Developing a strategic negotiation plan: Toyota Highlander.

Luthy, Michael R. ; Ryan, Mike H. ; Desselle, Bettye R. 等

CASE DESCRIPTION

The primary subject matter of this case concerns the evaluation of gathered information to develop a negotiation plan prior to a consumer's purchase of a sport utility vehicle. Secondary issues examined include the sales process and the increasing role of the Internet in consumers' information search activities. The case has a difficulty level of one (appropriate for freshman level courses) although it may be used through level five (appropriate for first year graduate level) depending on the amount and complexity of background reading assigned. The case is designed to be taught in as little as one class hour, but may be expanded to as many as three class hours depending on the amount of theoretical material discussed by the instructor, if role-play negotiations are carried out, and whether any out-of-class preparations are assigned. The case is expected to require from zero to approximately four hours of outside preparation by students.

CASE SYNOPSIS

Introducing students to the topic of sales negotiation is always challenging. While it is typically a significant part of business-to-business purchases and many higher-ticket priced consumer goods, negative word-of-mouth and uncomfortable personal experiences leave many students apprehensive. Presenting the topic in the context of purchasing an automobile, or in this case study, negotiating the purchase of two sport utility vehicles, students will draw on their own experiences, those of their friends and family members, and any assigned readings. The overall goals of the case are to defuse the anxiety many students associate with negotiation, underscore the importance of analysis and planning prior to face-to-face encounters, and better prepare students for future business and personal purchase situations where negotiation is a factor. Specifically, in this case students examine collected price and non-price information, and develop a negotiation plan. Through this task the instructor may explore various fundamental aspects of negotiation (e.g., agenda analysis, concession strategies) and the distributive bargaining model (e.g., aspiration targets, reservation points, buyer and seller surplus).

INSTRUCTORS' NOTES

Pre-class Readings and Student Preparation

If the instructor wants to minimize student preparation for the case, either as a prelude to "off the cuff" discussions of negotiation experiences and impressions of car buying, or to better fit the goals for this case with other course objectives, no formal readings need be required to discuss this case. Due to the issues the case raises and its flexibility of use with different student populations, depending on how the case fits with the instructor's goals for the session, selected readings may be assigned. Relevant readings and brief descriptions listed by student level are presented in Exhibit 3.

As part of the learning process instructors may also find it useful to discuss the case in the larger context of different sales situations. To that end there are resources available that present student role plays involving sales and/or negotiations. The professional selling skills workbook (1995), edited by Avila et al. contains numerous tools that can be used for this purpose. Role playing the selling side of the Toyota Highlander negotiation can be beneficial to students accustomed to only viewing these types of interactions from the buyer's vantage point.

Exhibit 3

Suggested Readings

Level One (Freshmen)

The Only Four-Page Guide to Negotiating You'll Ever Need, by Walter Kiechel. Description: Everyone engages in negotiating all the time, whether they realize it or not. Preparation is critical to the success of the process. You will need to prepare on two fronts: getting the right attitude, and gathering information on what your interests are and what the other party's might be. Looking at the overlapping interests of both parties is important; pay special attention to possible alternatives to negotiation. Once the two parties have explored their respective interests together, they may well be able to arrive at an outcome not contemplated in either's initial offer but that satisfies each far better than the result of a long haggle. You can't banish emotions from the proceedings. Rather, the point is to get feelings into the open, acknowledge them, and minimize them as obstacles. Some of the experts recommend that you resist making the first offer yourself, while one cited an example where the initial offer determined the eventual settlement. Measured progress is definitely better than hasty decisions. Harvard Management Update Article, product number U9609A, length 4 pages.

Ethics in Negotiation: Oil and Water or Good Lubrication?, by H. Joseph Reitz, James A. Wall, and Mary Sue Love. Description: Is ethical negotiating not only "the right thing to do," but also effective in achieving desired outcomes? Various ethical criteria (the Golden Rule, Universalism, Utilitarianism, Distributive Justice) are used to evaluate ten commonly used negotiation tactics (lies, puffery, deception, weakening the opponent, strengthening one's own position, nondisclosure, information exploitation, change of mind, distraction, and maximization). Some negotiating ploys are unqualifiedly unethical; some are inherently ethical; some are contingently ethical. Unethical bargaining can reap onetime benefits, but in the long run it damages relationships, sullies reputations, and actually closes the door on many potentially fruitful transactions. Business Horizons article, product number BH004, length 10 pages.

Levels Two through Four

Negotiation Analysis: An Introduction, by Michael A. Wheeler. Description: Provides an overview of the seven elements of negotiation analysis. These elements include BATNAs (nonagreement walk-aways), parties, interests, value-creation, barriers to agreements, power, and ethics. Illustrations are drawn from a range of contexts (from buying a car and the sale of a business to dispute resolution and international diplomacy). Harvard Business School Publication, product number 801156, length 14 pages.

Anchoring and First Offers in Negotiation by George Wu. Description: Describes how first or opening offers can be used effectively in negotiation. Examines how opening offers serve as an anchor, changing one side's perception of the other side's bottom line and hence the set of possible outcomes. Harvard Business School Publication, product number 895070, length 3 pages.

Framing and Negotiation, by George Wu. Description: How can framing--alternative description of an object, event, or situation--can be used effectively in negotiation? A real estate dialog is used to illustrate three common varieties of framing: losses versus gains; short and long horizons; and aggregation and segregation. Harvard Business School Publication. Product Number 895023. Length 5 pages.

Expectations and Stereotypes: How Do They Affect the Deal? By Kathleen Valley. Description: Designed to provide students with a basic insight into recognizing the productive and destructive aspects of expectations and stereotypes, and their consequent effects on negotiation. Harvard Business School Publication, product number 396167, length 2 pages.

Level 5 (1st Year Graduate)

Two Psychological Traps in Negotiation by George Wu. Description: Two psychological traps, anchoring and framing, and their role in negotiation are described. The anchoring section describes how first or opening offers can be used effectively in negotiation. Examines how opening offers serve as an anchor, changing one side's perception of the other side's bottom line and hence the set of possible outcomes. The framing section describes how framing--alternative description of an object, event, or situation--can be used effectively in negotiation. Uses a real-estate dialogue to illustrate three common varieties of framing: losses versus gains, short and long horizons, and aggregation and segregation. Harvard Business School Publication, product number 897036, length: 8 pages.

Diagnosing and Overcoming Barriers to Agreement by Michael D. Watkins. Description: Synthesizes and extends work on barriers to negotiated agreement. Five key types of barriers are described--structural, strategic, psychological, institutional, and cultural. Approaches to overcoming these barriers are discussed. Harvard Business School Publication, product number 800333, length 20 pages.

Additionally, the instructor has the option of requiring students to prepare written answers and a negotiation plan before the class discussion and even conduct mock negotiations by giving select information to different students playing the roles of buyers and sellers.

GENERAL BACKGROUND

The bargaining in this case is typically categorized as a distribute bargaining (or win-lose) model where gains by one party (the buyer) are offset by the other party (the seller) and vice versa. A graphical representation of the model is presented in exhibit 4 (Walton and McKersie, 1965) while terms are defined in exhibit 5.

[ILLUSTRATION OMITTED]

Exhibit 5

Distributive Bargaining Model Term Definitions

Target Price: The "best" price (typically a minimum for the buyer and a maximum for the seller) the negotiation party would like to pay for a given item.

Reservation Price: The price (the absolute maximum for the buyer and the absolute minimum for the seller) the negotiation party will accept. Beyond this point they would rather not reach agreement.

Negotiation Range: The area (or latitude) identified as lying between a party's target and reservation points

Buyer's Surplus: The amount that the buyer did not have to pay but was willing to in reaching an agreement.

Seller's Surplus: The amount that the seller did not have to forgo but was willing to in reaching an agreement.

BATNA: Best Alternative To a Negotiated Agreement; there can only be one best and it must be concrete.

Another possibly useful piece of information in leading the class discussion is the markup on the wholesale prices of the various components Michelle Tipton and the Lacey's are interested in. This information is presented in exhibit 6.

RESPONSES / ISSUES SURROUNDING QUESTIONS TO ANSWER

1. What should Michelle and the Laceys' negotiation strategy be? (e.g. how much information to share concerning where they are in the buying process, that there is a vehicle trade-in, that they are looking at other dealerships as well, that they have wholesale price information from Internet sources, whether and how much deception is ethical/allowable, etc.)

Because the buyers in this case have more than one dealership from which to chose (Toyota of Louisville and Green Tree Toyota) and the possibility of representing to the sales staff of these dealerships that they have additional choices--Oxmoor Toyota and even dealerships in Cincinnati, Ohio and Indianapolis, Indiana (within a reasonable drive from Louisville given the high ticket price of the purchase), two extreme endpoint strategies are possible.

The first would be the so-called "full information sharing" option. This involves informing the salesperson at the outset that they plan to purchase two of nearly the identical model, have wholesale price information, have a trade-in, and are going to all area dealerships and asking for their best price for the package. This approach has the appeal of making the other bargaining party aware of the buyers' informational power and availability of alternative vendors. The principle chief limitation is that it amounts to a power play or ultimatum of sorts where if the seller doesn't give the lowest price they likely will lose the sale.

At the other end of the spectrum is the so-called "string out the process option." Under this scenario, the buyers go in to each dealership and to all external appearances "play dumb." In reality, this approach draws on the increasing investment of time the salesperson spends with one or both potential buyers; answering questions, discovering needs, narrowing down the number of models under consideration, going along on a test drive of the vehicle, explaining and assisting with the buyers' selection of options, pricing, etc as a means of getting a better deal. While it is true the buyers as well tend to view increasing expenditures of time as more commitment to a purchase, in this case the buyers know a priori what they want. Through selective releasing of information they move toward their ultimate goal--the best price for the purchase of two vehicles. Revealing that they will be visiting other dealerships would come only after a written price quote is obtained. The same is true for the information that a trade-in vehicle will be involved.

Other points along the continuum marked by these two extremes are related to how much, and when, selected information is revealed. A separate but related issue is whether deceptive behavior or quasi-ethical behavior is allowable. For example, if the buyer decides to tell the seller they do not have a trade in or in response to the question says "no" when in fact they do and plan to introduce that aspect at a point later in the negotiations. These questions, in particular the determination of what constitutes acceptable or ethical behavior (for parties on both sides) is likely to elicit many different perspectives from students and fuel some interesting discussions.

2. What do you expect the behavior of the sales people to be when Michelle and the Lacey's visit the Toyota dealerships?

Drawing on the experiences of students and depending on their levels of expertise, expected behavior may run the gambit from a "hard sell" i.e. strong pressure to buy, and a pressure to buy from inventory currently featured or on the lot, a manifest desire on the part of the sales staff to reach an agreement before the potential buyers leave the showroom, and incremental investment efforts such as to take a test drive, to a discussion of the buyers needs, price range, etc. A discussion of this issue prior to the students/class developing a negotiation plan increases the likelihood that they will develop a more well thought out plan.

3. Develop a negotiation plan (i.e. characteristics of opening offer, reservation price, tactics, tradeoffs they should make, how to react if the seller brings up issues before you are ready to discuss them, e.g. whether you have a trade in vehicle, etc.). Do you have a Plan B if your original plan becomes untenable?

According to many negotiation sources related to automobile buying, unless there are extenuating circumstances such as a vehicle in high demand and limited availability (e.g. Dodge Viper), the buyer's reservation price should be the MSRP (Manufacturer's Suggested Retail Price). The wholesale price, the amount paid by the dealer for the vehicle, could be the target/aspiration price. More realistically however, the aspiration price should be several hundred dollars above the wholesale price. With the buyers' bargaining range determined, an opening offer closer to the aspiration price is typically called for. Given that the buyers already have determined the precise configuration they want and the fact that the markup on accessories is higher than for basic equipment, they can initially represent the configuration they want as one that has fewer options. By doing so, they allow room to "give in" and add other options, ones they want anyway and that have higher profit margins for the seller. A variant on this strategy is to initially represent the configuration they want and including more options than they really want to purchase. Then, in response to an offer of a price, they buyers can propose omitting unwanted options as a means of bringing the price down. Invariably students, particularly ones with limited experience, will develop a plan that is, for lack of a better term, linear. It may assume that the process will go from point A to point B and so on. Most will not have the foresight to plan for contingencies such as the seller jumping from point A to point G, mitigating whatever particular advantages or perspectives the buyer was hoping to introduce. From the seller's perspective they may want to determine whether the buyer is a potential sale as quickly as possible. The issue of when to take a test drive for example, may be introduced by the seller early on, or earlier than the buyer had planned. The presence of contingencies in the students' plans illustrates a richer understanding of how negotiations such as this occur in practice. If they have a secondary plan (or Plan B) if they determine that the original plan is fundamentally flawed and not appropriate, even with contingencies, for them to continue--they are indeed very prepared. A Plan B could be invoked if the buyers decide for whatever reason that they do not want to deal with the salesperson or dealership (e.g. determining that they are lying on some information, treated particularly badly) or some aspect underlying their original plan has changed (e.g. one of the two buyers pulls out of the agreement to purchase two vehicles at once).

4. What do you believe the salespersons' negotiation plan will be? How can you determine what their plan is?

For many younger students, in particular freshmen, they may have little to no experience in negotiations such as these. Consequently, they may have not considered the preparation of the other side; their goals, needs, trade-offs, etc. in a negotiation. It was Abraham Lincoln, reflecting on his careers as attorney, politician, and President that said when negotiating he spent 1/3 of his time thinking about what he wanted and 2/3 of the time thinking about what the other side wanted; and looking back on it he should have spent more time thinking about what the other side wanted. That perspective, attempting to more fully understand the other party to a negotiation, is one that will benefit students as they analyze and then formulate their own goals, strategies, and tactics.

Instructors may want to assign different students to different tasks--half developing the seller's negotiation plan and half the buyers' plan. These documents could then form the basis for in-class role play experiences or critiquing for the class as a whole.

REFERENCES

Avila, R.A. T.N. Ingram, R.W. LaForge & M.R. Williams, (1995). The professional selling skills workbook, Fort Worth, Texas: The Dryden Press.

Consumer Reports website (2002). Retrieved May 16, 2002 from www.consumerreports.org

Edmunds New & Used Car Prices website (2002). Retrieved May 16, 2002 from www.edmunds.com

Harvard Business Online website (2006). Retrieved July 8, 2006 from http://harvardbusinessonline.hbsp.harvard.edu

Kelley Blue Book website (2002). Retrieved May 20, 2002 from www.kbb.com

Toyota automobile website (2002). Retrieved May 2, 2002 from www.toyota.com

Walton, R. & R. McKersie (1965). A behavioral theory of labor negotiations.

Michael R. Luthy, Bellarmine University

Mike H. Ryan, Bellarmine University

Bettye R. Desselle, Prairie View A&M University

John T. Byrd, Bellarmine University

Exhibit 6

Toyota Highlander Base Vehicle Costs and Options with Mark-Up

 Mark-Up from
MSRP Wholesale Model and Engineering Options Wholesale

$24,390 $21,761 4 door sport utility with 12%
 base engine
25,790 23,007 4 door, 4 wheel drive sport 12%
 utility with base engine
1,580 1,407 3.0 Liter, 6 cylinder 220 hp 12%
650 559 Vehicle skid control 16%

 Mark-Up from
MSRP Wholesale Exterior Options Wholesale

$699 $455 Fender Flares 54%
310 248 Glass, deep tinted 25%
102 61 Hood protector 67%
220 176 Luggage rack 25%
80 64 Mud guards 25%
625 405 Running boards 54%
334 200 Rear spoiler 67%
900 720 Power sunroof 25%

 Interior, Security, Safety, Mark-Up from
MSRP Wholesale and Miscellaneous Options Wholesale

$379 $235 Molded wood dash 61%
90 58 All weather floor mats 55%
$147 $88 Glass breakage sensor 67%
309 185 VIP security system 67%
250 215 Side impact air bags 16%
40 32 Daytime running lights 25%
30 24 Outside heated mirrors 25%
400 352 Heated seats 14%
200 150 Premium sound package with 33%
 CD changer
520 416 16" aluminum wheels 25%