Learning MBA Master Degree

TEACHER: Hello! I suggest we start this module by talking about a false and a real Dutch. Do you agree?

STUDENT: An intriguing proposition I can’t refuse, for sure. Are you going to talk about counterfeit Heineken beer and an authentic renaissance painting, or what? Go ahead, please.

TEACHER: I was referring to an auction system called "DUTCH AUCTION". And the reference to a false and a real one is due to the fact that two different auction systems are called Dutch.

Let’s start with the "false" Dutch Auction.
You are purchasing an item and ask for bids from suppliers. Once you have the bids, you call the suppliers separately and give them a chance to improve on their rival’s last bid. Assume you got a bid from A for $10 and a bid from B for $9. You call A and tell them you have a bid for $9, and ask them to re-quote a lower price. Say they now re-quote $ 8. Then you call B and tell them you have a bid for $8 and invite them to re-quote. This process continues until you do not get any of your suppliers to re-quote a lower price. At this point you accept the last bid you got, which is the lowest one. Again, calling this system a Dutch Auction is incorrect.

STUDENT: OK, this one was new to me. But I actually think I know what a real Dutch Auction is.

TEACHER: Fine, you tell me.

STUDENT: In an actual Dutch auction, the auctioneer is normally a seller. He starts by mentioning a high price to which there is no response from any of the potential buyers.
The auctioneer calls lower and lower prices, and the first buyer who calls out in response to a reduced price, wins. The longer a potential buyer holds back, the higher his or her chance to pay less, but then the chance that another buyer calls in and wins also increases as he or she holds back.

Of course, this is the reverse of a traditional public auction, where the bids of the competing buyers rise and the last one to call wins. But let me tell you something, auctions are not actually "negotiations", are they?

TEACHER: No, not exactly. But at least the "false" Dutch auction is a form of negotiation you should know about. Anyway, let’s continue.

STUDENT: Let me ask a question, then. What about EMOTION in negotiations?

TEACHER: Most negotiators will deny it, but actually emotion is part of almost every negotiation. Some people feign emotions as a ploy; they falsely pretend to be hurt, sad, offended, etc., to produce a desired effect on their counterparts. Others actually feel and often unintentionally show emotions, which in general is no good. If your counterpart produces an emotional outburst, either in attack or in defense, remain as calm as you are capable of.

And now I will ask you to "pardon my French" (seriously, no pun intended), because I will explain two common French expressions.

FAIT ACCOMPLI is a French expression used in almost any western language. It refers to an action already taken and impossible or at least difficult to reverse. It is a ploy to give more power to the party which took the action. Example: a buyer sends a check with a non-earned discount, and waits for the seller to start negotiating on the difference; but he already has taken the action of paying less than agreed. He did not attempt to negotiate a discount before sending the check; he presented the other party with a fait accompli. This is often a difficult to counter action: it is advisable to include firm rules in a contract with heavy penalties, and react firmly the first time the other party behaves in this way. If you let it pass once... you are signaling that you will accept it again and again. Do you remember the meaning of the word "appeasement"? OK, do not practice it!

The other French expression frequently used is Force Majeure, roughly equivalent to "Acts of God"; strikes, war, floods, and any unforeseeable event that can prevent an agreement being implemented. In your contracts, add as many as you can if you must deliver, allow as few as you can if you are on the receiving end of a product or service.

STUDENT: Merci, mister Le Teacher. Are we returning to English now?

TEACHER: Yes, and I don’t want anyone to connect my next subject with the previous one!

I am going to explain the HOOKER’S PRINCIPLE to you. It is very simple and very true: "services are valued more highly before they are performed than they are afterwards". I guess I do not need to explain the reason why this principle was given this name, do I?

Let me give you a more innocent example. If you have a short circuit in your home’s wiring and can not watch you favorite TV show, you will give more value to the services of an electrician before he actually fixes the problem, than you will after he did fix it and you have watched your TV show. You will probably accept the electrician’s estimate gladly and let him repair your wiring. But you will feel less happy when after he has fixed the problem and you can watch TV at your pleasure, the electrician's bill arrives.

If you are selling services, make sure your customer can not find an excuse to reduce the price after you have performed it; he will probably do it if he can. And whenever possible, do as the professionals do after whom the principle in named: demand payment in advance!

STUDENT: Good advice. But I am missing your interesting cases in which you illustrate negotiation procedures.

TEACHER: You like true stories, don’t you? OK, here is one. A negotiation involving two teams about the "turnkey" delivery of a food processing plant. The prospective supplier is FabTec and the buyer is TastyFoods Inc. As you can imagine, this is a long negotiation which in turn will involve a lot of second level deals between FabTec and its suppliers.

Since both teams are very professional, they come to the negotiation after careful PREPARATION. Preparation is "the jewel in the crown of effective negotiation". Getting it right dramatically improves your performance in negotiations. And the necessary condition for good preparation is of course knowing your business; and in many cases, as in the one we are studying, you need to know your customer’s business. How can you negotiate the construction of a turnkey plant if you don’t know your customer's industry as well as he does?
Some basics on preparation:

1. What are my interests?
2. What are the issues? Itemize them.
3. How important is each issue for me? Prioritize
4. Quantify my entry offers
5. What are my exit offers?
6. What do I NOT want? Prioritize.
7. What are the other negotiator’s interests? What will be their priorities?
8. How to handle information on both sides.


Obviously TastyFoods Inc. prepared itself by finding out as much as they could about FabTec: expertise in the specific engineering field, reputation, customer satisfaction of previous jobs done, etc. The first item negotiated was based on point 8 above. Since TastyFoods Inc. would have to supply a lot of information about their business, manufacturing practices, sales forecasts and even trade secrets, they asked for a severe CONFIDENTIALITY AGREEMENT.

FabTec was used to this type of request from customers; they debated for some time about the penalties they would have to pay if some confidential information was leaked, and on how to establish their actual guilt, but soon agreed to most of TastyFoods Inc.'s demands. TastyFoods Inc. used the STANDARD TERMS strategy: a printed contract they claimed was used in all parts of the world by all subsidiaries of TastyFoods Inc. when contracting for the construction of a plant. They claimed they had no authority to accept any change in this confidentiality agreement.

Both parties defined their interests and issues and prioritized them (points 1 to 3 above). TastyFoods Inc.’s basic interests:

1. Getting a state of the art food processing plant capable of producing a specific volume at the lowest possible cost
2. Planned additions to increment capacity in the future
3. A convenient price from the supplier. Financing?
4. Quick completion
5. And you can imagine a lot more...

A few of the interests, issues and priorities of FabTec:

1. Employing their considerable idle capacity in engineering manpower
2. Maximizing their profit
3. This job as an important reference for future works with the same multinational client and others.
4. And you can imagine a lot more...


Once the confidentiality agreement was signed and TastyFoods Inc. supplied the necessary information, FabTec established their Entry and Exit points: First offer to start negotiations, and the point at which they would abandon negotiations.

TastyFoods Inc. had no entry point, since the first move would come as a quotation from FabTec, but they did have a maximum they were willing to invest in the construction of the plant (capital expenditure budget). Of course they did not reveal this information to anyone.

STUDENT: OK, now both parties have prepared themselves, the necessary information has been exchanged, and FabTec quotes a price for supplying the turnkey plant. Right?

TEACHER: Before even considering the quotation, TastyFoods Inc. insisted on a LIFEBOAT CLAUSE. This is an unlimited escape clause, and the wording TastyFoods Inc. wanted was "...acceptance of the offer is contingent on the veracity of all statements made by the seller regarding performance, quality, and specifications, and approval of the buyer of all matters relevant to the purchase, whether presently known or not, and any other material facts that may affect the buyer’s interest". You realize that such a clause gives TastyFoods Inc. the chance to "jump into a lifeboat" and cancel the contract at any time without any PENALTY CLAUSE.

The FabTec team countered with the TIT-FOR-TAT strategy: "Yes, but ... we would agree if you accepted:"

1. Fixing specific stages of the construction process and amounts due to FabTec if TastyFoods Inc. jumps into the lifeboat at these points (no free lunch!).
2. Your decision to cancel the contract must be based on objective criteria subject to arbitration


Point ii. was obviously an OFFER THEY MUST REFUSE because it was totally contrary to the demand of a lifeboat clause made by TastyFoods Inc.

If allowing TastyFoods Inc. to escape the contract was to be based on "objective criteria", by definition it would not be a "lifeboat". FabTec's offer was designed to be refused and begin a trading process.

The parties debated and finally settled conceptually on point i. As for the fixing of the stages and the money to be paid for canceling at each stage this was left for later negotiating rounds.

The question of the lifeboat clause preliminary settled, TastyFoods Inc. challenged the price and the "package", the specifications of the plant. Not surprisingly they wanted both a price reduction and a plant with more costly features. FabTec countered with the ONE PRICE, ONE PACKAGE defensive ploy. They maintained "this package, this price; that package, that price" principle. Their team had a TOUGH GUY and a NICE GUY; while the latter listened carefully and stated his understanding (not his agreement) with TastyFoods Inc.’s demands, the former kept countering with the OVER-AND-UNDER ploy. This is the impossible response to the "impossible" demand. He said for instance "OK, we may reduce the price by 10% for a plant with 25% less capacity".

To counter the One Price, One Package strategy, the TastyFoods Inc. team applied the SALAMI strategy. The USA used to accuse the Soviet Union of applying this strategy during the Cold War. It is based on the principle that "a slice of a cut sausage will not be missed". K&G kept saying that they might accept FabTec’s price, but on condition that... and "slices" were cut in the form of added features. A bit more capacity here, a faster machine there, a few more sanitary facilities for workers, etc. They combined SALAMI with the SELL CHEAP, GET FAMOUS buyer’s ploy: "make this plant and you will have a lot of other customers lining up to deal with you".
TastyFoods Inc. was a US company but they had a joint venture with a Japanese enterprise to do business in certain Asian countries, and the plant under negotiation was for one of these countries. Mr. Suji, the representative from the Japanese company, had not spoken at all. At one point the FabTec team was totally resistant to allow one more Salami slice to be cut from their price and TastyFoods Inc. wanted more. One of the members of the FabTec team decided to use the WAKING UP THE DEAD ploy. This ploy’s objective is to exploit possible differences within the counterpart’s team, by inviting a member of the latter who has remained silent to comment.
The FabTec person said: "What do you think, Mr. Suji? Do you have any suggestion on how to break this impasse?" A risky tactic. The Americans in the TastyFoods Inc. team resented the interference and stiffened their position. Mr. Suji´s role was actually to be present only as an observer, and he made a polite evasive statement.

STUDENT: Tough position for FabTec. How did they move?

TEACHER: Actually, they had to sacrifice one more cut of salami, but one of their most senior negotiators minimized the damage by using the MAJOR SACRIFICE GAMBIT. This is a ploy to manipulate the perceptions of the other negotiators. FabTec had no option but to make a concession after the blunder they had made with their attempt to "wake up the dead". But the FabTec negotiator defined it as a significant concession and stressed the "sacrifice" they were making in order to do business with TastyFoods Inc.; he hinted that he would expect some compensation for the "heroic sacrifice" his company was making.

STUDENT: Did it work? Did the TastyFoods Inc. people believe it?

TEACHER: I do not think they believed it, but it broke the impasse while allowing both parties to "save face".

At this point the TastyFoods Inc. team decided that they could not continue with the Salami tactic and began giving some very subtle buying signals. This caused the FabTec people to "salivate" in anticipation and signaled their satisfaction about the deal being about to be closed. Taking advantage of this situation, the TastyFoods Inc. people hit with the MOTHER HUBBARD price pressure ploy.

STUDENT: Mother Hubbard? Was it the mother of one of the negotiators?

TEACHER: The name refers to a famous English nursery rime: "Old Mother Hubbard went to the cupboard to give her poor dog a bone, when she got there the cupboard was bare...". The TastyFoods Inc. team "confessed" that they had made a mistake when estimating the total investment needed, and thus their capital investment budget was not sufficient to allow for the expenditure at that price. Only a reduction in price, or else delayed payment terms at no interest to carry over the expenditure to future budget periods could allow them to continue negotiations. "Their cupboard was bare!"

FabTec countered by claiming that their price included maintenance of the machinery for 5 years; they said " if your investment budget is so bare, let’s take the maintenance out of the price. We can reduce the price of the turnkey plant and you can pay for the maintenance of the machinery out of your maintenance budget". What they suggested was "creative accounting" (in TastyFoods Inc.’s accounts, not in theirs). This solution would "solve" the capital investment budget limitation, but the total price paid by TastyFoods Inc. would be the same. Wisely, the TastyFoods Inc. negotiators rejected this proposal on the basis that their senior management would immediately discover the trick.

FabTec then suggested to SPLIT THE DIFFERENCE between their last offer and the price TastyFoods Inc. was prepared to pay. This a settlement ploy which may work and be equitable, but all depends on whether both parties can afford to split the difference. Can FabTec still make a decent profit if the difference is split? Can TastyFoods Inc. get an acceptable return on their investment in the new plant?

At this point an agreement seemed to be reachable, since TastyFoods Inc. accepted to split the difference in price and all plant specifications and other details had been settled. Yes but.... TastyFoods Inc. demanded a RESTRICTIVE COVENANT, a contract prohibiting FabTec from using any original technology they developed for TastyFoods Inc. if they built plants for other companies in the future, with stiff penalties. FabTec in turn demanded ROYALTY payment if TastyFoods Inc. used this technology in future plants built for TastyFoods Inc. by other construction firms. Lawyers were called in and finally a clause was added to the agreement which partially contemplated TastyFoods Inc.’s request. Of course this particular issue involved a lot of GIVE AND TAKE; FabTec was allowed to use the new technology in new plants which did not manufacture products competitive with TastyFoods Inc.’s, while TastyFoods Inc. was permitted to use any new technology in its future new plants without royalty payments to FabTec.

STUDENT: It looks that they had an agreement. Or was it a GAZUMP situation?

TEACHER: I see you have done some reading on negotiations. As you know, Gazump is a situation where one of the parties thinks it has a contract and the other one considers it a STATEMENT OF INTENTION of which it can get out easily if a better opportunity comes up. In this case detailed MINUTES were taken on the partial agreements of every session, and the final contract was reviewed by lawyers on both sides. The made sure that it was a contract, not a gazump.

STUDENT: This was an interesting case of a complicated negotiation ending successfully in an agreement advantageous for both parties. Was the plant actually built, delivered and did it perform well? In other words, was the agreement IMPLEMENTABLE?

TEACHER: Yes it was. And I will finish this module by telling you about some of the good negotiating practices used by both these experienced teams.

They were very careful about PROTECTING INFORMATION. They worked separately in secure premises when preparing for the negotiation. Circulation of documents was controlled and restricted. Senior personnel was briefed in person. Superseded documents were shredded, carbons and printer ribbons destroyed (this was some time ago when these kind of things were still in use!), computer files and disks were erased. Only people who really NEEDED TO KNOW received specific information. Taking documents home or on trips was strictly prohibited.

And, this being the last Module of this course... goodbye, and happy negotiations to you!