue or result eg appeal to fear (of failure, loss or reputational damage) or pride (emphasise status/reputational gains) Logic - central to most negotiations - based on logical persuasion - carefully planning arguments, facts, figures to support case - Hard for supplier to say no at final step of closure if they can be made to agree with each step of logical argument Compromise - find middle ground between supplier and buyer by moving towards each other's positions - 'meeting each other halfway', 'splitting the difference' Bargaining - extracting value from a deal by the exchange of various items that each party values (currencies) Bargaining

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