Cover Sheet The Examination Case

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ASSIGNMENT

The Smithson Company: The Practicalities of Negotiation

INSTRUCTIONS: First reread “How to Take This Course” for directions on analyzing the examination case. Then carefully read this case. When you believe that you fully understand the case, prepare a written answer, including supporting arguments, to the assignment below. Although there is no correct length, a satisfactory analysis, including recommendations, usually runs between four and six typed double-spaced pages. All of the needed information is found in various exhibits and in the narrative itself.

1. How might Jim have been more successful during the initial informal negotiations with Phil?

2. Prepare a negotiation position for Smithson defending each of the four points that Jim proposed.

3. Prepare a position for Consolidated giving logical reasons for rejecting each of the points.

4. Describe what you think the probable outcome will be and give your reasons for this.

The study team’s recommendation that the new product line be adopted was accepted by the administrative vice-president. Jim was singled out for congratulations and was transferred from marketing to purchasing, where he would head up a newly created project office to develop and market the new piping, which was to be called impervious maintenance-free piping systems or IMPS.

Jim was a little troubled by the move because he knew that now a considerable amount of negotiation would be expected of him. This was likely to involve both informal and structured across-the-table bargaining. He was not concerned about informal bargaining, but he did not regard himself as a skilled, formal negotiator or feel he had enough experience and skills to engage in hard-nosed bargaining requiring many devious tricks.

He explained his concerns to his new supervisor, Victor Walker, the director of purchasing. Walker explained that Jim had been selected over ten other candidates for the job as the project manager for IMPS precisely because he had demonstrated his ability as an effective negotiator.

Walker, citing his own long experience in the field, said that Jim had shown that he understood the need for thorough preparation and had the initiative to accomplish negotiations. He had demonstrated his ability to carry out a disciplined review of the strengths and weaknesses of his position.

According to Walker, Jim had also shown skill in convincing those with contrary views of the merits of his position, demonstrated the ability to establish objectives and formulate appropriate strategies to reach them, and used effective leadership techniques. In other words, Walker felt that Jim had all the basic attributes of a good negotiator.

SETTING UP THE PROJECT OFFICE

Jim’s first task was to establish a project office. He was provided with a permanent staff of one clerical worker and one general administrative employee. No professional help was furnished.

Jim decided that the wisest course would be to operate the office as a matrix organization, drawing on available specialists from other departments as needed. These workers would be loaned for a limited period of time and would return to regular duties when their special project tasks were completed. This had been the structure of the original study team.

With the new arrangement established, Jim went to work.

JIM’S FIRST PROBLEM

As the company began to gather materials necessary for production of the first run of impervious maintenance-free pipes, trouble arose. Jim was notified that the special epoxy coating was available only from the Ajax Sealer Company. This company was in financial difficulty and needed up-front funding to fill the Smithson order.

Jim approached the finance department to discuss an advance payment arrangement or, as an alternative, the outright acquisition of Ajax. His initial contact was with Phil Henderson, who vetoed both possibilities. Phil said that Smithson was having cash-flow problems and indicated that he was unwilling to pursue the matter further.

Without success, Jim argued the importance of the Ajax product and added a word about promotion possibilities if the new line were launched expeditiously. Phil was unresponsive. Jim then proposed that Smithson offer to buy the epoxy process from Ajax. Phil refused.

Jim realized that this approach to an officer of the company who could block the development of the product was poorly planned. He had failed to give proper attention to workable alternatives. Once more, he turned to Ralph Henderson, who put forward the suggestion that Smithson itself produce the epoxy. The company could do this if the Ajax chief chemist, who was expert in producing this material, were hired as a Smithson employee. Ralph indicated that patent problems might arise, but Jim had some ideas.

Jim’s first idea was to obtain a licensing agreement from Ajax that would permit Smithson to obtain the use of the patent for a stipulated royalty. As an alternative, it might be feasible to have Smithson manufacture a suitable substitute. This might not be possible within the time available, but the idea could be held in reserve.

As these ideas developed in his mind, Jim became convinced that there was a way to obtain the epoxy, and that his plan could be carried forward if he could muster just the right skills to use in informal negotiations with Ajax.

ANOTHER PROBLEM ARISES

Two months after the epoxy problem had been solved, Smithson received from Consolidated Chemicals a request for a price quotation for an order of 25,000 feet of IMPS. Delivery was required within 60 days after receipt of the order. Consolidated wanted a response from Smithson within two weeks, as the quotation was competitive and Consolidated thought negotiation might be necessary.

First Team Meeting

Jim received the Consolidated request and promptly set up a meeting with Ralph and Tim Woods from manufacturing. He also invited Fred Howe, the new marketing representative, to sit in. This group reviewed the proposal and Jim gave each of them a specific task to complete within two days. Fred was to determine which companies represented competition for Smithson and what price might be quoted by each. Ralph was to review Smithson’s cost records to see if his initial projection of a price five percent below the probable competition was still valid. And Tim was to find out if the required delivery schedule could be met.

Jim reserved for himself the task of finding alternatives if the projected pricing was not realistic, if the delivery schedule could not be met, and if the competition proved to have an inside edge not known to Smithson.

Second Team Meeting

At the end of the two-day period the four met again. Fred reported that he was able to identify only one other serious contender for the Consolidated job. On the basis of his information, this company would quote a price between $2.25 and $2.50 per foot of pipe. Ralph recommended that Smith-son quote a price of $2.15 to $2.30 per foot, depending upon the number of separate sections required.

If Consolidated would accept one continuous pipe that could be shaped on the site, the recommended price would be $1.50 per foot. Tim reported that it would be necessary for manufacturing to put on an extra shift to meet the required delivery schedule. If this was not feasible, the job could be handled comfortably by extending the schedule from 60 to 90 days.

Jim was aware that Consolidated held Smithson products in high regard but that they had expressed concern about the fact that the new IMPS had not been tested under actual operating conditions. He also knew that the other likely bidder, identified by Fred, was notorious for leaking false information. He suspected that the price this company would actually quote might range between $2.00 and $2.15 per foot.

The three men next considered a possible extra work shift in manufacturing to meet the delivery schedule. Their calculations showed that if a compromise could be reached by which Consolidated would agree to continuous pipe, which had been estimated at $1.50 per foot and would not extend the delivery date, Smithson should quote at $1.99 per foot to cover overtime manufacturing costs. If negotiations were conducted, the team leader would be given a bottom-line figure of $1.75 per foot for continuous pipe.

Jim Meets with Phil

When Jim gave these figures to Phil in a group meeting, they argued about the estimated price. Under no circumstances could Smithson afford to quote a price lower than $2.20, said Phil, bringing up the cash-flow problem again.

Jim thanked the others for their assistance and spoke again with Phil privately. When he assessed the situation calmly, Jim realized that the finance officer was too cautious. He himself, on the other hand, tended to be overly optimistic. Regardless of what the two thought of each other personally, the situation called for patience and tact in order to develop a recommendation that the director of finance would approve.

Jim tactfully pointed out to Phil that a price of $1.99 per foot would permit a profit of almost 50 percent. Phil remained adamant, refusing to go below $2.20. He declined to defend his position beyond the statement that the company was experiencing cash-flow problems. Jim decided this was the moment to take a hard line.

Calmly, he charged Phil with obstructionism, accusing him of simply wanting to be heard in every discussion about the new product. Finally, he confronted Phil with information that he had collected, indicating that the cash-flow problem was not as serious as Phil made it out to be.

At this point an angry and agitated Phil spoke candidly. Yes, Jim was right. He felt left out of the plans for IMPS. A real conflict of personalities had developed. When he had worn himself out, Phil concluded: “Be that as it may, if we don’t get at least $2.00 per foot we’re in trouble.” Jim agreed to do his best to get no less than $1.99, which, Phil finally admitted, was better than losing the entire procurement for pennies.

Opening Guns

The quote was prepared as agreed and mailed to Consolidated. That company notified Smithson that the quote was within the range anticipated but that negotiations were required to resolve a few problems.

Jim reconvened his team to discuss a few problems, this time adding Gail Kitchin from the legal department and Phil Henderson from finance. Consolidated not only insisted on a lower price (the amount not specified), it also wanted Smithson to install IMPS and to indemnify Consolidated against any and all liability.

Jim felt that the Consolidated order was needed to ensure success for the new product. Otherwise, at this point, he would have terminated discussions and rejected it out of hand. Therefore, he proposed the following conditions:

1. Hold to the $1.99 price per foot.

2. Agree to install the pipe for an additional $2.00 per foot, using a trenching tool that could be rented with an operator for the equivalent of $1.25 per foot.

3. Insist that the delivery date be 90 days after receipt of the order. This would allow time for the trenching.

4. Reject any indemnification except to warrant that IMPS was free from defects in material or workmanship.

The team unanimously accepted these conditions and the counteroffer was sent to Consolidated. Negotiations were then scheduled.