How to Create Added Value
Many people perceive the room for negotiation as the difference between the highest price that a buyer is willing to pay and the lowest price a seller can come down to. It will only be possible to strike a deal if the buyer can pay a price above the seller's threshold of pain. The real room for negotiation becomes much larger if you learn how to create added value. Our studies indicate that 40% of the actual room for negotiation is never exploited because negotiators have not learned to identify and utilize the potential added value. You will be able to locate the added value by finding the answers to the following questions:
What can I do to assist the other party in reducing his costs and risks, or to increase his profits?
What can the other party do to assist me in reducing my costs and risks, or to increase my profits?
What can we do together to reduce costs and risks, or to increase profits?
Here You Can Locate Added Value
In a negotiation, there will be many areas in which you can look for added value:
Follow the entire process from the engendering of the idea to the time when the end user can no longer benefit from the product. Who can do what in the course of this long chain?
Financial variables and conditions
Quality and performance, technical specification of requirements
Economies of scale
Follow the Entire Process
Get an overview of how things look today. That is the point of departure for all changes:
Why do they do things this way? Never accept these answers: "That's how we've always done it"; "That's normal practice in the industry"; "We just follow our routines"; "It works."
What will happen when the need no longer exists and the production or the service is to be abandoned? Will the machine be scrapped? Can its life be prolonged? Can it be sold off? Is the system flexible and can it be extended and modernized?
What are the individual elements? How do they affect costs, risks, and profits? How do they affect time, reliability, and useful life? Define the factors that have a negative impact on time, costs, reliability, and useful life.
What can we do instead? What would happen in that case? Positive or negative changes? Where are the opportunities and risks and problems? Compare these to the point of departure.
Who will do the work that has to be done? The most cost-effective party, the one who will benefit most from the experience gleaned, or the most risk-oriented party who can sustain adversity. How do we solve the problem if it becomes necessary to transfer the responsibility? Do we need to redesign the product, or will anyone have to get extra training?
What advantages can new technology give us? The emergence of the Internet as a channel of information and distribution is an example of new technology that opens up new opportunities and that constitutes a threat to much traditional commerce.
Case Study: How IKEA was born
In the late 1950s, many furniture stores were located in town and city centers. It was easy for customers to go there, and it was convenient that the stores were concentrated in one place. The stores, of course, had to pay a high rent for the premises. To make economic sense of this, furniture prices were high, and carrying the furniture on stock was not feasible. This led to long delivery times.
When customers made their choices, the order was passed on to the factory. Delivery took time. Often, the promised delivery times were not kept, and this, in turn, led to annoyance on the part of customers.
Factories tended to be small, which made it difficult for them to use advanced machinery, there was a great deal of manual work, and series tended to be short. Manufacture was costly. Development of new materials was prevented.
What was in the cardboard boxes that traveled all the way from furniture factory to the customer's house? Most people's answer: a table. Certainly, there was a table in the box, but 90% of its content was air. It is a costly affair to package, transport, and stock air. The creative individual who originally realized this approached the party at the other end of this chainthe designer. He was given the assignment of designing a table that was capable of being packaged in a box in which no air was included.
The solution was several hundred years old, but had been forgotten. British officers had a thing constructed that they referred to as a campaign table. A brilliant construction of a table that they could take with them into the field. The table was collapsible, and the legs were detachablethey could be screwed into the table. This was the solution. The table legs should not be affixed at the factory. This work should instead be left to the end user. The legs should not be glued on; they should be screwed on. This insight formed the basis of the multi-billion company: IKEA.
This change in construction that was developed and made commercially viable by IKEA changed life for an entire industry. It entailed a great deal of added value.
The factory can get around an entire manufacturing element, thus reducing manufacturing costs. Today, the work and responsibility involved in fitting the table legs rest with the customer. The customer does not perceive this as a cost.
The tables can be packaged in flat boxes, and 90% of the air can be dispensed with. Costs involved in packaging, storing, and transporting the table are considerably reduced.
Because IKEA builds its outlets on the periphery of towns and cities, it can reduce rents to a level that makes it financially feasible to carry large stocks of the finished table.
Customers can take their newly purchased table with them on the same day, and will not have to wait for it for several months. Availability increases notably which, in turn, leads to more decisions to buy and to larger volumes.
The table is packaged to allow customers to transport it themselves. The costs for the store's furniture van have disappeared.
IKEA places orders for 10,000 tables at a time. This allows the rationalization of production, the deployment of modern machines, and a more efficient purchasing of raw materials.
IKEA begins to collaborate with the suppliers to develop better machines and materials. IKEA transfers know-how between factories.
IKEA develops its activities in Sweden, and initiates exportation that was soon to conquer the whole world.
People can furnish their homes with good-quality furniture at reasonable prices.
What Can We Learn from Developments In the Furniture Industry?
As long as we stay in a rut, business will be conducted as a zero-sum game. If we wish to make more money through a deal, we have to squeeze some of the other parties in the chain to take upon themselves higher costs, risks, or liabilities.
Would the key to increased efficiency be shifting liability onto customers? Would it be flat boxes, low prices, long series, low quality, and production in developing countries? Or were design modifications what were required? The answer will be found somewhere in your own organization. You are in possession of the requisite specialist insight.