A Scandinavian Scare
(Reprinted by
permission of the authors)
Note: After you
have negotiated the Cartoon exercise, try to apply what you learned to the
following case involving negotiations between a buyer and a supplier.
In the fall of
1999, a group of managers met in Scandinavia for the first of three
negotiations involving four companies from three different countries and a
family of products. The situation was a common one: a buyer tells a supplier it
wants prices reduced by 10 percent and, “Oh by the way, we’ll also be
soliciting quotes from your major competitor.”
At the heart of
the meetings was the buyer’s corporate agenda to cut costs. Cost-cutting is a
common theme among large corporations. Even in good times, they have been known
to pressure their vendors to lower prices and to play vendors off against each
other. This case illustrates what actions a supplier might take in this
situation. Other vendors who may find themselves in similar situations can take
these actions as well.
Background
FD is a Dutch
manufacturer of filtration products. Rather than selling directly to end
customers, throughout the 1970s and 1980s, FD sold oil filters and oil filter
cartridges (replacements) to Swedish and Finnish heavy equipment manufacturers
who, in turn, branded and sold the products to their own customers. In the late
1980s the Scandinavian market for oil filters began to change. The Finnish
government consolidated many of the region’s heavy equipment manufacturers into
one company, Conquip. About the same time, FF, a Finnish competitor of FD,
began supplying filters to Conquip that were similar to those supplied by FD.
Because the Finnish government had a stake in both FF and Conquip, FF was able
to gain market share quickly. As a result, entire divisions of Conquip began
replacing FD as their supplier of filters in favor of FF. By the late 1990s,
only Conquip Truck, a Swedish division of Conquip, remained as a dedicated
customer of FD filters in the region. FD was determined to keep Conquip Truck
as a customer.
In the mid-1990s FD had introduced a new
filter cartridge design called LEIF (Low Environmental Impact Filter). FD had
hoped that the LEIF products would block further FF inroads into the market for
oil filters. The patented LEIF product family, which included LEIF filter
housings and LEIF replacement cartridges, was designed to fill increasing
demand for environmentally friendly products and to tackle the problem of
imitators such as FF. LEIF’s new technology meant that LEIF cartridges were
cheaper to produce than the old filters, and so could be offered at a lower
price. In the environmentally conscious Scandinavian market, LEIF was the
product of choice.
Conquip Truck started purchasing LEIF
replacement cartridges from FD and prepared to begin purchasing LEIF filter
housings as well. But before LEIF could be widely adopted and marketed, Conquip
Corporate launched an initiative aimed at reducing supplier costs within its
divisions. In 1999, Conquip Corporate sent FD a list and asked FD to quote its
best prices for these filters. This RFQ (request for quote) seemed like an
ultimatum. If FD did not quote competitive prices, Conquip might force its
Conquip Truck division to stop buying from FD. FD had been aware of Conquip’s
supplier cost initiative, but the RFQ came rather earlier than FD had hoped, as
even within Conquip Truck LEIF still had not been widely adopted.
The Negotiations
Marc de Winter,
the FD marketing and sales director, studied the product list in the RFQ and
proposed a meeting in Finland to discuss this request. This meeting turned out
to be the first in this case’s series of three meetings and negotiations.
Meeting 1:
Information Exchange and Relationship Building. FD’s goals for the first
meeting were to develop a relationship with the Conquip representatives and, in
the process, find out about Conquip’s objectives, positions, and interests.
Developing personal rapport and trust with Conquip’s corporate office would be
extremely important in any future negotiations. FD attended the meeting along
with FILTECH, its Swedish distributor.
The discussion helped reveal Conquip’s
goal: reducing prices on all filtration products supplied by FD and FF over the
next three years. At the meeting, Conquip offered to retain FD as a
companywide, primary supplier if FD could meet its price demands. However, de
Winter was suspicious of this offer because of the close relationship between
Conquip and FF. He thought that it would be difficult to hold Conquip to its
promise. Moreover, many of FD’s high-volume products were conspicuously missing
from Conquip’s RFQ. De Winter concluded that Conquip just wanted quotes from FD
on products that competed directly with FF products, no doubt for the purpose
of reducing FF’s prices.
Despite his suspicions, de Winter
promised to prepare a quotation based on the information given, and a second
meeting was scheduled for later that fall to discuss and negotiate pricing
options. In a side discussion after the first meeting, FD and FILTECH came to
the conclusion that Conquip was trying to replace FD with FF throughout the
company. It was a tough situation: unless FD was able to meet Conquip’s demands
and convince them to keep FD as a supplier, FD risked losing all of its business
with this major Finnish customer.
Meeting 2: The
Negotiation. Before the second meeting de Winter assessed the situation. There
were three main issues to discuss: pricing; product type; and volume of sales
to Conquip, including to how many and which of Conquip’s divisions FD could
sell its LEIF product range. FD and FILTECH’s highest priorities were to
maintain positive margins and a long-term sales relationship with Conquip. FD
also had some sense that Conquip was interested in sales in the high-margin
aftermarket (the market for filter replacement cartridges) and to ensure low
procurement costs from FD. Conquip’s interest in scope of sales (number of
products), however, was not as clear.
FD walked into the negotiation with a
poor BATNA: no agreement meant FD risked losing all its Conquip business to FF.
FD was aware of this poor BATNA, but did not want to make concessions too
easily and look weak. Meanwhile, Conquip seemed to have a strong BATNA: the
company could easily switch to FF filters. However, if de Winter could convince
Conquip of the value of LEIF’s innovative technology, Conquip’s BATNA would
weaken: it would have no supplier of a product that would be equivalent to the
patented LEIF product.
Both FD and FILTECH enjoyed sizeable margins
on filter sales to Conquip Truck. They knew they could meet Conquip’s 10
percent price cut demand over three years and still enjoy healthy margins.
The negotiation began with an almost
exclusive focus on the price. The sides haggled over de Winter’s prices on
items in Conquip’s RFQ. As a result of this focus on one issue, negotiations
proved to be difficult. De Winter did offer a series of different proposals
that incorporated different levels of pricing, different product lines, and so
on, but Conquip rejected all these proposals, insisting on a 10 percent
discount acrossall products. Conquip would not discuss any other issues without
an agreement first on price.
It seemed like an impasse until de Winter
began to focus on Conquip’s aftermarket sales. He guessed that Conquip might be
willing to accept smaller price cuts if it could increase aftermarket sales.
Unknown to de Winter at the time, in the aftermarket for FF replacement
cartridges, Conquip was losing market share to its competitors. De Winter
explained that LEIF’s patents would ensure a strong position for Conquip in the
aftermarket. (Customers with LEIF filters would demand LEIF replacement filters
manufactured by FD, which only Conquip could supply.) This meeting ended with
Conquip agreeing to commit Conquip Truck to LEIF product at prices reduced by 7
to 9 percent (depending on the product) over three years. Conquip also promised
to seriously consider FD as a supplier for its other divisions.
Meeting 3:
Post-Agreement Negotiations. Several days after the agreement resulting from
meeting 2, de Winter received a phone call from Conquip Corporate indicating
that the pricing was not acceptable after all. Conquip Corporate wanted to
renegotiate prices before signing the final agreement. De Winter made clear
that he was not coming to Finland or Sweden again to renegotiate a deal in
which all parties had already come to a verbal agreement. He invited them to
Holland if they wanted to renegotiate.
Ultimately a meeting was set up between
Conquip Corporate and FILTECH in Sweden. This final negotiation resulted in an
extra price decrease that would be shouldered by FILTECH (not FD) and a promise
to give FILTECH more business at another Conquip division in Sweden where
business had been lost previously.
Discussion
Questions
1. Why did Conquip send an RFQ with a 10
percent price-reduction requirement rather than calling de Winter in for a
negotiation? Is there any downside to having run the negotiation this way?
2. At the first negotiation meeting, Conquip
made a threat disguised within an offer. The offer was to retain FD as a
companywide, primary supplier if FD could meet its price demands.
A. What was the threat embedded in this
offer?
B. Why was this offer not credible to
de Winter?
3. If FD could have reduced prices by the 10
percent requested by Conquip and still have a positive and reasonable margin,
why negotiate? Why not just reduce the price to save the business?
4. How did Marc de Winter improve his
bargaining position at meeting 2? What general negotiation principle did he
employ? How well did it work?
5. When negotiating, what ethical considerations
should you take into consideration? Why?
