China negotiating basics: What’s a BATNA?

October 20, 2008 – 1:04 am

Last week we introduced the concept of LIM – a framework for analyzing and prioritizing your negotiating goals.   Closely related to LIM is the notion of BATNA – Best Alternative To No Agreement.

BATNA is what happens if the negotiation doesn’t result in a deal.  You are back where you started from – and have lost time, effort, expenses and energy.   BATNA, often referred to as the ‘no deal option’, is your worst-case-scenario.

Why is BATNA so important?

Experienced Chinese negotiators use their BATNA as the starting point for establishing the LIM framework. The whole purpose of negotiating is to improve you situation, so BATNA is a crucial benchmark.  Sometimes, however, inexperienced negotiators don’t consider their own BATNA or misunderstand what their true BATNA is.

BATNA helps negotiators in 3 ways:

1) Tells you when to walk away.  If the proposal is below your BATNA, its time to go.
2) Helps you set your goals and LIM
3)  In the longer term, understanding your own BATNA helps you run a more efficient department or company because it shows you how to raise your no-deal option.

Raising your BATNA is important because the higher your BATNA, the stronger your bargaining position. 

Let’s take a look at 2 scenarios. 

1 – Bob wants to buy a pair of shoes.  He goes to Xu Jia Hui where there are many department stores, malls and shoe stores.  Since he has so many options, his BATNA is very high – if he doesn’t like the prices or selection (i.e.: his Negotiating Variables) in one store, he knows he can easily go to another.  Bob enjoys a very strong position and receives good service from a wide range of sellers who want his business.

 

2 – This time, Bob is looking for a hotel in a small town in the middle of nowhere.    It is 6:00 in the evening, and getting dark.  Bob is hungry and tired and has an important meeting first thing in the morning.   There is only one guest-house near the train station – and Bob doesn’t know of any others.  If he can’t make a deal with the guest-house manager, then he will have to sleep in the train station or on the street.  Sure, he could keep looking – but that might make his situation worse if he can’t find an alternative quickly.  In this case, Bob’s BATNA is very low. 

HINT:  Never confuse your BATNA with your counter-party’s.  I often hear Chinese negotiators say that the other side will have to accept the terms because otherwise it will be a disaster for the Chinese side.  That’s not logical. 

Some negotiators don’t recognize their true BATNA until the negotiations have already failed.  Make sure that you don’t make this mistake in your China negotiations.

By Andrew | Posted in China Negotiating Basics | Tagged | Comments (0)

China purchasing departments need key relationships with their key suppliers

October 17, 2008 – 2:03 am

I remember sitting with a group of purchasing consultants talking about the problem their clients were facing.  One purchasing manager told that his standing instructions to were to negotiate a 10% price decrease for the same parts and materials EVERY year.  There are only 2 ways to sustain that trend:

1)  Find new suppliers each year — assuming that competitive pressure and hungry new sellers would ensure an endless stream of new suppliers, because you have to find a new source every couple of years.

2)  Build a long-term relationship with a single key-supplier and negotiate a long-term plan based on your requirements.

Most Chinese purchasing managers have been doing #1.  And this may work great during the early stages of a bear market.  But once the bankruptcies and buyouts have taken affect, there are going to be signficantly fewer players in the market.  Then you are going to have to learn to do #2

Hint:  Now is a great time to negotiate longer-term key-supplier relationships with solid companies.  Every company doing purchasing in China needs a solid list of key-suppliers.  Now is the time to forge long-term, friendly, mutually beneficial purchasing terms with your China supplier.

By Andrew | Posted in Purchasing/Procurement | Tagged , , , | Comments (0)

China Negotiating Basics: What’s a LIM?

October 15, 2008 – 5:14 am

Negotiations are always structured – either you give them structure or your counter-party will.  If you are not particularly interested in the deal offered, then you have the luxury of waiting for the other side to offer you terms.   But if you are serious about getting the best deal then you have to be proactive about packaging and presenting the most favorable negotiating terms.  And that is where LIM comes in.

LIM describes your negotiating priorities.

Simply put,  LIM is a framework for your negotiating priorities. 

 L = Like, or your best case scenario for the negotiation. 
 I = Intend, or what you think is most reasonable.
 M = Your bottom line.  Anything lower and you will not accept the deal.

How do you arrive at the different targets?

Variables include more than just money

Your first task is to decide on the variable or bargaining points that you will offer and discuss.  This is down by analyzing your own goal system to determine what your best case scenario is.  Then break down your goal into all its component parts.  It may be that your goal really is 100% about the money and you don’t have to include anything else. Usually, however, your variables will include some TIME requirement (shipping schedule, roll-out timetable, delivery dates), TERMS (cash or charge, credit terms, payment dates, late fees) and POWER (who owns 51% of the new venture, contact disputes will be mediated in HK).  There are many others, and you have to figure out a LIM for your entire package of variables.

Setting LIM

M is your bottom line.  This may be your break-even or it may be the terms that you are already getting from an established partner.  In many cases someone higher up in the organization is involved in setting the M or bottom line terms.

L is what you can reasonably expect as your best case scenario.  Your L proposal should be ambitious and maybe a little aggressive – but not so crazy that it scares away potential partners or clients.  You probably won’t really get your L, but it will give you a chance to state your priorities and establishes a benchmark for your expectations.

I is where you think you’ll probably end up.  I could be based on the deal you are getting now or it could be industry standard for similar deals.  Some people put I midway between L and M, which is suitable for some negotiations. 

The important thing is to put together your LIM after you have developed a comprehensive list of variable and bargaining points.  If you try to analyze your variables after you have already submitted an initial proposal, you may come off looking dishonest or disorganized. 

Knowing what to ask for is a key to success when it comes to negotiating in China.

By Andrew | Posted in China Negotiating Basics | Tagged , , | Comments (0)

China Sales & Negotiation: The DMU

October 14, 2008 – 2:13 am

The Chinese Decision Making Unit

If you are selling to a large company, there is a good chance that the buying decision is being made more than one person. We call this the “DMU” or Decision Making Unit. If you are selling to traditional Chinese companies, there is a very good chance you will not be spending too much time with the real decision-makers. There is a good chance you will have never actually met them. (Some people will say that you may never even find out who the decision-makers are, but that is becoming less and less true.)

What does this mean to the sales professional? You had better have a method for dealing with the internal selling process at your prospect company. In other words, you won’t be carrying the message to the decision – maker. This presents you with 2 challenges:

  • 1) Motivate your contact (or find contacts who are already motivated) to carry your message to the decision-makers.
  • 2) Prepare this contact of yours to bring the message “upstairs”.

Let’s take a look at these two factors in more detail.

1) Motivate the message-bearer.
This sale may be important to you, your company, HIS company, and all the future generations.
But is it important to the “gatekeeper” that you are dealing with? What does he care about, and why? There’s a good chance it is not what you think.

People are more motivated by FEAR OF MAKING A MISTAKE than by DESIRE FOR ADDITIONAL PROFIT, particularly when the profit goes somewhere else, but the fear is right there with them. Are you presenting your company as stable, experienced, and safe?
Find out what this person cares about, and do your best to solve those problems.

2) Prepare the messenger.
If you are successful at selling to the gatekeeper, he will carry your message up the ladder. Or he will try. Maybe. You’ll never really know. But you can prepare the messenger so that he can do a better job for you.

Since you know that the buying decision will be made by someone else, you can prepare a presentation tailored as specifically to this decision-maker as possible. A quick, well-organized powerpoint presentation — translated into Chinese and English — with all the important buying points a top-level manager would care about. Make sure you put it on a nice disk — maybe even attached to your company letterhead and brochure. The DMU presentation should be brief — no more than 7 – 10 ppt slides, and should include your contact information (consider using the footer and a closing “Thank You” page with your contact info). Give it to your contact, but explain to him how to use it to explain your offering to the rest of the DMU.

Will this work every time? No, it has to be handled well. You have to really convince your contact to help you by carrying your message to the DMU — and that is going to require some persuasion. There may be some downside or risk to this. But if you can find a way benefit this person, he may be willing to help you (if it is helping him more).

But just because he is willing doesn’t mean he is able. So help out. Give him good materials to work with and train him to deliver your basic message.

It is not as good as getting in to see the decision-maker yourself, but sometimes that doesn’t happen right away. If you remember these basic ideas about selling to the DMU, your chances of success improve.

By Andrew | Posted in Sales and selling | Tagged | Comments (0)

Chinese negotiatiors need to know what your business is — and what it isn’t.

October 13, 2008 – 4:55 am

I was recently attending a Young Entrepreneurs networking event in Shanghai. Now, it’s a while since I could accurately be described as a Young Entrepreneur – I’m really more like a middle-aged business owner. But I like to drop by these things every once in a while to stay in touch with what’s happening in the marketplace and meet new people.

I was introduced to one bright young guy and we chatted briefly about general issues before I tossed him one of the easiest pitches in the world for a smart entrepreneur to hit out of the park.

“So what do you do in Shanghai?” I asked.

“Well, I’m doing a few different things. I’m working with some friends to look for opportunities in software development, and I also do a little management consulting for businesses entering the China market, and I work with a partner to do sourcing for US manufacturers…”

In fact, he may still be going on about the menu of services that he willing to offer. I don’t know – and don’t really care. As far as I’m concerned, if a guy does two or more completely different, unrelated things, it means that he isn’t really all that good at anything. At least that’s the message he’s sending.

Young entrepreneurs – particularly in China – see endless opportunities and potential in the world. That’s great. But no one is going to hire you or invest in you if you seem like an uncommitted flake. Investors and buyers need to have confidence that their targets are reliable experts who are deeply involved in their own business.

If you need to buy an office telecom system, and the consultant you speak with tells you he integrates telecom systems – and also writes software – then he sounds like he might be an expert in what you need.

If another consultant tells you that he integrates telecom systems – and acts in TV commercials and is a management consultant and a logistics expert – then you are probably going to look elsewhere.

People trust experts and specialists – whether they are hiring or investing. If you can’t decide what your own strengths are, then prospective clients or investors won’t be able to either. Develop a powerful, simple message that explains EXACTLY what you will do for your clients. Sure, you may pass up a few opportunities in unrelated businesses that you might be interested in. But specializing in something – be it a product or service or a market – is the only way you will ever get deals and build a track record that inspires confidence and trust.

By Andrew | Posted in Negotiating with Westerners | Tagged | Comments (0)

Connections and Guangxi — Do foreign investors understand the value?

October 13, 2008 – 4:54 am

Dear Smart Shanghai Team -
I am the owner of a company in the Shanghai area, and am looking for a foreign JV partner to help me expand my factory. During my negotiations with one US investor, I told him that my company had a tremendous advantage – NO COMPETITION. I have personal connections with the local government, and was able to get a license to sell a certain kind of product that no one else has. It is a great opportunity, but he still said no! I don’t understand. What do you think happened? –
CKL

Dear Mr. L

We understand your confusion. You have used personal connections to gain a competitive advantage – exclusive rights to produce or sell a product in a certain area. But for some investors, that is less of an advantage than you may think. There are two reasons for this.

• It is a temporary advantage. Other people in China have personal connections as well. In addition, there are other market forces at work. China ’s investment laws and regulations are changing rapidly – and usually becoming more liberal and open. This is a very positive trend – but it means that there will be more and more competition. Your investor may be worried that in a few months, your exclusivity will disappear, and then you will be faced with more competition

• Scalability or Expansion. You may have great personal connections in this city or province, but what will you do next? How will you expand your business? What happens after you satisfy this market? If you main advantage is your personal connections and exclusive arrangement with the local government, you have no clear advantage in other markets. Investors are always interested in knowing about your strategy for the future. Some overseas investors think that personal connections are more of a strategy for the past.

You should talk about operational advantages – things like distribution channels, market recognition, product design, technology, production methodology, etc. Overseas investors like to hear about profitable operations and market strategy. Your personal connections are a great asset – but you probably have others, too. Focus more of your conversation on PROFITABILITY and MARKET GROWTH.

By Andrew | Posted in Negotiating with Westerners | Tagged , | Comments (0)

Chinese negotiators should have more transparent pricing strategies

October 13, 2008 – 4:51 am

Chinese negotiators should have more transparent pricing strategies

A Chinese negotiator I know recently met with a potential buyer from overseas, and then called me with a question. The Chinese salesman had explained his product offering, and then quoted the potential buyer a price. The buyer merely nodded his head and said, “Ok, I understand”. The Chinese negotiator, however, had expected the prospect to come back with a counter-offer or a new proposal. Instead, the overseas buyer merely asked a few polite questions about the industry, said goodbye, and left. The client was never heard from again.

The negotiator in question asked me if the buyer was serious, and if so, why he didn’t come back with another offer.

“How high was the price you offered him?” I asked.
“Pretty high, but I would have come down if he pressed me,” was the Chinese salesman’s answer.
“How much would you have come down?”
“65 – 70%. But he never even tried to bargain with me.”

This leads to the question of PRICING STRATEGY. There are several ways of approaching the initial price question.

Many sellers like to start out very high, and then “allow” the other side to bargain them down to a much lower price. This approach works best when you have a unique asset for sale (such as property), or have a very high volume of potential customers. In truth, it works best when the buyer is not very knowledgeable or sophisticated.

Other sellers try to make their first offer so competitive that they immediately engage the buyer’s interest. The works best in high-volume sales where competition is high and price is the key factor. Many Chinese manufacturers set prices based on this model. The margins may be very thin, but volume is high and buyers have the ability to compare prices easily. This approach works best when you have a cost-advantage over your competitors. Many Chinese companies start with this approach, and try to climb the “value-chain” by offering more services or higher-margin products later.

A third approach that is rapidly gaining favor in China is the “package” approach. The initial price is often quite high – but includes a variety of value-added services or features. The basic product offering is relatively low-margin, but the salesman makes his real money from services and “extras”. Anyone who has every bought a new car is familiar with this approach. Typical extras & add-ons include service contracts, custom design, warrantees or guarantees, faster delivery, training, or other types of service and consultation. Buyers will bargain for a lower price by deciding how much extra value they require from the seller. This approach requires that the seller actually have the ability to deliver value-added services and features that are worth the extra money.

Chinese marketers have been very successful with the high-volume, low margin approach. More and more Chinese companies are switching to the third approach of adding value for higher prices. The first approach of quoting very high starting prices and then bargaining down is becoming less effective with international B2B clients for 3 reasons.

1) Better transparency in the market. Overseas buyers are growing more sophisticated about doing business in China. Services like Alibaba.com and professionals sourcing consultants have made it possible for relative “outsiders” to learn about costs and competitors more quickly than they could in the past.

2) DMU or Decision Making Units are becoming more common. There was a time when a salesperson in China could meet the single decision-maker from an overseas company and build a relationship. Nowadays the visitor to China is probably just one representative of an organization that has a sophisticated buying process, and they come to China to visit a long list of potential suppliers. If the initial offer does not meet a pre-set criteria, that company will not be considered for further meetings.

3) Even though the Chinese seller may be very honest and have the most honorable intentions, if his offer is two or three times that of his competitors for the same product, he will appear dishonest and disreputable. The China market has gotten more and more sophisticated, and overseas buyers have learned that there is no shortage of reputable, honest trading partners here.

It really doesn’t matter whether you choose to compete based on price (option 2) or value (option 3) – you still must be able to defend your first offer. If your initial price proposal is unreasonable or uncompetitive, you probably won’t get a second chance to win the business.

 

By Andrew | Posted in Negotiating with Westerners | Tagged , , | Comments (0)

China negotiation requires Smart Teams

October 1, 2008 – 9:04 am

China negotiatiors are coming under more and more pressure to ‘deliver the goods’ and negotiate good deals that improve profit margins or lower costs.  But as the global economy slows down, managers involved in negotiations in China are find it harder and harder to get the terms their bosses want to see.   Business is getting more and more competitive, and many companies believe that they can negotiate their way to success by aggressive behavior.  This may have worked a few months ago — but now negotatiors in China know that they have to do more than bang the table and wait for other side to give in.

Negotiation is a skill, just like any other.  It can be anayzed, taught, practiced and improved.  Many HR departments and purchasing managers have passed over negotiation training in the past — but now they should look again.  Nothing boosts a training department’s ROI like a good negotiation course that helps purchasers and sellers start adding to the bottom line right away.

Shanghai negotiations often include a variety of stakeholders, cultures and languages, so the chance of miscommunication and misunderstanding is high.  One of the first things that a good China negotiation class should teach is how to set good, measurable goals that both sides can agree on.  Vague or diverging goal systems are a leading cause of problems for negotiatiors in China.

By Andrew | Posted in Uncategorized | Comments (0)