Negotiating with Wal-Mart

Wal-Mart, the world's largest retailer, sold $315 billion worth of goods in 2006. With its singleminded focus on "EDLP" (everyday low prices) and the power to make or break suppliers, a partnership with Wal-Mart is either the Holy Grail or the kiss of death, depending on one's perspective. There are numerous media accounts of the corporate monolith riding its suppliers into the ground. But what about those who manage to survive, and thrive, while dealing with the classic hardball negotiator? In "Sarah Talley and Frey Farms Produce: Negotiating with Wal-Mart" and "Tom Muccio: Negotiating the P&G Relationship with Wal-Mart," HBS professor Jim Sebenius and Research Associate Ellen Knebel show two very different organizations doing just that. The cases are part of a series that involve hard bargaining situations. "The concept of win-win bargaining is a good and powerful message," Sebenius says, "but a lot of our students and executives face counterparts who aren't interested in playing by those rules. So what happens when you encounter someone with a great deal of power, like Wal-Mart, who is also the ultimate non-negotiable partner?" The case details how P&G executive Tom Muccio pioneers a new supplier-retailer partnership between P&G and Wal-Mart. Built on proximity (Muccio relocated to Wal-Mart's turf in Arkansas) and growing trust (both sides eventually eliminated elaborate legal contracts in favor of Letters of Intent), the new relationship focused on establishing a joint vision and problemsolving process, information sharing, and generally moving away from the "lowest common denominator" pricing issues that had defined their interactions previously. From 1987, when Muccio initiated the changes, to 2003, shortly before his retirement, P&G's sales to Wal-Mart grew from $350 million to $7.8 billion. "There are obvious differences between P&G and a much smaller entity like Frey Farms," Sebenius notes. "Wal-Mart could clearly live without Frey Farms, but it's pretty hard to live without Tide and Pampers."

Sarah meets Goliath

Sarah Talley was 19 in 1997, when she first began negotiations to supply Wal-Mart with her family farm's pumpkins and watermelons. Like Muccio, Talley confronted some of the same hardball price challenges, and like Muccio, she acquired a deep understanding of the Wal-Mart culture while finding "new money" in the supply chain through innovative tactics. For example, Frey Farms used school buses ($1,500 each) instead of tractors ($12,000 each) as a cheaper and faster way to transport melons to the warehouse.

Talley also was skillful at negotiating a coveted co-management supplier agreement with WalMart, showing how Frey Farms could share the responsibility of managing inventory levels and sales and ultimately save customers money while improving their own margins. "Two sides in this sort of negotiation will always differ on price," Sebenius observes. "However, if that conflict is the centerpiece of their interaction, then it's a bad situation. If they're trying to develop the customer, the relationship, and sales, the price piece will be one of many points, most of which they're aligned on." While Tom Muccio's approach to Wal-Mart was pioneering for its time, many other companies have since followed P&G's lead and enjoyed their own versions of success with the megaretailer. Getting a ground-level view of how two companies achieved those positive outcomes illustrates the story-within-a-story of implementing corporate change. "Achieving that is where macro concepts, micro imperatives, and managerial skill really come together," says Sebenius. And the payoffsas Muccio and Talley discoverare well worth the effort.

Sarah Talley's Key Negotiation Principles

When you have a problem, when there's something you engage in with Wal-Mart that requires agreement so that it becomes a negotiation, the first advice is to think in partnership terms, really focus on a common goal, of getting costs out, for example, and ask questions. Don't make demands or statements...you know, can we do this better and so forth. If the relationship with Wal-Mart is truly a partnership, negotiating to resolve differences should not endanger the tenor of the partnership. Don't spend time griping. Be problem solvers instead. Approach Wal-Mart by saying, "Let's work together and drive costs down and produce it so much cheaper you don't have to replace me, because if you work with me I could do it better." Learn from and lobby with people and their partners who have credibility, and with people having problems in the field. Don't ignore small issues or let things fester. Do not let Wal-Mart become more than 20% of your company's business. It's hard to negotiate with a company that controls yours. Never go into a meeting without a clear agenda. Make good use of the buyers' face time. Leave with answers. Don't make small talk. Get to the point; their time is valuable. Bring underlying issues to the surface. Attack them head on and find resolution face to face. Trying to bluff Wal-Mart is never a good idea. There is always someone willing to do it cheaper to gain the business. You have to treat the relationship as a marriage. Communication and compromise is key. Don't take for granted that just because the buyer is young they don't know what they are talking about or that it will be an easy sell. Most young buyers are very ambitious to move up within the company and can be some of the toughest, most educated buyers you will encounter. Know your product all the way from the production standpoint to the end use. Chances are your buyer does, and will expect you to be even more knowledgeable.

Bargaining Price with the Chinese

by Dr Bob March

Chinese haggling tactics and bargaining can result in foreigners making costly concessions.

Overview
K. G. Marwin Inc. developed a particular technology in the 1980s, called the Trilliamp Process, that the Chinese government sought to integrate into an ethylene facility in Lanzhou, the capital of Gansu province. It signed a contract with Marwin, which in 1985 invited inquiries from U.S. and Japanese manufacturers for production of the machinery. Marwin recommended the Japanese company Auger-Aiso as most capable of producing the turbines, while the Chinese invited two U.S. companiesFederal Electric and Pressure Inc., which manufactured through the large Japanese trading company Mitsuboto compete for the multi-million-dollar contract.

The Scene
To undertake the negotiations with the three prospective suppliers, six Chinese officials and three representatives from the Bank of China were selected. The Auger-Aiso chief negotiator was Mr. Glazer, the companys Japan branch manager from the United States who resided in Tokyo and was assisted by his Japanese colleagues. Glazer remembered the tight deadlines he had faced on previous trips to China; now positions had been reversed, with the Chinese facing the pressures and deadlines. He realized the value of thinking like ones opponentseeing things as they do. This was the first potential deal with China in the ethylene market, and Auger-Aiso faced stiff competition from Mitsubo, which had already cornered the Chinese oil-processing market. At the first negotiation meeting in Beijing, the Chinese insisted that custom required the visitorGlazerto make the first presentation. This he did, even though he was accustomed to allowing his opponents to speak first. Glazer began by addressing the excellence of Auger-Aiso technology, explaining that the manufacturing would all be done in Japan to ensure product excellence. When the Chinese offered no indication of their position or price, Glazer felt obliged to quote an upper-range price that would allow flexibility. The Chinese still made no comment.

In the afternoon, the Chinese heard offers from the combined Mitsubo-Pressure team, then Federal Electric. By the end of the day, Federal Electric had dropped out of the race, accepting that it could not compete.

Revolving Doors, Changing Moods

During the first week of negotiations, a pattern emerged. The Chinese would meet with Glazer and his colleagues in the morning and ask for a price, saying that their competitors had already bid such-and-such a price, which was invariably lower than the last Auger-Aiso bid. They would meet with Mitsubo-Pressure in the afternoon and use the same approach, causing the latter to drop its price. Moreover, each meeting would end with the Chinese saying, We will call you tomorrow. But, because they never called, both prospective vendors became panicky and visited the Chinese office without notice to present an even lower bid. As the Chinese kept the vendors guessing and in the dark, Glazer understood how the Chinese had earned a reputation as master negotiators. At the second meeting, tactics changed and there were different people representing the Chinese side. An antagonist would suddenly burst out in loud Chinese and harangue the Auger-Aiso side for some fifteen minutes, complaining about the quality of the machines they were offering. A protagonist would then intervene and, apologizing for his colleague, would say he had been upset about the current situation. Glazer regarded these outbursts as no more than arranged role playing, designed to make the protagonist (the good guy) appear more trustworthy to the foreigners. But, Glazer realized, all the participants were play-acting. Then there was yet another change. The Chinese located the Auger-Aiso and Mitsubo-Pressure teams near the meeting room, in adjacent rooms. Mitsubo-Pressure would be called in and asked for its best price. After the team had returned to its room, Auger-Aiso would be called in, told the latest price, and asked if it could beat this. When the prospective vendors could drop their price no lower, they would add something to the package. Auger, for example, added oil gauges for its turbines, effectively a three-percent add-on. Even so, the Chinese still would not commit to placing an order.

When the Price Is Right

Glazer could hardly believe that he had lowered his price twenty per-cent that week; to do so would have been out of the question in the United States. On the final day, Auger-Aiso made another offerand, for the first time, the Chinese made a counter offer. Auger-Aiso accepted, and agreement was reached. A few hours later, Mitsubo-Pres-sure came back with an even lower price, but the deal had already been struck.

Glazer spoke later about how difficult it was to compete with Japanese trading companies, explaining that U.S. companies had so many factors to bear in mind, including insurance and a variety of liabilities. Meanwhile, Japanese trading companies, which had vastly different legal parameters [within which] to operate within, could more easily focus on getting contracts and closing deals. He believed that Auger-Aiso had been awarded the contract because it had been the preferred supplier right from the start.

Commentary
In most respects, the Chinese negotiating style for big-ticket items has changed little over the past twenty years or so. Vendors still go to China and submit to the pressures of intense bargaining, while the good guy/bad guy routine remains a tool of intimidation. Although Glazer saw through the tactic, it could be the undoing of less-experienced foreign negotiators. Glazers suspicion that Auger-Aiso was the preferred supplier from the beginning is plausible. Consider the case in chapter 3, involving the Japanese packaging printing press manufacturer Kumi-Chantdung, in which the successful vendor turned out to be the initially preferred supplier. The clever Mitra was able to intuit that his company was preferred, and so gained the upper hand. One can only wonder whether, had Glazer guessed that Auger-Aiso was the preferred vendor, he would have been less willing to drop his price toward the end. No mention is made of socializing or banqueting because more than one team was competing, as in another chapter 3 studywhich the present case most resemblesinvolving Benjamin, who was invited to submit a proposal for a huge Guangdong brewery. It is also interesting to note that, compared with the Benjamin case, the one above places less emphasis on the technical package and specifications, including installation and engineering support. This may be because, over the years since 1985, the Chinese have become more sophisticated in terms of quality requirements, whereas in the past price was the dominant factor, and its reduction the best way of giving face. In the 1980s and 1990s, the Chinese bought a great deal of technology that could not be applied and machinery that was inoperable. From this the Chinese learned how to get the best package at the best price.