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The Negotiation Process between Suppliers and Retailers in a Context of High Power Asymmetries

Seminar Paper 2013 16 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Agenda

List of Abbreviations

List of Figures

List of Tables

1. Introduction

2. Supplier-Retailer Relationships in Negotiations
2.1 The Exchange of Information
2.2 Finding the Lowest Common Denominator

3. Case Study Analysis – Negotiating with Wal-Mart
3.1 Background
3.2 Actor Analysis
3.2.1 The Retailer’s Position – The Power to Make or Break
3.2.2 The Supplier’s Position – Homegrown Freshness
3.3 Structure and Context
3.4 Negotiation Strategy and Process

4. Key Findings and Negotiation Principles

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Examples for the ZOPA of Suppliers and Retailers

Figure 2: Creation of an Intersection Area for Negotiation Settlement

List of Tables

Table 1: Interests and Stakes of the Actors

1. Introduction

A negotiation is generally defined as a process that takes place in “situations in which two or more parties recognize that differences of interest and value exist among them” (Howard 1982, p. 7) and in which they want to seek “optimal, balanced, mutually acceptable and durable solutions of [their] conflicts, problems and projects (Dupont 1996, p. 39). In the business context, negotiations between producers and retailers in particular have been given a great deal of attention in academic literature since the late twentieth century (Lindqvist 1983, Davies 1990, Bolen 2003, Whelan 2009). In fact, those negotiations are vital for establishing the terms of trade, or whether there will be any trading at all (Bolen, 2003).

However, supplier-retailer relationships are usually everything than balanced when it comes to bargaining strength: Developments in the structure of consumer and grocery products supply chains––i.e. the shrinkage of traditional distribution channels and the emergence of hypermarkets as well as specialized retail chains––have made retailers become sort of “gatekeepers” to the final customers (Hirschman & Stampfl 1980). Since producers wanting to sell their products to the market have to sell them to retailers first, the latter are clearly in a more powerful position not being as dependent on their counterpart as it is typically the case vice versa. Likewise, the role of power in negotiations has been discussed by a number of established authors (see, for instance, Barbarach & Lawler 1980, Zartman & Rubin 1994). Most notably in interactions with large retail chains, the imminent question for small producers is: What happens when you encounter a company such as Wal-Mart, occasionally described as “the ultimate non-negotiable partner” (Hanna 2008)?

Focusing on such asymmetric power situations in negotiations between suppliers and retailers, this paper is aiming at answering the abovementioned question by establishing first a basic understanding on supplier-retailer relationships in general, followed by an in-depth analysis of negotiations that took place between Frey Farms, a small vegetable producer in the United States (US), and Wal-Mart in 1997. The successful negotiation strategies of Sarah Frey Talley, Chief Executive Officer (CEO) of the producer, have been acknowledged in a Harvard Business Case underlying this analysis. This will enable us to develop key negotiation principles for small suppliers, and to show that price alone cannot be the centerpiece of interaction.

2. Supplier-Retailer Relationships in Negotiations

A common thread in negotiations between suppliers and retailers is the emphasis on a close and long-term relationship, which in fact lasts 6-8 years on average (Knox & White 1992). In order to establish and maintain this trading relationship with retailers, a profound knowledge of retailer buying behavior is vital for producers (Davies 1990)––especially when they are in their start-up or growth phase and in a generally weaker position. This chapter is therefore providing an overview of basic elements and concepts in the negotiation process between suppliers and retailers, which has been found to take place for three specific occasions (Lindqvist 1983):

- Negotiations for annual contracts (inaugurating general terms of trade);
- Product negotiations (new products for listing, or consideration of de-listing);
- Negotiations regarding joint marketing campaigns.

2.1 The Exchange of Information

A fundamental element to consider in the negotiation process between suppliers and retailers is the exchange of information (Whelan 2009). In order to negotiate contractual provisions effectively, retailers may decide to reveal certain sensitive information, i.e. data relating to their future commercial strategies as for instance pricing, promotional activities or investments plans. By exchanging information, “the retailer may wish […] to gain […] the commercial confidence of the supplier and to underline how advantageous it is for the supplier to (continue to) nurture and respect their commercial relationship” (Whelan 2009, p. 823). This applies more specifically to the desire of being granted discounts from which ultimately benefit consumers.

However, the attentive reader may already see that this kind of attitude primarily relates to situations of balanced power between suppliers and retailers, or even to a bargaining advantage of more dominant suppliers. Powerful retailers, on the other hand, often have a wide number of what among professionals is called Best Alternative to Negotiation Agreement (BATNA). This concept proposed by Fisher & Ury (1981) means that a party possesses a greater deal of power in proportion to the possible alternatives it has in case of a breakdown of the current negotiations. In the retailer’s case (especially in generic consumer retail where suppliers usually cannot stand out with unique niche products), the concept materializes through the availability of various suppliers on the market producing the same or similar products. By implication, having lots of alternatives significantly alter the willingness to divulge information to the weaker party, i.e. the one without or with only few alternatives. In addition, it is worth noting that retailers are often very careful with the exchange of information in order to assure that the supplier will not pass it on to third parties, such as direct competitors (Whelan 2009).

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Details

Pages
16
Year
2013
ISBN (eBook)
9783656451990
ISBN (Book)
9783656452737
File size
684 KB
Language
English
Catalog Number
v229419
Institution / College
Novancia Business School Paris
Grade
1,5
Tags
negotiation process suppliers retailers context high power asymmetries

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Title: The Negotiation Process between Suppliers and Retailers in a Context of High Power Asymmetries