Strategies for Small Enterprises Negotiating with Large Firms
The less powerful parties tend to be creative than more powerful ones.
—Stuart Diamond
In recent years, the trend among large firms has been to merge, form alliances, or outsource to remain competitive in the global marketplace. Large firms, by contracting out value-added activities to smaller external suppliers create greater contacts between large and small enterprises. Due to their size and resources, larger firms tend to obtain more favorable agreements in dealing with smaller ones. Experience shows, however, that negotiators from smaller enterprises, when entering discussions, can improve their outcomes not only by being well prepared but also by being prepared to walk away from potentially unprofitable deals. One of the major weaknesses of smaller firms is to allow the bigger party the control of the negotiating process in the faint hope of getting sizeable contracts.
Larger companies, being well aware of this, encourage smaller firms in the illusion of securing substantially lucrative future business by making them accept major and immediate concessions in current deals. Unfortunately, these future orders might not materialize, or if they do, might easily turn out to be unprofitable for the small firm that has been persuaded into giving away too many concessions. In the long term, these small companies may go out of business due to financial insolvency. There are exceptions, however; for example, a small firm to win recognition in the marketplace wishes to associate itself with a world class leader. In this case, the objective of the negotiation is to reach a deal in order to claim a well-known firm as its client. Whatever the objectives of the smaller firms are, it is important for them to overcome their relatively weak position vis-à-vis the larger party by developing appropriate strategies. This chapter examines strategies which smaller firms may employ to strengthen their bargaining position.
Success Strategies for Smaller Enterprises
Discussed here are strategies that help small businesses in negotiations successfully.
Preparation is the most crucial element in any negotiation. The more complex the deal, the more complex the preparation.1 This is an area where executives from smaller firms have difficulty mainly due to factors such as having access to few qualified support staff, a lack of information, expertise shortcomings, and, finally, having no clear objectives. As a result, when entering into discussions with larger partners, smaller firms find themselves in a weak position right from the start. To compensate for their lack of preparation, they start making unilateral concessions because of a lack of sufficiently valid arguments to support their proposals. Being prepared means knowing what the other party’s needs are, the risks involved, the type of concessions to be traded (by creating and claiming value), and one’s position vis-à-vis the competition, and having an alternative plan.
Another advantage of being well prepared is when the more powerful party comes in badly prepared. It is common for large firms to keep their best negotiators for complex business deals, therefore leaving the negotiations with smaller businesses to less experienced junior managers. There are times when at the last moment large firms also send in their senior executives without adequate preparation. This reflects the attitude of large enterprises of not taking their negotiations seriously with smaller firms.
When negotiators enter into discussions pressurized by limited time, they lose control of the negotiation process leading to less than optimum decisions. On the other hand, executives with plenty of time use the clock to their advantage by simply displaying patience.
A golden rule among professional negotiators is if you don’t have time to negotiate, don’t enter into the discussions. Otherwise you run the risk of negotiating against yourself.
To do well in any negotiation, the party which is ready with prepared options and alternatives is likely to do better regardless of its size. The executive walking into a negotiation with multiple options gains bargaining power. For instance, a small firm having several enterprises as potential clients is better placed both to protect its bottom line and to resist making unnecessary concessions. At times, even with limited options, one may find oneself in control of the discussions as long as the other party is not aware of how strong or weak one’s position is. Frequently, the smaller firm is intimidated by the larger firm and fails to face contentious issues and clarify key elements. This is often due to insufficient technical expertise to master all the essential points in the negotiation. Hiring experts on a short term basis is an effective way of overcoming deficiencies. The more options one develops, the greater the chances of reaching one’s goals and protecting profit margins. One particular danger to avoid is having one major client accounting for the bulk of the revenue. Unless one has a unique product, service, or technology not available anywhere else, this stops one from negotiating effectively.
Find Out How Important the Deal is to the Large Firm: Determine Your Bargaining Leverage
Most importantly, before contacting the larger party, the smaller firm must find out how important the deal is to the larger enterprise. The importance of the deal will determine which strategy and tactics the smaller firm needs to develop. According to the 80/20 principle, 20 percent of the number of items purchased by a large firm accounts for about 80 percent of the total budget.2 The remaining 80 percent of the items represent only 20 percent of the expenditure. As a result, the smaller firm must find out whether its product or service is marginal or part of the core business of the larger party. Most firms want to deal with core products or services because of the potential size of the business. However, the terms and conditions for core products are highly demanding. Moreover, the competition is at its most severe. This calls for detailed preparation and taking a long-term approach in order to develop a sound business relationship. Even if an offer is marginal to the other party and unappealing to others, a new business opportunity may present itself where competition is less fierce.
Associate Yourself with Recognized Organizations: Become a Recognized Player
To increase their negotiating power, smaller firms seek to associate themselves with better known enterprises who already enjoy international status. Furthermore, it is essential in today’s market for smaller firms to obtain certification from recognized standard organizations. For instance, large enterprises that outsource part of their requirements insist on doing business only with firms that are certified as having ISO 9000. In the case of food products and pharmaceuticals, the USFDA certification is essential because of its international recognition. Similarly, firms attaining the appropriate European Union standards are allowed to do business in any of the member states. With the enlargement of the EU to 25 members, smaller firms can now access a bigger market than ever before. Relying on a world-renowned inspection agency to guarantee that the goods being shipped are in accordance to the pro-forma invoice adds bargaining strength.
Select Large Firms in Difficulty: Get Your Foot in the Door
Probably the most demanding negotiation for a small firm is obtaining the first order from a larger enterprise. Once you are doing business with larger partners, you are taken more seriously in the global marketplace. Although representatives of larger enterprises seek the best deal, they might, when having major difficulties, be more flexible and understanding with new suppliers. For example, when a firm is going through a time of crisis that makes current suppliers nervous about continuing doing business with it, it is the time for a new supplier to begin negotiations with the firm. Moreover, preparations on the part of the large enterprise may be less than adequate because of inside dissentions that hinder the effective management of daily operations. In these circumstances, a small firm could well negotiate a deal that would have been impossible under normal conditions.
Identify Individual Units Within the Larger Firm: Build Your Network
When considering doing business with a larger firm, it is advisable to identify single units within the organization.3 Generally, large corporations can consist of numerous divisions, departments, or separate companies in which they have a controlling interest. As more and more organizations decentralize and give greater decision making authority to their managers, a smaller firm must identify the right contacts in order to create a better chance for itself. The aim is for the small firm to negotiate with the people from the larger organization who actually deal with the product. Often, large, successful companies establish small, autonomous divisions and units to stimulate individual initiative, internal entrepreneurship, and risk-taking.4 In addition, it is important to be sure that these people have decision making authority. If case decisions are made by committees or by other senior executives, smaller companies can save time by providing the relevant information that committee members of the larger firm will require to conclude a deal. Another important point for smaller firms is to find out the extent of the other party’s decision making authority, For example, suppose a smaller firm is negotiating an order worth $1.5 million, but the larger firm’s representative only has the authority to negotiate deals up to $1 million. Thus, any orders above that amount must be approved by a committee of senior executives. If the small firm splits the order into smaller amounts that fall within the authority of the representative, the deal can be concluded without having to wait for a committee decision. For example, the smaller firm can propose a trial order worth $300,000 to be followed by two orders of $600,000 each. By doing this one concludes the negotiation with the counterpart without further discussions or delay.
Involve the Real User or Decision Maker in the Discussion: Be a Problem Solver
A typical situation that smaller firms find themselves in when dealing with large parties is that they have to negotiate with buyers from the purchasing department. Professional buyers must necessarily seek the best conditions from suppliers. These buyers continually negotiate with large numbers of interested firms and therefore are well informed on what is available. They obtain the best terms by encouraging suppliers to compete among themselves. Usually, the firm with the lowest price that satisfies the required conditions gets the deal. To be seen as such a successful firm, you need to convince the users within the larger firms of your superior technical capability, higher quality standards, management commitment, and any other arguments that place your offer above your competitors. Doing so not only gives added value to your firm, but also helps to develop an ally on the other side. This person will give direct support to your proposal by convincing his or her buyer to award you the deal. Remember, potential users of your product or service are more interested in the technical aspects of your proposal while purchasing executives are mostly concerned with pricing.
Be Ready to Walk: Your Ultimate Power
A source of strength that is often underrated by smaller firms and frequently misunderstood is walking away from a deal that no longer makes sense. In any negotiations, when a deal begins to look unprofitable, you should seriously consider withdrawing from it. Frequently, small companies are faced with technical and capacity limiting problems—they might lack qualified staff or plant facilities that can serve larger orders. This limit is based on a thorough calculation of real potential costs. Having a bottom line coupled with alternatives gives a greater leverage in protecting your interests. Knowing when to walk out of a negotiation gives you greater confidence in advancing the benefits of your proposal as well as being more reluctant to make unnecessary concessions.5 Moreover, the other party will soon realize that this negotiation will be difficult. You now have two separate scenarios: either the larger firm will consider you as a worthwhile partner, or might decide to end discussions. If the larger party wants to continue, chances are that you will be closer to achieving your goals, or if the negotiations end early, at least you have saved time on a deal that might have eventually turned risky or gone below expectations.
Readiness to Negotiate Successfully
As already seen, a smaller firm can negotiate more effectively with larger firms by planning negotiations more carefully. Better planning and thorough preparation place a smaller firm in control of the negotiating process, advancing its goals, protecting its interests, and reaching more balanced agreements.
To ensure that you are confident of reaching your goals when entering into your next negotiation, complete the table below to test your readiness. If your score is 30 or more, you are ready. On the other hand, if your score is between 25 and 29, you have certain weaknesses which need to be addressed. A score below 25 indicated serious flaws in your strategies, calling for a postponement of negotiations until you improve your position or select other firms that may be more compatible with your goals. In the example given in Figure 17.1 below, the firm with a score of 19 is not ready to conduct a successful negotiation.
Figure 17.1 Testing your readiness to negotiate with larger firms
Many small enterprises benefit from the opportunities opened up by larger firms from subcontracting and outsourcing. This can be a lucrative business for the companies involved. Moreover, doing business with larger supply chains can be a highly effective strategy for firms seeking to be more integrated in international trade. But there are many pitfalls for smaller firms, who, by definition, are likely to be the weaker party in business negotiations. This chapter suggests a series of strategies to strengthen the capacity of small businesses to negotiate more effectively.