L4M5 Summarised Note

1. Understand key approaches in the negotiation of commercial agreements

with external organisation
1.1. Analyse the application of commercial negotiations in the work of
procurement and supply
a. Definition of commercial negotiations
• The definition
• Differences between negotiation and other persuasion
methods
• Negotiation content and processes
• Negotiations in different procurement stages:
− Roles of negotiation in each stage of CIPS
procurement cycle
− Roles of negotiation in each stage of CIPS contract
management cycle
b. Sources of conflict
• Conflicts that arise from the content of the negotiation
• Conflicts that arise from the process of the negotiation
c. Conflict management styles: Thomas-Kilmann conflict mode
instrument
• Competing style
− Objectives
− Best use in which circumstances
• Accommodating style
− Objectives
− Best use in which circumstances
• Avoiding style
− Objectives
− Best use in which circumstances
• Compromising style
− Objectives
− Best use in which circumstances
• Collaborating style
− Objectives
− Best use in which circumstances
d. Stakeholder management and team management
• Classification of stakeholders
− Internal stakeholder
− Connected stakeholder
 − External stakeholder
• Roles of each group of stakeholders in negotiation
• Stakeholder management and engagement
− Stakeholder matrix
− Stakeholder support level scale
• Team management
− Typical roles of negotiating team members
e. Common questions that students encountered in recent exams:
• Aims, objectives of negotiation
• The sources of conflict (multiple selection)
• The questions may describe a scenario and ask about which
conflict management style is adopted
• The questions may describe a scenario and ask how to deal
with a specific type of stakeholders
1.2. Differentiate between the types of approaches that can be pursued in
commercial negotiation
a. Collaborative (win-win) approach
• The objectives of this approach
• Best use in which circumstances
• Typical characteristics of this approach
b. Distributive (win-lose) approach
• The objectives of this approach
• Best use in which circumstances
• Typical characteristics of this approach
c. Comparison between collaborative and distributive approaches
d. Principled negotiation: four fundamentals
• People: Separate people from problems
• Interests: Focus on interests, not positions
• Options: Generate options for mutual benefits
• Criteria: Use objective criteria
e. Setting targets and BATNA
• What is best alternative to a negotiated agreement
• What is zone of potential agreement
• What are options/tradeables/variables
• ‘Must, intend, like’ criteria
• How to set up BATNA
f. Common questions that students encountered in recent exams:
• Outcomes, objectives or characteristics of win-win and win-
lose approaches
 • Questions may describe a scenario and ask about which
approach (win-win or win-lose) is adopted
• Questions may describe a scenario and ask about which
approach (win-win or win-lose) should be used
• Questions may require students to identify
variables/tradeables with or without a scenario
• Questions may describe a scenario and ask about which is
the BATNA of that scenario
• Advantages and disadvantages of BATNA
1.3. Explain how the balance of power in commercial negotiations can
affect outcomes
a. The importance of power in commercial negotiations
b. Sources of personal power: French and Raven’s Power base model
• Legitimate power: where this power stems from
• Reward power:
− Where this power stems from
− How it is used in a negotiation
• Expert power:
− Where this power stems from
− How it is used in a negotiation
• Referent power
− Where this power stems from
− How it is used in a negotiation
• Coercive power:
− Where this power stems from
− How it is used in a negotiation
• Information power:
− Where this power stems from
− How it is used in a negotiation
c. Sources of organisational power
• Macro environment: STEEPLE analysis
• Microenvironment: Porter’s five forces: students should
focus more on what can shift the balance of power towards
buyer or supplier
• One-to-one buyer/supplier dynamics
− Supplier positioning
− Supplier’s perspective
• Sources of information about buyer that supplier collect
− Publicly available information: internet
− Other sources of information
 • How purchasers can improve leverage with suppliers
− Increasing spend:
(a) Spend concentration
(i) Vendor base reduction
(ii) Volume pooling
(iii) Volume redistribution
(iv) Volume consolidation across
categories
(v) Standardisation and harmonisation of
specification
(vi) Forming purchasing consortia
(b) Spend analysis
− Increasing buyer’s attractiveness:
(a) Factors that are unrelated to spend volume
can be optimised to increase buyer’s leverage.
They can be payment period, simple processes,
etc.
(b) Buyer’s attractiveness model: four quadrants
and what is seller’s objectives with each quadrant
d. Common questions that students encountered in recent exams:
• Questions may describe a scenario and ask students which
sources of personal power are used
• Where a certain source of personal power stem from
• What are factors in macro environment
• What are factors that affect the balance of power between
supplier and buyer (Porter’s five forces)
• What are methods of spend consolidation
• Some questions may describe a scenario and ask students to
identify the quadrant that the buyer falls into according to
attractiveness matrix
1.4. Identify the different types of relationships that affect commercial
negotiations
a. The relationship spectrum (Mark Moore)
• Transactional suppliers
• Operational suppliers
• Strategic suppliers
b. Reputation and trust
• Sources of reputation
• How to build relationship based on reputation
• Sources of trust
• How to build relationship based on trust
 c. Repairing a relationship: the vicious cycle of blame
d. Common questions that students encountered in recent exams:
• Characteristics of tactical/operational/strategic negotiation
• How to repair a relationship
• Sources of reputation and trust
• Students said that they did not meet many questions on this
AC. But you should not skip this section. The questions are
randomised, and you may encounter some questions in the
next exam.
2. Know how to prepare for negotiations with external organisations
2.1. Describe the types of costs and prices in commercial negotiation
a. Types of costs
• Direct and indirect costs
• Fixed and variable costs
• Addressability of spend: which costs can be reduced in
negotiation
• How to understand supplier’s cost base:
− Spend waterfall
− Spend tree
− Value analysis and value engineering
− Exchange rate movements
− Vendor supply capacity
− Early procurement involvement
b. Break-even analysis
c. Costing methods
• Absorption costing:
− How to calculate
− Strengths and weaknesses
• Marginal or variable costing:
− How to calculate
− Strengths and weaknesses
• Activity-based costing:
− How to calculate
− Strengths and weaknesses
• Cost plus
− How to calculate
− Strengths and weaknesses
• Total costs of ownership
d. Volume, margins and mark-up and their impacting on price
• Margin and mark-up:
 − How to calculate
− Implications of margins and mark-ups on gross
profits and net profits
• Pricing strategies used by suppliers
− Cost plus pricing: how to calculate price
− Premium pricing: how to calculate price
− Penetration pricing: how to calculate price
− Marginal cost pricing: how to calculate price
− Market pricing: how to calculate price
• Cost modelling and analytics
− Procurement analytics
− ‘Should cost’ analysis/benchmarking
e. Negotiating prices:
• Saving levers:
− Volume concentration
− Demand management
− Best price evaluation
− Global sourcing
− Specification improvement
− Joint process improvement
− Relationship restructuring
• Purchase price cost analysis (PPCA)
− Purposes
− When to use
− Types of costs that are discovered by PPCA
f. Common questions that students encountered in recent exams:
• Which costs are direct/indirect/fixed/variable
• How to calculate break-even (or which information is used
in the break-even analysis)
• Characteristics, strengths and weaknesses of different
costing methods: absorption, marginal and activity-based
• The formula of margins and mark-ups
• The relationship between margins, mark-up and supplier’s
profitability
• Characteristics of each pricing method
2.2. Contrast the economic factors that impact on commercial negotiation
a. Microeconomic factors
• Scarcity, choice and opportunity cost
• How supply and demand determine price
− Demand
 (a) Demand curve
(b) The factors that shift demand curve and
change quantity demanded
− Supply
(a) Supply curve
(b) The factors that shift supply curve and change
quantity supplied
− Equilibrium price
(a) Definition
(b) Market prices are set up above and below
equilibrium price: shortage and surplus
− Elasticity
(a) Definition
(b) Implications on supply and demand
(c) Types of elasticity: demand elasticity, income
elasticity, cross-elasticity
− Market and competition
(a) Perfect competition:
(i) Typical characteristics
(ii) Procurement implications
(b) Monopolistic competition
(i) Typical characteristics
(ii) Procurement implications
(c) Oligopoly
(i) Typical characteristics
(ii) Procurement implications
(d) Monopoly
(i) Typical characteristics
(ii) Procurement implications
b. Macroeconomic factors:
• Considerations
• Macroeconomic factors:
− Economic growth
− Inflation rates
− Interest rates
− Currency exchange rates
− Unemployment rate
− Protectionism
c. Sources of information on micro- and macroeconomics
d. Common questions that students encountered in recent exams:
• Sources of information
 • Students said that they did not meet many questions on this
AC. But you should not skip this section. The questions are
randomised, and you may encounter some questions in the
next exam.
2.3. Analyse criteria that can be used in a commercial negotiation
a. Benefits of having a strategy
b. Typical criteria in a negotiation strategy:
• Objectives:
− Overarching objectives
− Specific objectives
− TOP’s objectives
• Variables, bargaining mix
− Variables
− Concession planning matrix
• ‘Must, intend, like’ limits
• BATNA
c. Common questions that students encountered in recent exams:
• Students said that they did not meet many questions on this
AC. But you should not skip this section. The questions are
randomised, and you may encounter some questions in the
next exam.
2.4. Identify and assess the resources required for a negotiation
a. Choice of location
• Ideal negotiation environment
• Home or away
• Neutral ground
b. Room layouts and surrounding
c. Team roles in negotiation
d. Individual negotiation styles: warm, tough, logic and dealer
e. Use of telephone, teleconferencing, web-based meetings
• When to use these methods
• Advantages and disadvantages of each method
f. Common questions that students encountered in recent exams:
• When to use a certain method of communication: telephone,
teleconferencing, web-based meetings
• Identify roles of individuals in a negotiating team
3. Understand how commercial negotiations should be undertaken
3.1. Identify the stages of a commercial negotiation
a. Supplier conditioning
b. Analyse different phase:
 • The opening phase
− The objectives of this stage
− Dos and don’ts of this stage
• The testing phase:
− The objectives of this stage
− Dos and don’ts of this stage
• The proposing phase:
− The objectives of this stage
− Dos and don’ts of this stage
• The bargaining phase:
− The objectives of this stage
− Dos and don’ts of this stage
• The agreement and closing phase:
− The objectives of this stage
− Dos and don’ts of this stage
c. Common questions that students encountered in recent exams:
• What are phases of a negotiation
• Questions may describe a typical activity and ask students
about the phase when they do that activity
• Yes/no questions regarding dos and don’ts of a phase
3.2. Appraise the key methods that can influence the achievement of
desired outcomes
a. ‘Push and pull’ persuasion
• Definition and typical characteristics of ‘push’ and ‘pull’
• Further classifications of ‘push’ and ‘pull’:
− Directive
− Collaborative
− Persuasive reasoning
− Visionary
• Differences between ‘push’ and ‘pull’
b. Tactical ploys:
• Good cop/bad cop
• Thank and bank
• Lack of authority
• Declaration of public stance
• Getting peanuts
• Salami
• Outrageous initial demand
• Add-on
• Broken record
 • One more thing
c. Common questions that students encountered in recent exams:
• Questions may ask about differences between ‘push’ and
‘pull’
• Questions may describe a scenario and ask students to
identify the tactics/ploys used in that scenario
3.3. Compare key communication skills that help achieve desired outcomes
a. Types of questions
• Open questions:
− Features
− When to use
• Closed questions:
− Features
− When to use
• Probing question:
− Features
− When to use
• Hypothetical question:
− Features
− When to use
b. Listening:
• Roles of listening in negotiation
• Rules of effective listening
• How to improve listening skill
c. Non-verbal communication
• Typical non-verbal communications
• Interpretation of non-verbal communication
d. International cultural differences
• When are cultural differences important in a negotiation
• Evaluating cultural differences
• Other issues that arise in the negotiation with foreign
suppliers other than culture
e. Emotional intelligence
• Definition
• Roles of emotional intelligence in negotiation
f. Common questions that students encountered in recent exams:
• Questions may describe some characteristics or features and
ask what kind of question has such characteristics and features
• Questions may ask about the circumstances in which a
certain type of question is used
 • Questions may describe a scenario in which supplier/buyer
shows some non-verbal cues then ask how those cues should
be interpreted (or with yes/no answer)
• Questions may ask about roles of emotional intelligence in
negotiation
• How cultural differences affect negotiation
3.4. Analyse how to assess the processes and outcomes of negotiations to
inform future practice
a. Reflecting on performance
• When to undertake reflection
• How to reflect on performance
• Benefits of reflection
• Areas to consider when reflecting
b. Opportunities for improvement and development
c. Protecting relationships after the negotiation
• Why you should protect relationships with supplier
• Some tips to protect the relationships
d. Common questions that students encountered in recent exams:
• Questions may describe a need for improving negotiation
skills and ask about what should be done
• Students said that they did not meet many questions on this
AC. But you should not skip this section. The questions are
randomised, and you may encounter some questions in the
next exam.
If you need to check your skills, use my practice tests as your reference:
1. L4M2: https://www.udemy.com/course/cips-diploma-l4m2-practice-
test/?referralCode=D6857E569E583169D7E6
2. L4M3: https://www.udemy.com/course/cips-diploma-practice-test-
commercial-contracting/?referralCode=A5F71CD5C684538996EB
3. L4M4: https://www.udemy.com/course/cips-diploma-practice-test-
ethical-responsible-sourcing/?referralCode=00CB8A48071CD88E9BE8
4. L4M5: https://www.udemy.com/course/cips-practice-test-commercial-
negotiation/?referralCode=919D1BDB285AFA4CB55A
5. L4M6: https://www.udemy.com/course/cips-diploma-practice-test-
supplier-relationships/?referralCode=76AF6ECB83302BBF245F