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An academic look at the process of managing relationships

Success in the competitive dynamics of material handling requires increasing emphasis on managing relationships. Managers must understand the process that organizations go through to create relationships between suppliers and their customers—the distributors. That process is founded on negotiation activities that occur between organizations as they attempt to achieve their strategic and operating goals. Proper assessment requires a definition of the content and boundaries of the negotiation process: Negotiation is a management process involving the preparation for bargaining, the interaction of two or more parties in a bargaining situation, and the resolution of this interaction. Preparation includes the collection of information and the use of that information to form interactive strategies designed to achieve the firm’s negotiation objectives. Bargaining includes the execution of those strategies and the “give and take” over individual issues necessary to satisfy the parties. Outcome represents an agreement between the parties to accomplish mutual gain or to discontinue negotiations.

Using this definition as a basis, Figure 1 demonstrates the general form of the negotiation process model, which contains the basic areas of interest to the involved parties.

The negotiation process includes five elements:

  • Negotiation environmental factors, the environments that surround the negotiating parties
  • Negotiation potential, the nature of the relative relationship between the parties
  • Negotiation preparation, the activities that take place to ensure that necessary information is available for decision-making during interactions between the parties
  • Bargaining, the actual discussions that take place between the parties
  • Negotiation outcome, the results of the negotiation process.

Negotiation Environmental Factors
The negotiator must distinguish between influences from different elements within the firm and those from outside the firm. These factors have been classified into four environments—external, organizational, departmental and personal.

The external environment has variables over which the organization and negotiators have little or no control, including the characteristics of competition, the state of the economy, technology, legislation, political decisions and cultural factors.

Each negotiator must also carefully consider the elements of the organizations that can affect the negotiation outcome. First, it is important to recognize that negotiations between suppliers and customers may occur within domains of responsibility of particular units within each organization. For example, the manufacturer may be represented by personnel from the sales department, while the buying firm may be represented by the purchasing unit. Each of those individual units has internal unit goals and objectives that may or may not be consistent with their respective organization’s goals. Therefore, it is critically important to differentiate between the organization and the unit when departments are representing an organization’s interests.

Finally, each negotiation in the material handling industry occurs between the individuals that represent the organizations. They can be front-line people, such as purchasing agents or sales representatives, or senior executives that become involved in negotiations because of the strategic nature of the issues being addressed in the negotiation.

Negotiation Potential
Every negotiation requires effective assessment of the nature of the potential relationship prior to interaction between the parties. Negotiation potential is assessed when the parties understand the power and dependence positions of the parties to the relationship.

Two dimensions are critical to understanding the power/dependence relationship. First is the assessment of the power and resulting dependence between the organizations involved. Each brings market and operational clout to the negotiation that affects each party’s perceived need for the other. In addition, one or more individuals may represent each organization in the negotiation. That brings a level of personal power to the negotiation that is reflected in the ability of one party to influence the other party when interacting in the bargaining environment. That influence may result from the type of power base that is implemented by the negotiators. These elements provide the foundation for the preparation and bargaining activities of the negotiation process.

Negotiation Preparation
Each party must assess the other’s relative needs and capabilities. Negotiation preparation allows the parties to structure information in a manner that is meaningful to the parties during bargaining and requires detailed analysis of the situation, including the collection, organization and evaluation of information about the participants, organizations and the external environments. Negotiators use this information as a basis for developing goals and strategies to be implemented during bargaining. Negotiation goals occur at two levels. First, each issue must have a goal that falls within the issue discussion range previously introduced. These goals offer the target necessary for each negotiator to use to ensure potential attainment of their desired negotiation outcomes. In addition, each negotiator should be aware of the need for targeting a particular relationship with the other party. Therefore, a relationship goal is also necessary for a successful negotiation outcome. These goals are a necessary foundation for each party’s ability to develop strategy for the forthcoming discussions that occur in each bargaining situation.

Negotiation strategy must be developed in several areas. First, consideration must be given to the roles and responsibilities of the negotiators. The second strategic consideration is the desired location of the bargaining sessions. Is there a need for face-to-face discussions of the issues, or can discussions occur over the phone or some other form of electronic interface? Where will the interaction occur (at home, away or at a neutral location)? The third consideration is temporal strategy, understanding the effect of time on the outcome of each negotiation. Consideration must also be given to the appropriate discussion order for the issues involved and the concessions that will be made by the parties during the negotiation. Also, each negotiator must determine whether his opening position on an issue will ask for significantly more than he needs to achieve from the objectives of the negotiation.

The second element of the concession decision is the concession strategy, which results from the negotiator’s positioning on the issue over time. A negotiator who discusses an issue with the other party for a period of time and gives very little to the other party during that time is implementing a ”hard line” strategy. However, a negotiator who spends time discussing another issue and gives significant benefits to the other party at his or her own expense is implementing a ”concessionary” strategy. In each case, the parties must recognize that the starting position and concession strategy are two fundamental elements of each negotiation situation.

Bargaining consists of three elements (position development, issue discussion and finalization). Position development considers factors within the bargaining environment, such as the arrangement of the room where discussions will take place, identification of the individuals present at each bargaining session and establishment of the agenda for the discussions. Issue discussion involves the consideration of the behavioral elements of the interaction between the parties during bargaining. Consideration must be given to each party’s behavioral posturing. The quality of the information that is presented between the parties is important to consider. Issue discussion also includes an assessment of the ”actual” concessions made during the bargaining sessions. Finalization is the part of the process when the parties reach agreement on one or all of the issues discussed during bargaining. Agreement is dependent on the complexities of the issues discussed, in addition to temporal constraints imposed by deadlines, such as expiration dates included on existing contracts, product introduction and operating system limits, and market and supply base issues such as holidays and other specified times that affect specific demands in various markets.

Negotiation Outcome
Negotiation outcome addresses the nature of the final agreement between the parties. The three elements considered at this stage are verification, agreement and negotiation breakdown. Verification is important in situations in which the party responsible for the preparation of the final document includes provisions not previously agreed to by the parties. Therefore, negotiators must verify the contents of the contract according to their interpretation of the terms agreed to during the finalization stage of bargaining.

When the parties can agree on appropriate terms for a final document, agreement occurs and produces one of four outcomes: (1) both parties benefit (win-win), (2) one party benefits at the expense of the other (win-lose), (3) the other party benefits at the expense of the former (lose-win) or (4) neither party benefits (lose-lose). The nature of the agreement will depend on the relative positions of the parties throughout the negotiation process, the amount of preparation and the strategies used. Negotiation breakdown occurs when the parties fail to agree on the key issues to the agreement, and they recognize that their mutual needs can be achieved more effectively through other sources. This type of situation is not unusual in today’s business environment, where strategies such as niche marketing and supply base reduction are implemented as mechanisms to target specific customers or suppliers in the material handling industry.

The circular nature of negotiation causes the information from one negotiation to become a part of the next one. For example, a material handling firm that completes a negotiation with one supplier or customer will use the information they’ve gained in future negotiations with the same party. In addition, the party will use elements of the information base for future negotiations with other parties that have similar negotiation characteristics. This learning experience is critical to firms desiring market and supply base expansions in your industry.

Material Handling Equipment Distributors Association
Meet the Author
Lloyd M. Rinehart is an associate professor of marketing and logistics in the College of Business Administration at the University of Tennessee, Knoxville, located on the Web at www.utk.edu.

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