Posts in "Strategy"

Negotiation Strategy

Objective Criterions

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“Here’s the rule for bargains: ”Do other men, for they would do you.” That’s the true business precept.” Charles Dickens

Most of us have at some time, played the high-lowball game during negotiations. For example, a while ago I was attempting to buy a domain I wanted. The seller had a listed price of $500, I put in a lowball offer of a $100 dollars straight off the bat. The $100 I offered, had no actual basis and was nearer to the $200 or so I wanted to actually pay for the domain. The seller and I had a number of correspondences back and forth, and a deal was struck around $230. Did I get a good price? Was my reservation price, one that had a logic basis? Unfortunately I could not answer any of these questions.

It therefore got me thinking, that having objective criterions are necessary to ensure that both sides get an optimal deal. In the case of the above example, companies such as Sedo are able to calculate the true worth of a domain through several established criterions that include, estimate of the domain name’s value, list of recent comparable sales, search engine friendliness, branding potential, legal situation and even, possible buyers. This estimation establishes the true worth of a domain. If the had seller relied and gone with such a report from a trusted authority, stating the domain estimate at $500, I would have had very little room to negotiate a price which was substantially lower. We can therefore see, that by adding objective criterion’s to negotiations, we can optimize the value created on the whole.

It is therefore recommended, that whenever you enter into a negotiation, be it changing terms of payments with your supplier, a salary increase for your staff or the sale of your business to a private equity firm, do research regarding the metrics that can be used fairly, to add objectivity to the negotiations. It is important that the criterions proposed are acceptable to both sides. A key characteristic of skilled negotiators is, they are always prepared. They know their underlying interests, the options available,  available alternatives, and a list of objective criterions to reach an optimal agreement for both sides.

Negotiation Strategy

What are your Alternatives?

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“The hardest thing to learn in life is which bridge to cross and which to burn.” ~David Russell

How does one assess whether one is really getting a good deal or not? To answer this question one needs to have a deeper understanding of the alternatives available. Lets say for example, we are negotiating a salary increase with our employer. We want an increase from $50k to $60k. We bring up the topic with our employer, who immediately refuses the suggestion blaming the current economic climate. We could be an extremely valuable resource for the company, but without any available alternative we have very little leverage in this negotiation. However if we do some research about market rates for our profession and may even float our resume around to get an idea what our market worth is we could arrive at a figure which gives us a better understanding of our market worth. With this figure we now have a foot to stand on during negotiation.

Alternatives however are rarely as straight forward in complicated deals where one is negotiating the sale of a business or better terms of payment from suppliers. They do however give us an important edge to see how far we can actually push during negotiations. Lets say for example I am selling my car and my reserve price is $20k I meet a seller whose maximum limit is $30k. In this case any price above my $20k reservation price will be a positive outcome for myself and likewise any price below $30k will be a positive outcome for the seller. This brings out the objective of negotiations which is to achieve a better deal than not negotiating at all. Revealing your alternatives during negotiation is usually not a good strategy unless it strengthens your position at the negotiation table. It is important to remember that alternatives should not be used to apply pressure or force the other side into a particular decision. They are markers to help us make an optimal choice.

Before the negotiation process, one should clearly list down all the available choices related to the issue at hand. I then list down possible alternatives that the other side may have. This gives a better understanding of how much room there is to negotiate. It is important to not use ones alternatives to apply pressure tactics to induce the other side to give in. Such tactics may work in the short term, however repeated use of such strategies will hurt your future chances of getting a better deal. One needs to be fair and ensure that each side is benefiting from the agreement to ensure better long term results.

Negotiation Strategy

Options Development

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“Everything is something you decide to do, and there is nothing you have to do.” Denis Waitley

Often in negotiations, each side promotes their optimal outcome without taking into account mutually beneficial options. We often only concentrate on how we can get the most out of a particular predicament, rather than creatively coming up with alternatives for mutual gain. Other common problems leading to stalemates, is when each side looks for a single answer to resolve the issue, or views the pie as fixed, and looks for ways to increase their own share. These road blocks lead to slow negotiations, and can be frustrating for both sides. Below are a couple of ways I follow for option development:

1. Separate Brainstorming & Decision Making: The option development phase is an important one, and needs to be handled independently. If we mix the option development phase, with the decision making one, it could potentially lead to premature judgments. This phase needs to focus on the creativity of both sides, to develop options which cater to the bigger picture. At this stage there is no option which is too crazy, and both sides must feel comfortable in expressing their point of views and opinions. The end result of these sessions should be a developed list of potential options which cater to both sides and are mutually beneficial.

2. Cater to Interests: As mentioned in earlier posts it is important to focus on interests rather than positions during the negotiation process. This has great significance in the option development phase. For example, if we negotiate a larger equity stake in the business with one of the founders, it is important to let the partners know why you want 10% instead of the 6% offered. Is it because the 10% signifies the actual opportunity cost that you are foregoing to join the business? Explore the reason of the founders interests  and why they had offered 6%. Without this, the discussion is polarized to very hard positions, its either 10%, or I will not be joining. Such an attitude is not conducive to developing viable options.

3. Focus on Increasing the Pie: On a micro level when you look at an issue there are a couple of possible options available. For instance, if you are negotiating terms of payment with a vendor there are a limited number of options available to reach an agreement. However, if we take a 3 dimensional view of the issue at hand and take into account macro level factors to improve the situation, a number of options will become available. In the same negotiation with the vendor, if we zoom out and brainstorm new ways to increase the volume of business with the vendor through shared activities, maybe the vendor would be more inclined to negotiate more favorable terms. Broadening the scope of the issue is an essential trait of the skilled negotiator.

The objective of the option development phase is to arrive at a set of mutually viable and beneficial options. To reach this objective much collaborative work is required. Many individuals shy away from talking through options and stating their interests, only because they fear they may be giving too much away and may appear vulnerable. Such a stance will most likely lead to a limited set of options, most of which do not cater to the interests of the involved sides.  We must therefore introduce candor into our negotiation process to yield optimal results.

Negotiation Strategy

Focus on the Problem

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“When dealing with people, remember you are not dealing with creatures of logic, but creatures of emotion.” Dale Carnegie

Dale Carnegie’s quote, eloquently summarizes a major challenge we face at the negotiating table. Negotiations tend to get complicated due to the fact, that as human beings we bring a lot of baggage to the process. In the seminal book “Getting to Yes” by Roger Fisher and William Ury, they have a dedicated section devoted to separating the personal element as much as possible, from the negotiation process. They identify three main segments which tend to complicate matters repeatedly, they are perceptions, emotions and communications. Listed below are a few tips on dealing with each segment.

1. Perceptions: As stated in yesterday’s blog post, if we do not look adequately into the other sides position and interests, our perceptions will be skewed. We may perceive an issue in a certain manner because of a particular reason, whereas, it could be due to something completely different. We need to open up candid discussions on both sides. Unless this is done, both sides will blame the other and point fingers. Each side needs to be part of negotiation process, as also clear on each other’s positions, to reach a mutually agreeable decision.

2. Emotions: This area tends to complicate matters during the negotiation process as a routine. To become an adept negotiator, one needs to become emotionally aware of ourselves and others. Emotions tend to play either a positive or negative role in negotiations. It is only when negative emotions such as anger, fear and distrust come into play, that reaching a consensus becomes very challenging. As skilled negotiators it is important to keep a constant check on our own emotional levels, as well as that of the other person. When we sense a boiling point it is important to diffuse the situation by either changing our stance or by temporarily leaving the scene. It is important to focus on the issue at hand and not take personal jabs at the other person.

3. Communication: During the negotiating process if the involved individuals are not able to communicate properly, chances of reaching any sort of agreement is minimal. We need to ensure that during the negotiation process both parties communicate clearly and listen actively. At the same time, we need to be aware of non verbal communication as well. Key factors such as eye contact, facial expressions and body posture are continuously communicating messages to the other side. We also need to be aware of the non verbal cues we may be receiving from the other side as well. Miscommunication is one of the primary reasons why negotiations break down, we must ensure that the focus on keeping channels of communication clear at all times is maintained.

The entire objective of negotiating is to find a mutually acceptable consensus. To ensure that this objective is achieved, we need to keep the process as simple as possible. If we complicate the process by bringing external baggage into the equation, chances of reaching a consensus become slim. We need to ensure focus on the issue at hand at all times. This will undoubtedly be challenging, and there will be moments when our emotions will get the better of us. However, if we always remind ourselves of the core issue and make a concentrated effort to reach a consensus, both sides will benefit.

Negotiation Strategy

Understanding Motivations and Interests

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“Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. It’s not that Level 5 leaders have no ego or self-interest. Indeed, they are incredibly ambitious–but their ambition is first and foremost for the institution, not themselves.” Jim Collins

At the heart of every negotiation, each side has a set of motivations and interests which enable them to take  certain positions on issues. When the sides lack an understanding of the other’s interests and motivations, reaching a mutually agreeable decision is very challenging. Before beginning any negotiations, there are a couple of steps I take, to better understand my position on the matter as well as the other individuals position. Chances are, we will not have all the information needed to make an optimal decision. However, the initiative to understand positions better, will greatly improve chances of reaching a common ground.

1. Identify Self Interests: When we enter a negotiation process, there are obviously some goals and targets  we want to achieve. For example lets say,  you want to exit a partnership in a business you have been with for the last 5 years. What are your reasons for wanting to exit? Asking ourselves questions helps to view the issue from an analytical aspect. Identify the reasons for your inability to work with the other partners, is it due to office politics, or to fund an financial emergency need ? We need to be clear about our position to quit when we go to the negotiating table. Internal clarification greatly assists in the communication of our message.

2. Understanding the Other Side: Once your position and the interests which led to its selection is clear, begin to focus on the other side. This is a critical step which gives a holistic view to the issue being discussed. Much of the time we forget to look at the issue from the other’s point of view. We need to not only understand the other side’s position, but also why they have taken it. Through this exercise, it is possible to come up with different positions which may be taken and create counter arguments for them. In the example above, the other partners may look at the sudden request for quitting as suspicious and may choose a hard line when negotiating terms of exit. You could be a critical member of the team whose departure will cripple the firm. As many possible positions should be taken into account.

3. Candid Discussions: Both parties need to have detailed discussions to help each other understand points of view from each angle. Sometimes this can be difficult when individuals do not want to cooperate, this is quite common. The fact of the matter is, if we choose to take the hard ball route, one side is forcing their position down the other side without paying adequate attention to the other’s interests. To make any progress, one needs to gauge what, and how, the other side thinks to be able to reach common ground. This is a difficult process if candid discussions are not part of the organization and will take time. However it is well worth the wait.

Negotiating is a challenging task. If we just look at the surface on “what the other side wants” instead of also asking “Why do they want it?” we will only have half the picture. By taking the initiative to understand our own interests as well as those of the other side, will provide us the ability to look at the bigger picture and make a more informed decision. Becoming stubborn and refusing to pay attention to the other’s interests, or dismissing them all together will only make the negotiations difficult.

Strategy

Having Trouble Getting to “Yes”?

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Negotiation is “the art of letting them have your way.” Daniele Vare

Negotiations are a central part of our lives. During the course of a day, we negotiate a host of issues, ranging from simple ones, such as who gets dropped off first to work, to more complex ones, such as negotiating the equity split in your brand new start-up. In each scenario, those with better negotiating skills have an advantage to arrive at a decision in their best interest. However, acquiring better negotiating skills takes time and experience. I strongly believe, that a better understanding of the negotiation process  will dramatically improve these skills. On a macro level, all negotiations consist of three main components. They are:

1. Issues: This is the central cause for negotiations to take place. Examples can be, the sale of your company, a salary increase or a partnership agreement. It is essential that everyone involved in the negotiation is on the same page, and has a thorough understanding of the issue being negotiated. Much of the time, the involved individuals fail to see the issue correctly, which leads to complications that could easily have been avoided. Understanding the issue at hand and making sure everyone is on the same page is hence very important.

2. Positions: Once the issue has been presented, the involved individuals take positions. For example, if the issue at hand is a salary increase, the employee will take the position that his performance warrants a pay increase, and the employer could take the position that the employee’s performance does not warrant this. It is through negotiations that a middle ground needs to be found, where both the employee and the employer can reach a mutually acceptable decision.

3. Interests: The positions we take are always motivated by certain interests. In the above example, the employee may want to buy himself a condominium or, be getting married and needs a salary increase  to afford his changing status. The employer on the other hand, may be under strict instructions by senior management to put in place a salary freeze because of the prevailing economic uncertainty, hence his position to deny a salary increase. Negotiating interests means, negotiating about things that people really want and need, not what they say they want or need. Often, these are not the same. People tend to take extreme positions, often designed to counter their opponent’s positions.

Understanding these basic foundational blocks is critical before one delves deeper into negotiation tactics. We have to be able to see the picture from a broader perspective in order to reach mutually acceptable decisions. During the course of the week, I will share a few steps with you, steps which have made my negotiational skills more affective. I hope they will be of some assistance to you. As always your comments and feedback will be greatly appreciated.

Advice Strategy Time Management

Are you getting things done?

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“Good thoughts are no better than good dreams, unless they be executed.” Ralph Waldo Emerson

Ever had a day start off with a million things to do, and at the end of it, not manage to strike even one of them off the list? Often the tasks at hand are huge ones, like writing a business plan, creating a brochure or even developing a website. Chances are, if you have, write a business plan on a to-do list, it is not going to get completed when you need it. Lets face it, most of us have procrastinated at some point in time. Some do it more regularly than others. As an entrepreneur, your plate is usually full, and procrastination comes at a heavy opportunity cost. We have to do whatever it takes, to make sure that we use our time optimally. Time management is a topic I wrote about earlier this year. Since then, I have changed my time management methodologies and now use the GTD (Getting things done) methodology, it has helped me greatly in getting more accomplished.

The GTD methodology was developed by Mr. David Allen. It is a simple system which helps streamline many of the tasks we do on a daily basis. Before I started using this system, my mind used to race from one project to the next. If I receive an important email while busy writing a report, I often just switch tasks, and that is ususally the end of the report. Things such phone calls and uncalled for meetings were draining a lot of my day. This system got me started on a concept called, working in a particular context. Which means, I partition my day contexts such as responding to emails, phone calls, thinking, reading and a host of other activities where I can see all the tasks related to that context. It made a world of difference.

Over the course of this week, I plan to outline some key components of the system. This will help individuals who do not know this methodology to learn a little more about it. Pointers from this series can be applied to your daily schedule, and you can test out which components of the system to incorporate into your schedule without disrupting it too much. In the end the focus has to be on execution and delivering results. We could talk incessantly about the business we want to start, or the new product that needs to be launched. Unless we take decisive action, we will not get anything accomplished. I hope this system will be of as much benefit to you, as it has for me.

Strategy

5 Steps to Better Inventory Management

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“Every company has metrics that track performance. The key question is whether these metrics really provide visibility to performance as viewed by the customer.” Steve Matthesen

Inventory management is an aspect of business which needs to be given more attention than what it currently receives. It is certainly not the most glamorous aspects of running a business. Inventory management is a basic business building block like marketing, sales or finance. Simply put, inventory management deals with how efficiently an organization manages it stock cycles. Stocks in inventory, relate to aspects of business that are exposed to risk when accumulated beyond certain thresholds. In the case of a service business, it is the amount of outstanding payments. Efficient inventory management helps a business to maximize its existing assets by increasing turnover. Listed below are five steps to assist your business in managing inventory cycles better:

1. Inventory Velocity: This is an essential metric, which measures the speed at which a business can move it’s stock. The speed at which a business moves it’s inventory will impact substantially on its profitability and ROI. Inventory velocity can be calculated by simply dividing the cost of goods sold by the average inventory for the period. This is a benchmark all businesses should watch very closely. To learn more about the importance of measuring inventory velocity please click here.

2. Forecasting: Mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. There are three important aspects to be considered when constructing forecasts. The forecasts need to be based on data acquired from the market, sales channels and the current pipeline. Based on these aspects, we can construct forecasts for multiple scenarios which enable us to put measures in place, for the best and worst case scenarios. It is important to remember that forecasts are only as good as the assumptions they are based upon. To learn more about how to forecast revenue for your business please click here.

3. Communication Channels: When there are insufficient channels of communication between the producer, distributor, retailer and customer inventory, management becomes challenging. The information gap needs to be bridged by implementing several communication channels which include, allocated representatives, conference calls, real time stock levels and feedback channels. When information is allowed to flow freely from the customer to the producer, changes can be made faster and everyone in the chain stands to benefit. To learn more about the various communication channels please click here.

4. Technology: Organizations such as Walmart and Dell have shown the power of technology to optimize inventory management. Today, entrepreneurs have access to several tools such as bar coding, inventory management  and billing management software, which can help give small businesses an edge in managing their inventories optimally. To learn more about different types of technologies available for inventory management please click here.

5. Internal Policies: Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially. Policies pertaining to ordering, review and collections need to be mapped out in detail to ensure proper management of inventories. To learn more about internal policies relating to inventory management please click here.

Operations and supply chain management are the nuts and bolts of all businesses. Without smooth operations and proper controls, we could have a great website, killer marketing strategies and still come up short. When a customer does not get the product in time, or at the right price, we lose the customer. It all comes down to execution, and ensuring that we have systems in place to manage each order optimally. Inventory management is a critical aspect of this chain, and I recommend all business owners review their inventory cycles and work out ways to optimize them.

Strategy

Inventory Management Internal Policies

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“Policies are many, Principles are few, Policies will change, Principles never do.” John C. Maxwell

A common answer I get when I ask individuals why they chose to become entrepreneurs is, “We did not want to get buried in bureaucracy and policies which stop us from performing optimally.” I completely understand where they are coming from. It is true that in some larger organizations policies and controls become so complex that it leads to much frustration. However, I do not advocate running a business without any control measures. Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially, and is an area where entrepreneurs need control measures to ensure that things move smoothly. Listed below are a few policies which may be helpful:

1. Ordering: If your business depends on manufacturers to produce your product, it is best you have documented your specifications in detail. It is also advisable to get quotes from a number of manufacturers before deciding to go with a particular vendor. This not only helps gather market information, it enables you to get the best price as well.

2. Inventory Review: I recommend setting up a policy to review inventory stock levels periodically. This helps determine current worth, idle stock alternative strategies to be offloaded can be discussed, and it provides management with a holistic view of the level of risk they are currently exposed to. For a service based business, this can identify customers not paying on time, and adjust their credit lines accordingly.

3. Collections: This is an area where entrepreneurs face a lot of challenges. If you have outstanding payments for products sold through retailers or for services rendered, it is essential that a mechanism is in place to receive this payments as soon as possible. I would recommend setting up periodic reminders through, email, phone calls and personal visits to speed up this process. Depending on your business model, having a collection policy which is adhered to closely, can increase short term liquidity substantially.

Inventory management is definitely not the most exciting aspects of business. It is however, a critical function which needs to be given a lot more focus. Through appropriate policies and control measures, we can achieve optimal inventory velocity and increase the likelihood of turning in even greater profit.

Strategy

Inventory Management Technologies

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“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” Bill Gates

Technology has played a massive role in optimizing inventory management. Examples of companies which stand out are, Walmart and Dell, they have used technology to make the most of their inventories and maximize velocity. Both these companies have used technologies such as RFID (Radio Frequency Identification), web based systems and software automation. Take Walmart for example, they track inventory levels throughout their stores continuously, and are able to transfer inventory from one geographical location to another, based on demand changes or how they use RFID to streamline pick-ups and deliveries from their warehouses. These represent massive infrastructure costs, which eventually lead to cost savings and efficiency. Most start-up companies will not be able to afford such systems. However, they do need to think of creative ways to use available technologies to optimize their own inventories.

Some ways to incorporate simple technologies into your business are:

1. Bar Coding: With specialty printers and software available quite reasonably, I recommend tagging your stock to keep track of movements. We implemented this in one of the companies I was consulting at, and it gave management a holistic view about stock levels and usage patterns. Using this information, they were able to make better inventory based decisions.

2. Inventory Software: These programs help keep track of key metrics regarding the usage of your inventory. They have the capability to provide future trends based on past usage, and can identify areas where the business is taking unnecessary exposure by ordering too much or too little. The fact that your stock inventory can be viewed holistically is a great benefit in itself.

3. Billing Management: For service based businesses, I strongly recommend using an invoicing and billing management software. These are critical to ensure that invoices are issued in time, and payments made accordingly. One can easily find metrics such as, how long your billing cycles are, and which customers need to be given stricter terms. Some tools have inbuilt email reminders, a very handy feature, to remind customers on a periodic basis. I find a lot of younger business owners take this function too lightly which can severely damage cash flows.

A constant aim should remain to increase inventory velocity. Technology provides us with a multitude of tools to help reach this goal. Some technology tools available, can unnecessarily complicate processes which can backfire. It is important to always keep simplicity and some specific goals in mind when integrating technology tools.