Negotiating with Wal-Mart
What happens when you encounter a company with a great deal of power, like Wal-Mart, that is also the ultimate non-negotiable partner? A series of Harvard Business School cases by James Sebenius and Ellen Knebel explore successful deal-making strategies. From the HBS Alumni Bulletin.
Wal-Mart, the world's largest retailer, sold $315 billion worth of goods in 2006. With its single-minded focus on "EDLP" (everyday low prices) and the power to make or break suppliers, a partnership with Wal-Mart is either the Holy Grail or the kiss of death, depending on one's perspective.
There are numerous media accounts of the corporate monolith riding its suppliers into the ground. But what about those who manage to survive, and thrive, while dealing with the classic hardball negotiator?
In "Sarah Talley and Frey Farms Produce: Negotiating with Wal-Mart" and "Tom Muccio: Negotiating the P&G Relationship with Wal-Mart," HBS professor Jim Sebenius and Research Associate Ellen Knebel show two very different organizations doing just that. The cases are part of a series that involve hard bargaining situations.
"Wal-Mart could clearly live without Frey Farms, but it's pretty hard to live without Tide and Pampers."
"The concept of win-win bargaining is a good and powerful message," Sebenius says, "but a lot of our students and executives face counterparts who aren't interested in playing by those rules. So what happens when you encounter someone with a great deal of power, like Wal-Mart, who is also the ultimate non-negotiable partner?"
The case details how P&G executive Tom Muccio pioneers a new supplier-retailer partnership between P&G and Wal-Mart. Built on proximity (Muccio relocated to Wal-Mart's turf in Arkansas) and growing trust (both sides eventually eliminated elaborate legal contracts in favor of Letters of Intent), the new relationship focused on establishing a joint vision and problem-solving process, information sharing, and generally moving away from the "lowest common denominator" pricing issues that had defined their interactions previously. From 1987, when Muccio initiated the changes, to 2003, shortly before his retirement, P&G's sales to Wal-Mart grew from $350 million to $7.8 billion.
"There are obvious differences between P&G and a much smaller entity like Frey Farms," Sebenius notes. "Wal-Mart could clearly live without Frey Farms, but it's pretty hard to live without Tide and Pampers."
Sarah meets Goliath
Sarah Talley was 19 in 1997, when she first began negotiations to supply Wal-Mart with her family farm's pumpkins and watermelons. Like Muccio, Talley confronted some of the same hardball price challenges, and like Muccio, she acquired a deep understanding of the Wal-Mart culture while finding "new money" in the supply chain through innovative tactics.
For example, Frey Farms used school buses ($1,500 each) instead of tractors ($12,000 each) as a cheaper and faster way to transport melons to the warehouse.
Talley also negotiated a coveted co-management supplier agreement with Wal-Mart, showing how Frey Farms could share the responsibility of managing inventory levels and sales and ultimately save customers money while improving their own margins.
"Two sides in this sort of negotiation will always differ on price," Sebenius observes. "However, if that conflict is the centerpiece of their interaction, then it's a bad situation. If they're trying to develop the customer, the relationship, and sales, the price piece will be one of many points, most of which they're aligned on."
Research Associate Knebel points out that while Tom Muccio's approach to Wal-Mart was pioneering for its time, many other companies have since followed P&G's lead and enjoyed their own versions of success with the mega-retailer. Getting a ground-level view of how two companies achieved those positive outcomes illustrates the story-within-a-story of implementing corporate change.
"Achieving that is where macro concepts, micro imperatives, and managerial skill really come together," says Sebenius. And the payoffs—as Muccio and Talley discover—are well worth the effort.