Chapter 14 - Bargaining and negotiations. Chapter 14 examines the important human interactions called bargaining and negotiation in a business setting. Bargaining occurs between individuals, groups, organizations, and countries. In this chapter we considered bargaining between two parties, each possessing resources the other side desires.
Chapter14: Bargainingand Negotiations PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement,3rdedition,Copyright2013,W. Content ã Bargaining • Distributive bargaining • Integrative bargaining • Distributive bargaining experiment • Formal negotiation PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Bargaining ã Explicitbargaining ã Aninteractionwherepartieswithcertaindisagreementsconfer andexchangeideasaboutapossiblesolutionuntilacompromise isreachedorthebargainingisterminated PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Negotiation ã ã Thepreliminarydiscussiontobargaining Thetermsbargainingandnegotiationhavebeenused interchangeably PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. TwoưpartyBargaining ã Bilateral monopoly system or twoparty bargaining • • Bargaining that occurs between two parties who possess resources the other desires The 2 types of twoparty bargaining: • Distributive bargaining • • Psychology Integrativebargaining ã Economics PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargaining ã Definition: ã • • Bargaining where the total gains is “distributed” between the two parties involved, and each party usually wants as much as it can get Without some degree of cooperation either party can block the bargaining Can use game theory • Varying sum bargaining Zeroưsumbargaining ã PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PayoffSystem ã Factorsrelatedtothepayoffsystem: Theamountthathastobeexceededifthebargaineristorealizea profit The cost of time spent in bargaining The cost of failure to reach agreement Added benefits achieved by obtaining a specific threshold value Qualitative or quantitative variations in the general level of payoff values Whether payoffs are based solely on one’s own profit schedule or are based, in whole or in part, on the degree to which one’s profits exceed those of others Whether conflict is constantsum or varyingsum Penalties the bargaining opponent (or perhaps a third party) is likely to Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Payoff System Factors • Breakeven Point • The amount that must be exceeded in the bargaining interaction in order to obtain a profit • • Bargaining is often an attempt to convince the other person to accept a lower value than the one he or she maintains is necessary Bargainersresistancetomakingconcessionsispositively correlatedto Thetimerequiredtomakeafurtherconcession theprobabilityofwithdrawingfromthenegotiations PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PsychologicalBargainingFramework ã Six major factors affecting bargaining: 1. General bargaining predispositions 6. Bargaining strategy 2. Payoff system Outcome 3. Social relationship with theopponent 5.Situational factors 4.Social relationshipwith significantothers PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. BargainingStrategy ã • • Tougher bargaining strategy • More extreme opening position • Fewer concessions • Smaller concessions A consistent tough bargaining strategy (not fair) could result in: • High transaction costs • Lack of future agreements • Replacement of the bargaining opponent The best strategy: 10 Always reciprocating both the frequency and the magnitude of the PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã Content ã Bargaining ã DistributiveBargaining ã IntegrativeBargaining ã DistributiveBargainingExperiment 11 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargainingExperiment ã ã Examinestheeffectofthecontingencycompensationon bothbuyersandsellers Situation ã Anagreementhastobereachedonthespecificationsofthe producttobeboughtandthemoneytobepaid ã Boththesellerandthebuyercanmakeconcessions 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. DistributiveBargainingExperiment(cont.) ã Findings: The buyer’s initial offer is always above the seller’s reservation price The negotiator’s payment system has significant effects When only one party is contingently rewarded, o • o the effect is to shift the settlement in that party’s favor When both parties are contingently rewarded, • There is a much longer and more difficult negotiation process 13 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Distributive Bargaining Experiment (cont.) • Implication: Contingent rewards make a difference in negotiation outcomes Purchasing organizations need to be aware of the salesperson’s reward system Management must develop stronger contingencies to encourage purchasing effectiveness 14 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Formal Negotiation Seller’s Perspective VS Buyer’s Perspective 15 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. The Buyer’s Procedure for a Formal Negotiation Followup Develop tactics to achieve the strategy Set strategy based on objectives Develop the plan Determine bargaining strength Prepare a price/cost analysis Determine objectives Select team and chief negotiator 16 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Questions? 17 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. ... Select team? ?and? ?chief negotiator 16 Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. Questions? 17 Purchasing? ?and? ?Supply? ?Chain? ?Management, 3rd edition, Copyright © 2013,? ?W.? ?C.? ?Benton? ?Jr., All rights reserved. ... Anagreementhastobereachedonthespecificationsofthe producttobeboughtandthemoneytobepaid ã Boththesellerandthebuyercanmakeconcessions 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved.... The best strategy: 10 Alwaysreciprocatingboththefrequencyandthemagnitudeofthe PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. ã Content ã Bargaining ã