CIPS L4M5 Commercial Negotiation Exam Practice Test

The assumption is false, because when a procurement professional negotiates on behalf of his employer, he brings the power of his organisation (its brand, reputation and purchasing spend) as well his own personal power (that which is embedded within him) to the negotiation.

From a negotiation perspective, both organisational and personal power have the ability to influence the behaviours of other or the cause of event. This power is clearly core to negotiation, and of enormous important in seeking to achieve the objectives.

Becoming a preferred customer to supplier's perspective can increase the purchaser's leverage in negotiation. Beside the size of buying organisation or its spend, the following may be sufficient to differentiate the buyer from other buying organisations:

- Simple procurement processes

- Simple contracting processes

- Clear and concise documentation

- Absence of onerous supplier terms and conditions (onerous supplier terms and conditions mean that obligations imposed on suppliers are greater than their gains)

- On-time payment: The reduction in hassle for both supplier and the buyer, if bills are paid on time, is significant. From the customer’s perspective it could also be the opener to agreeing preferential payment terms. A supplier may weigh up that payment on time at 60 days is worth taking, over the current 30-day terms that slip to 90 days and beyond.

- Transparent processes

- Ethical behavior

LO 1, AC 1.3

Emotional Quotient is the set of skills that enables us to make our way in a complex world - the personal, social and survival aspects of overall intelligence, the elusive common sense and sensitivity that are essential to effective daily functioning. It has to do with the ability to read the political and social environment, and landscape them; to intuitively grasp what others want and need; what strengths and weaknesses are; to remain unruffled by stress; and to be engaging. The kind of person others want to be around and follow.

EQ seeks to measure emotional intelligence and is centred on abilities such as the following:

- Identifying emotions

- Evaluating how others feel

- Controlling one's own emotions

- Perceiving how others feel

- Using emotions to facilitate social communication

- Relating to others

On the other hand, cognitive ability is defined as a general mental capability involving reasoning, problem solving, planning, abstract thinking, complex idea comprehension, and learning from experience (Gottfredson, 1997).

LO 3, AC 3.3

Direct costs are those costs of a product/service directly attributable/traceable to its production, for example, the costs of labour and materials directly used to produce the goods/services which the organisation sells.

Having a BATNA:

Increases assertiveness (A): Knowing the fallback position empowers the buyer to negotiate more confidently.

Reduces the chance of a poor agreement (B): A BATNA ensures the buyer does not feel pressured to accept suboptimal terms.

Identifies walk-away points (F): It sets a clear boundary, allowing the buyer to exit negotiations if terms don’t meet minimum requirements.

These align with CIPS’s guidance on using BATNA to strengthen negotiation strategies.

In most commercial negotiations with monopolistic organisations, one can expect that in general they will have far greater bargaining power - you will need them more than they need you. There BATNA is stronger in the short run, but over time their power can be challenged effectively.

Ways of dealing with monopoly suppliers include the following:

Making yourself an attractive buyer

Seeking out alternatives / substitutes in a private or public manner

Designing out the requirement that forces you to go to the monopoly suppliers, or seek to make the product, or threaten to make it yourself if feasible

Lobbying government or campaigning, as part of an industry or trade body, for a reduction in barriers to entry that support the monopoly

Becoming a preferred customer to supplier's perspective can increase the purchaser's leverage in negotiation. Beside the size of buying organisation or its spend, the following may be sufficient to differentiate the buyer from other buying organisations:

Simple procurement processes: Using SRM technology may help to simplify the process

Simple contracting processes

Clear and concise documentation: Reduced paperwork helps both supplier and buyer save their time and resources.

Absence of onerous supplier terms and conditions

On-time payment

Transparent processes: Unclear tender award criteria can be seen as opaque. Suppliers who attended the tendering processes cannot know the reasons why their bids are rejected and hesitate to attend other tendering.

Ethical behaviour: Suppliers may prefer a buyer who adopts CSR policy because they can predict potential customer's behaviour. Demands for kickback are unethical behaviours.

Hypothetical questions are used to explore options or scenarios without making commitments. This technique allows negotiators to understand the other party’s preferences and limitations by presenting hypothetical situations, as recommended in CIPS guidelines for negotiation questioning techniques.

There are many factors that can influence the balance of power in a negotiation. These factors are classified into 3 levels:

- Macro level: STEEPLE framework: social, technological, economic, environment, political, legal and ethical

- Micro level: Porter's five forces:

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- One-to-one buyer-supplier dynamics.

The question asks about the micro factors that increases buyer's bargaining power. Among 5 answers, only 2 are likely to increase buyer's power:

- JCB's switching costs are low: Buyer may easily switch its suppliers anytime

- These components are highly standardised: The products are not different any more, buyer may choose to buy from any supplier available.

Other answers cannot be correct because:

- Suppliers are more concentrated than buyer: Suppliers are forming oligopoly market, their bargaining power tend to be greater.

- Eruption of epidemic in supply market: this is a macro factor. Eruption of epidemic may cause factories closed and disruptions on supply chain.

- Buyers purchase in small volumes: Buyer will be seen as less potential to suppliers. Buying organisation may have difficulties to deal better price with suppliers.

LO 1, AC 1.3

Absorption costing is an approach to allocating overheads in which indirect costs are loaded or absorbed into direct costs related to specific jobs, processes or outputs, using an estimated basis of allocation.

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The mark-up percentage is calculated as the profit divided by the cost of production, then multiplied by 100 to convert it into a percentage.

Calculation:

(

80

/

160

)

×

100

=

50

%

(80/160)×100=50%

Thus, the supplier’s mark-up percentage is 50%, as per standard pricing calculations used in procurement.

The coercive power comes from the belief that a person can punish others for non-compliance. It can be considered as opposite to reward power, which results from one person's ability to compensate or reward another for compliance.

LO 1, AC 1.3

There are two major persuasion methods: 'push' and 'pull'.

Persuasion can be defined as encouraging someone to do something that you want them to do for you. Persuasion is reasoning with someone so that they will believe or do something they might not otherwise do. Persuasion can be considered as 'pushing' on TOP so that they can accept the change in attitude or behaviour as a result of your actions.

Influence is the ability to affect the manner of thinking of another. Influence can be considered as pulling on TOP so that you achieve the same result, but TOP feels they have changed their attitude or behaviour as a result of their reflection and thinking, and not your direct actions.

There are 5 options in this question:

'Threat of punishment, costs and damage': The influencer tries to 'push' the other party to act as he/she wants by using force. This method is effective but short-lived. The influencer also risks to developing reputation for being heavy handed and dictatorial.

'Argument based on information, logic and reason': The influencer uses logic and reasons to persuade the other party. This is also known as 'Persuasive Reasoning' (Push)

'Using language and imagery to ‘paint a picture others can see’': The influencer seeks to influence another by understanding the other's emotions, and stimulating that party's imagination to visualise the desired future goal of the influencer. This is also known as 'visionary (pull)'

'Working together to define the problem, the goals and the best solution': In this technique, the person seeking to influence another involves the other party in the decision making process. This is known as 'collaborative (pull)'

'Listening to, involving and supporting others': In this technique, the person seeking to influence another tries to discover the other party's emotion and aims at mutual understanding. This is also a collaborative approach.

Closed questions are useful for verifying facts, as they prompt specific, concise responses. These questions allow the negotiator to confirm details without ambiguity, which is crucial for clarity in negotiation settings, as highlighted in CIPS’s guidelines on questioning techniques.

According to the book 'Influencing: Skills and techniques for business success' by Fiona Dent and Mike Brent, there are two major influencing styles. Push tends to be directive. It tells, and is clear and resolute, but needs to be employed in situations where firmness is required because of difficulties that exist or weakness is evident. Pull is more participatory and collaborative. It seeks to incorporate everyone’s perspective. It can appear wishy-washy if not skilfully employed. That approach should be followed which is most likely to secure commitment and not mere compliance.

The two divisions can be further divided into four style categories: directive; persuasive reasoning; collaborative – team oriented, people oriented to inspire them with a vision. The directive style relies on your expertise and reputation being respected by others, and where there really does seem to be one answer. It is "I" driven whereas persuasive reasoning is more "we" and issue driven. Directive styles can make the user appear as "a bull in a china shop"; persuasive reasoning can be portrayed as tough guy.

Collaborative influencing takes the "we" element further and seeks to mobilise everyone’s ideas in a journey of discovery. It may have the flavour of "I’m your best friend", which may not go down too well. Visioning style is concerned to stir people’s emotions in support of achieving an objective. This last one has been used by demagogues to stir people’s hearts and minds for evil purposes as well as good.

A useful table offers the benefits, problems, words and body language associated with each style along with advice on when to use and when to avoid each. Cases and exercises illustrate these styles.

Empathy comes in for extended treatment with the definition of "standing in the other's shoes". This does not necessarily happen just intuitively, and therefore before a specific influencing effort there should be an intense effort to think about the other person or persons and to sense what it might feel like to be them – their hopes, fears, concerns, what turns them on, what turns them off, where are they coming from.

In some markets, suppliers experience peaks and troughs in demand and so buyers can increase their leverage through developing an understanding of how busy their vendor are at particular time during the year or business cycle and targetting at quieter period. Similarly, if a buyer can develop an understanding of supplier capacity and to what extent have they covered their fixed cost, they may be able to target suppliers when their average costs are likely to be lowest. Vendor's average costs will be higher at low and high capacity utilisation.

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Elasticity refers to the responsiveness of quantity demanded or quantity supplied to a change in price or another factor.

In microeconomic graphs, elasticity and inelasticity can be shown by the slope of the demand curve. If a demand curve is almost horizontal, then the product pricing can be described as very elastic. If a demand curve is almost vertical, then the product pricing can be described as very inelastic.

The formulae of elasticity:

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LO 2, AC 2.2

In contracts which have major commodity input, the price is determined by market forces with no individual supplier or buyer able to influence it significantly. Prices are much more variable even within long term contracts and seeking a fixed price would create financial risks for both the buyers and the suppliers. It is often intelligent to agree a contract price adjustment mechanism to allow for market price changes so both sides share risk.

The relationship spectrum categorizes supplier relationships based on factors like strategic importance, allowing organizations to tailor their approach to each supplier relationship. CIPS emphasizes the relationship spectrum as a valuable tool for assessing and managing supplier interactions based on strategic relevance.

Variable pricing can lead to budgeting challenges and financial uncertainty over a 12-month period. While variable pricing may allow flexibility, it complicates financial planning and forecasting. For predictable budgeting and reduced financial risk, fixed pricing is typically preferred in such contract durations, aligning with CIPS recommendations on pricing models in contract management.

Fixed price contract is the contract in which the price is static throughout the contract period. A fixed-price contract may give certainty to budget and simplify contract management. However, it may lead to other problems since it requires bidders to estimate and bear the financial risks associated with price escalations. If the estimates are too high or events do not materialize, the buyer will pay a steep price that may affect the economy and efficiency of the contract. In the worst case, it may mean that the bid price is then above budget and may lead to a reduction in the requirements or rebidding. If the estimates are too low, it may appear as an abnormally low bid and disrupt contract execution.

On the other hand, price adjustment provisions include formulas designed to address problems, and can protect both the borrower and contractors from price fluctuations. Price adjustment formulas allow contractors to offer more realistic prices at the time of bidding. Despite concerns that they may lead to budget uncertainties, price adjustment formulas will estimate the actual cost implications that will be encountered. They use indexes that can be used for cost projection.

According to Asia Development Bank (ADB), any contract with a delivery or completion period beyond 18 months should contain an appropriate price adjustment clause.

In the scenario, the crude oil contract is planned to last 36 months. This period is pretty long with a fluctuating commodity. Therefore, the company should use price adjustment agreement.

Developing specific negotiation strategies in areas where risk or spend is high involves analysing a wide range of objectives and variables within the context of the organisation's business requirements. The first stage in any negotiation preparation is to define your overall objectives which may be related to a single variable such as price in the case of a standardised requirement, or many variables in the case of capital equipment. Your negotiating strategies and tactics will all be focused on achieving overall objectives.

In the scenario, to exchange cost cutting, the purchasing manager promises to 'reward' supplier shorter payment period. This is an example of reward power, which results from one person's ability to

compensate or reward another for compliance.

The reward does not need to be money, but could be introduction to other buyers in the group, positive references, agreement to trial new product, quicker payment or indeed any other variable that the buyer

knows is attractive and valued by the supplier.

In the study guide, CIPS lists 5 stages of an negotiation:

The opening phase: confirm understanding and get the issues on the table. At this stage, both parties should check agenda, authority and create atmosphere conducive to agreement

The testing phase is an information gathering stage where the hypothesis and assumptions you have made in the planning stage can be tested and confirmed or disconfirmed

The proposing phase: Both sides may start making tentative proposals regarding their offering.

The bargaining phase: Both parties trade concessions; the preliminary stages are over and proposals move from being tentative and general to being more definite and specific.

The agreement and closing phase: both parties should seek agreement or if TOP does not have the final authority, some sort of acknowledgement of what key terms are should be sought.

Internal stakeholder support will be important not just at the initial negotiation of the contract, but potentially throughout the life of the contract right through to exit.

As a general rule, connected stakeholders (with the exception of suppliers) have a low level of influence on procurement negotiations.

Suppliers are connected stakeholders who have contractual relationships with the organisation.

Commercial negotiation objective should be driven by the business needs of the organisation, and not just the instinct of procurement.

External factors in pricing decisions include Competition in the market (A) and Customer perception of value (D). These factors are outside the supplier's direct control but influence pricing strategies to remain competitive and meet customer expectations:

Competition in the market (A): Market competition dictates how much a supplier can charge without losing business to competitors.

Customer perception of value (D): How customers perceive the product’s worth affects its acceptable price range.

These factors are considered external as they relate to market dynamics rather than internal cost structures, according to CIPS's guidance on pricing influences.

Mark-up is the amount added to the cost of an item to get to its selling price and is expressed as a percentage.

Mark-up (%) = (Price - Cost) / Cost x 100

= (100 - 9 - 51 - 24) / (9 +51 +24) x 100 = 16 / 84 x 100 = 19.04%

LO 2, AC 2.1

According to Paul Steele's 'The Seller's Perspective', customer can be classified into 4 categories as below:

To increase the leverage in negotiation, buyer may increase its attractiveness and/or increase spend value. In this scenario, the buyer is already attractive to supplier as it always pays on-time, but the spend is still low. So to have greater leverage, the buyer has to increase its spend volume by spend concentration. Spend concentration may take many forms as following:

- Vendor base reduction

- Volume pooling

- Volume redistribution

- Volume consolidation across categories

- Standardisation and harmonisation of specifications

- Forming purchasing consortia

LO 1, AC 1.3

A shift in demand occurs when an influencing factor other than price changes. Those factors are:

- The income of buyers

- The tastes and preferences of buyers

- The prices of other goods and services, especially substitutes and complements

- Expectations of buyer about the future

In this question:

- 'Prices of complementary goods decrease' will lead to quantity demanded for that complements rising, then demand for consumer good will increase accordingly.

- 'Price of the consumer good decreases' will increase the quantity demanded for that good, but it will not shift the demand curve

- 'Customers' expectation of higher prices in the future': in this scenario, customers tend to buy more to store in present, which leads to demand curve shifting to the right

- 'Consumer tastes shift toward substitute products': Demand for substitutes will rise, so demand for that consumer good will decrease and the demand curve shifts to the left.

LO 2, AC 2.2

There are multiple sources of divergent positions that can arise in situations where money is exchange for goods and services. There are 2 different types of sources. Those that arise from the content or subject matter of the negotiation (what is being negotiated) and those that arise from the process of negotiation (how it is being negotiated).

Sources of divergent positions - the process of negotiation:

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Line of best fits is the line that goes approximately through the middle of the data points with an equal number of data points above and below it. Line of best fits is a method of calculating medium value in statistics.

Standard terms and conditions are basic terms and conditions of business governing transactions that do not have a definitive contract, usually designed to be included in form documents such as orders. While there may be conflicts regarding standard terms and conditions, they are about the content of negotiation, not the process.

Type of purchase: when buying organisation makes an decision to purchase an item, a buyer is faced with three possible scenarios. The item to be bought could be a straight re-buy, a modified re-buy or a new purchase. Decision on type of purchase is purely an internal decision.

According to Thomas-Kilmann conflict model instrument, there are 5 conflict management styles:

In this scenario, the buyer's bargaining power is stronger than suppliers', and the relationship is transactional. Therefore, to get the most preferable outcome, the procurement professional can take an assertive approach, while he doesn't need to co-operate closely with these suppliers. Competing will be the most appropriate approach to negotiation in this scenario so that the buying organisation can get a better deal.

There are many factors that can influence the balance of power in a negotiation. These factors are classified into 3 levels:

Macro level: STEEPLE framework: social, technological, economic, environment, political, legal and ethical

Micro level: Porter's five forces:

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One-to-one buyer-supplier dynamics.

The question asks about the micro factors that increases supplier's bargaining power. Among 5 answers, only 2 are likely to increase buyer's power:

There are no close substitutes for rubber: the buyer has to buy rubber, not any other material.

Costs of changing suppliers are high: buyer entails a large barrier if they want to switch supplier.

Other answers cannot be correct because:

SRI sets up its own rubber plantation: Buyer secures its own supply

SRI's purchase amount makes significant proportion of supplier revenue: Suppliers are reliant on buyer. If the buyer stops buying from them, they can face serious cash flow problems

Rubber from different suppliers is virtually similar: undifferentiated product would shift the power balance towards buyer.

Macroeconomic indicators are statistics or data readings that reflect the economic circumstances of a particular country, region or sector. They are used by analysts and governments to assess the current and future health of the economy and financial markets.

Macroeconomic indicators will vary in their meaning and the impact that they have on the economy, but broadly speaking there are two main types of indicator.

- Leading indicators, which forecast where an economy might be heading. They are often used by governments to implement policies because they represent the first phase of a new economic cycle. These include the yield curve, interest rates and share prices.

- Lagging indicators, which reflect an economy’s historical performance and only change after a trend has been established. They are used to confirm a trend is underway. These include gross domestic product (GDP), inflation and employment figures.

There is also the category of coincident indicators, but these are generally grouped in with lagging indicators as they either happen at the same time or after an economic shift.

The best macroeconomic indicator to watch will heavily depend on your personal preferences, what positions you are taking and which country your portfolio is focused on. However, there are some very common indicators that most traders and investors will keep an eye on.

For simplicity’s sake, we have split these out into leading and lagging indicators.

Top leading indicators:

1. The stock market

2. House prices

3. Bond yields

4. Production and manufacturing statistics

5. Retail sales

6. Interest rates

Top lagging indicators:

1. GDP growth rates

2. The Consumer Price Index (CPI) and inflation

3. Currency strength and stability

4. Labour market statistics

5. Commodity prices

A procurement professional may find stock market data from the security exchange, while most lagging indicators (such as GDP, CPI, unemployment rate, currency and inflation rate, etc) can be found from government statistics data.

Mark-up and margin allow supplier to make gross profit. Remember that every supplier operates under different cost structures and some are set up to be most profitable at a particular level of volume, so it is dangerous to assume all suppliers can survive on a lower margin if their volume increases. Intelligent buyers understand that mark-up and margin may define gross profits, but they tell you very little about a supplier's net profits.

LO 2, AC 2.1

When preparing for a negotiation, negotiator should establish a list of tradeables and a concession plan. Good negotiators never give anything away that has not already been planned as part of the bargaining mix in the concession planning stage.

In the above scenario, the procurement manager has planned his own concession, so he can trade with supplier. The answer should be "Yes, since procurement manager has his own cost savings target to achieve and he should make use of supplier's financial status"

LO 2, AC 2.3

Persistent late payment of the supplier’s invoices (A) and Unequal sharing of gains, risks, and costs with the supplier (B) are potential sources of conflict as they create dissatisfaction and imbalance in the relationship. According to CIPS materials:

Late payments (A) can strain the supplier’s cash flow, affecting their operational stability and leading to mistrust in the buyer.

Unequal sharing of gains, risks, and costs (B) can result in one party feeling exploited or unfairly treated, which undermines the collaborative spirit essential for long-term partnerships.

In contrast, requesting early supplier involvement, planning visits, or setting delivery dates are typically part of constructive relationship management practices and do not inherently lead to conflict.

Fixed costs (FC) are costs that do not vary with volume. To an airline once aircraft are purchased, flight crews trained and departures scheduled, costs are disproportionately fixed.

Variable costs (VC) are those which vary with the amount produced. Fuel, catering services and marketing are examples of variable.

LO 2, AC 2.1

The zone of possible agreement (ZOPA) or bargaining range is considered an area where two or more negotiating parties may find common ground. It is this area where parties will often compromise and strike a deal. In order for negotiating parties to find a settlement or reach an agreement, they must work towards a common goal and seek an area that incorporates at least some of each party's ideas.

The zone of proximal development refers to the difference between what a learner can do without help and what he or she can achieve with guidance and encouragement from a skilled partner.

There is no Walk away area. Walk away point is a position from which you cannot concede any more ground and must walk away/decline a deal.

Best alternative to a negotiated agreement is a fallback or backstop position if the negotiation fails to result in an agreement/no deal is agreed.

LO 1, AC 1.2

An adversarial relationship in purchasing and supply arises when identical or equivalent good or services are available from competing suppliers and buyers/sellers are trying to gain an advantage over each other. Low levels of trust are characteristic of adversarial relationships. The outcome when two organisations with adversarial negotiate is most likely to be win-lose.

Referent power is based on personal relationships and the respect or admiration one earns within an organization. Given Mike’s positive relationships and his rapport with team members and other departments, he is most likely to have referent power. This power type is influential in negotiation as people are more willing to work with someone they respect, as outlined in CIPS power dynamics in negotiation.

At the first stage of CIPS Procurement and Supply Cycle (Understand need and develop a high-level specification), procurement professional mainly negotiate with internal stakeholders. They have a duty to proportionately and constructively challenge specification if there's genuine doubt over the need or how the need is expressed. This is called demand management. Their first duty is to the organisation's treasury, not to functional managers.

Demand management including: negotiation/challenge between procurement and internal stakeholders over the need/requirement/specification. Remember that in any process or product, the greatest opportunity for cost reduction is at the design stage.

All one-to-one commercial negotiations between a specific purchaser and a specific supplier take place within an industrial market and a larger business environment characterised by multiple forces which both parties typically have little control over. STEEPLE framework highlights the 6 main external influences on a business:

Particularly, pharmaceutical industry is a heavily regulated sector, therefore, legal and regulatory matters in the industry is highly important. Otherwise, technological trends also permeate into pharmaceutical companies, technologies like digitalisation may transform the balance of power in such negotiation.

LO 1, AC 1.3

Ray Carter coined the mnemonic STOPS WASTE to remind buyers of 10 cost-reduction ideas they can ask for themselves and their suppliers in any situation when considering a key purchase input. Stop Waste by:

Standardisation - is there a standard specification?

Transportation - is the inbound transport classification appropriate

Over-engineered - is the specification too tight?

Packaging - can packaging be reduced or eliminated?

Substitutes - is there a cheaper substitute material

Weight - is there opportunity to reduce weight of the product?

Any unnecessary processing - is there any unnecessary design or feature?

Supplier’s input - are suppliers able to assist with the cost reduction

To make - is it more economical to make or buy?

Eliminate - if no one uses the feature, can it be eliminated?

SAMOA is a useful acronym for checking and testing the information gathered from the Internet:

Source

Audience

Methodology

Objectivity

Accuracy

OWN-IT is acronym for 5 steps in the process of collecting and analysing the data and information needed in any field:

Outline

Wide search

Narrow search

Increase your stockpile of information

Transform your stockpile into new knowledge

A SMART goal is used to help guide goal setting. SMART is an acronym that stands for Specific, Measurable, Achievable, Realistic, and Time-bound.

Mark-up is defined as profit expressed as a percentage of the cost. It calculates the profit margin based on the cost price rather than the selling price, which allows companies to determine how much they are earning over their production or purchase costs. This aligns with standard accounting and CIPS definitions of mark-up in procurement contexts.

In difficult negotiations and disputes, hardball tactics like punishment and threats often seem like the only way to win concessions. Some negotiators seem to believe that hardball tactics are the key to success in any negotiation. They resort to extreme demands and even unethical behaviour to try to get the upper hand in a negotiation.

The following are 8 typical hardball tactics:

1. Good cop / Bad cop

2. Low ball / High ball

3. Bogey

4. The Nibble

5. Chicken

6. Intimidation

7. Aggressive Behaviour

8. Snow Job

You can read the details of each tactic here.

In the contrary to hardball tactics, negotiators can adopt integrative approach to the negotiation. Some of integrative tactics are:

1. Expand the Pie

2. Bridging

3. Post Settlement –Settlement

Et cetera

A BATNA provides the buyer with the confidence to walk away if terms are not favorable, ensuring they don’t settle for a suboptimal agreement. Knowing the best alternative enables buyers to negotiate from a position of strength, as per CIPS’s guidance on negotiation strategies.

Effective listening is crucial in integrative negotiations because it promotes understanding and collaboration. By actively listening, parties can identify shared interests and address concerns, which supports the goal of reaching mutually beneficial solutions. This is a key component in CIPS guidelines on successful integrative negotiation practices.

The marketing and corporate communications of suppliers are direct sources of microeconomic information, particularly about individual companies and industry conditions. Other options (RPI, financial market data, etc.) are more aligned with macroeconomic data, focusing on broader economic trends, as outlined in CIPS definitions of micro vs. macroeconomic data sources.

The bargaining power of buyers increases when the buyer is large relative to the supplier. A large buyer can leverage its size to negotiate more favorable terms due to its significant impact on the supplier's business. CIPS notes that a buyer’s size and purchasing volume are key factors that enhance its negotiating power in buyer-supplier relationships.

Skilled negotiators seek to understand the needs of the other parties, as well as their own. In doing so, it allows them to determine a strategy that their own needs are met. Failing to understand the other party's needs is one of the most common reason for an unsuccessful negotiation. In the commercial negotiation, procurement team does not negotiate with organisation, they negotiate with individuals. It is therefore important to recognise that there are two levels of needs:

The organisation - What the organisation wants to achieve. This is generally well stated and understood

The individual - what is in it for the individual? This is generally not stated, rarely discussed, but very motivational. It is vitally important therefore that time is invested in understanding the needs of the individual

Skilled negotiators are aware of the needs that occur at both levels, and develop creative options and strategies that attempt to satisfy these needs.

For low-value, routine purchases, the involvement of The procurement manager (C) and An internal business user (E) is appropriate. The procurement manager brings expertise in supplier engagement, while the internal business user provides insights on specific needs for the product or service. Involving high-level roles, like the CEO or a legal advisor, is unnecessary for routine purchases, as per CIPS guidance on resource alignment in procurement.

Delivering on commitments is fundamental to building high-trust relationships. When an organization reliably fulfills its promises, it reinforces the supplier’s confidence in the partnership, fostering long-term collaboration. While contract management and audits are supportive processes, delivering on commitments directly strengthens trust, as emphasized in CIPS best practices for relationship management.

Other stakeholders, including directors, IT, and finance departments, often have an interest in procurement negotiations, particularly when the contract impacts strategic objectives, IT infrastructure, or organizational operations. This broader stakeholder involvement aligns with CIPS’s emphasis on inclusive stakeholder management in procurement to ensure well-rounded decision-making.

Currency exchange rates are determined by macroeconomic factors and demand and supply. In general, countries with stable political and economic systems, a growing economy and a strong rule of law will have stronger and more stable currency than those without these characteristics. In this question, the British Pound is stronger than other currency, which means that buyers who import goods from the UK have to pay higher in their own currencies.

LO 2, AC 2.2

In 1983, Peter Kraljic devised a means to segment the supplier base in the article in HBR. In this, he argued that supply items should be mapped against two key dimensions: risk and profitability.

Risk relates to the likelihood for an unexpected event in the supply chains to disrupt operations. For instance, in important areas of spend, such as tire suppliers for an automotive are business critical, and should a disruption occur, the auto company is likely itself to face substantial problems.

Profitability describes the impact of a supply item upon the bottom line. For certain areas of spend, such as stationery, supplies have only a negligible effect on profits. In other categories, a single source of supply can make or break a business.

Putting these two dimensions together yields a classic two-by-two matrix.

Source: Peter Kraljic, HBR

Trust-destroying behaviours:

- Rumours of partnership or relationship breaking down

- Emotion-based assessment of performance

- Avoiding accountability, passing the blame to others

- General mood – resentment, distrust, frustration, etc

LO 1, AC 1.4

According to Thomas-Kilmann conflict model instrument, there are 5 conflict management styles:

Accommodating is an unassertive and cooperative approach to resolving the conflict. Accommodating means conceding to the other party with little debate or fight, not challenging or strongly putting forward your own point of view and generally giving and yielding to the other party's point of view. Accommodating is best used when:

1. When others can resolve the conflict more effectively

2. When the issue is much more important to the other person than to yourself - to satisfy the needs of others and to show you are reasonable

3. To build up social credit for later issues which are important to you

4. When continued competition would only damage your cause

5. When preserving harmony and avoiding disruption are especially important

6. To aid in the managerial development of subordinates by allowing them to experiment and learn from their own mistakes

LO 1, AC 1.1

MIL criteria indicate 3 limits that negotiator should establish:

M - Must achieve: minimum target/maximum you can concede on this point; the mandatory requirement or fall back position

I - Intend to achieve: realistic target you are aiming for on this point

L – Like to achieve: stretch target to achieve on this point.

PPCA is purchase cost analysis

TIMWOOD indicates 7 types of waste in Lean principles

The RAQSCI model is a mnemonic summary of a business model used to define and structure business requirements

Reflecting on performance should become a natural final step in the negotiation process.

'Celebrating publicly about the deal': Public gloating, even in success or failure, if it gets back to the supplier via the press or social media, will likely damage the relationship

'Tempting TOP to reopen the negotiation': whether TOP agrees to reopen the negotiation, procurement should reflect on their achievement and what can be improved.

'Asking TOP for another concession': TOP can agree or reject this concession. Eventually, reflecting should be the final step. Procurement can learn a lot from reflection on performance.

LO 3, AC 3.4

In order to answer this question, you should better consider each option:

'Exchange rate' is the value of one nation's currency versus the currency of another nation or economic zone. This is a macroeconomic factor.

'Elasticity' refers to the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes. This is a microeconomic factor

Consumer tastes refer to the products and services that consumers consciously choose over others. Consumer tastes are so powerful that they can change how businesses conduct their activity. Like elasticity, this is also a microeconomic factor.

Among 4 options, only risk management is the internal factor. Risk pricing is a strategy applied by many companies in the world. To learn how to price the risk, you can read an article from McKinsey: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/how-to-price-risk-to-win-and-profit

This is a question that a student met in her actual exam. The knowledge section is unknown.

LO: Unknown, AC: Unknown

Trust may create value as following:

LO 1, AC 1.4

There are two major persuasion methods: 'push' and 'pull'.

Persuasion can be defined as encouraging someone to do something that you want them to do for you. Persuasion is reasoning with someone so that they will believe or do something they might not otherwise do. Persuasion can be considered as 'pushing' on TOP so that they can accept the change in attitude or behaviour as a result of your actions.

Influence is the ability to affect the manner of thinking of another. Influence can be considered as pulling on TOP so that you achieve the same result, but TOP feels they have changed their attitude or behaviour as a result of their reflection and thinking, and not your direct actions.

There are multiple variables to consider when choosing between 'push' and 'pull'. Professor Fiona Dent of Ashridge Business School proposes situations when each style might be most appropriate, breaking down push into 'directive' and 'reasoning' and 'pull' into 'collaborative' and 'visionary':

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Using logical and objective reasons is one of the typical characteristics of persuasion reasoning method.

Distributive approach to negotiation used when the interested parties are attempting to divide something up or distribute something of value, also known as zero-sum approach or win-lose. Commercial situations often demand a distributive bargaining approach, if the 'pie' is inherently of a fixed size. In this case, any conflicts must be resolved by sharing it.

In win-lose approach, a negotiator wants to maximise the value obtained in a single deal, the relationship with the other party is not important. Therefore, a strong party may win more than 50% of the metaphorical 'pie'.

It should not be assumed that win-win can be applied to all commercial negotiations, or that win-lose approaches are inherently inferior.

A push approach typically involves exerting authority or power (1) with the party being influenced generally aware of the influence process (3). This method involves overtly directing or persuading the other party, often through explicit information or directives, as per CIPS’s understanding of push influence techniques.

There are many macro economic factors that could influence procurement in general and commercial negotiation in particular. Below are six factors that are agreed to be fairly significant:

• Economy growth rate

• Inflation rates

• Interest rates

• Currency exchange rate

• Unemployment rate

• Protectionism

LO 2, AC 2.2