I'd like to share with you a negotiation problem, that dates back to 1986. And it's taken from a case study about the aspartame market. At that time, there was one player who sold aspartame. He was Monsanto, and they had aspartame under the brand Neutrasweet. This was an incredibly profitable business. They had over 700 million in annual sales. It was growing. Their gross margins were 70%. That means they were making over 500 million a year. That's like Intel. Their operating margins were 20%, so they're making over 140 million in profits. The price was somewhere around $85 to $90 a pound. See, aspartame is 180 times sweeter than sugar, and so if you figure it out on the sugar equivalent basis, it's about $0.50 a pound. Now, the reason why this whole set up is interesting is that for the first time, the patent was about to expire in Europe. It was expired in 1987 in Europe and then not until 1992 in the US. And it was a European company called Holland Sweetener who was thinking about entering the market to make generic aspartame. What do you think? Would you enter the market? Well, from their perspective, Coke and Pepsi were saying, come on in, we want you! You're great guys. Please, enter. And, frankly, if you're thinking about a market, there aren't too many opportunities where you have 700 million and plus growing with gigantic margins. Sure, the price will come down a little bit when you enter, but, there's a lot of room for it to come down and still have this be a really profitable opportunity. All right, well, that's the sort of standard analysis. Let's see if using added value will give us more insight. So, what is the added value of Holland Sweetener? How big is the pie if they're in the game compared to them not being in the game? There's several ways they could create value. One is, they could expand the market. So, is it the case that there are people who haven't been using Aspartame or NutraSweet who now would, when Holland Sweetener comes into the market? One feature of the product is that it's not heat stable, so you can't use it in cakes and other recipes that require baking. The primary use for NutraSweet are things like soft drinks and chewing gums and lozenges. And given the high profits that Monsanto was earning, they really had a huge incentive to go and find every opportunity out there for somebody who was interested in using NutraSweet. So not clear that there's a big opportunity to go and find new applications. Another possibility is that perhaps they could come in with lower cost. Well, the proposed plant size was 500 tons. And that's not so big that you're gonna have better cost structure than Monsanto. Moreover, Monsanto had been doing this for many years, and they had really managed to bring their costs radically down over time. Okay, so you're not gonna have lower costs and you're not going to expand demand. Your product, is it going to be possibly any better? And here's another place where I think Holland Sweetener was at disadvantage. You see Monsanto's brand name was amazing, right. NutraSweet, nutritious, sweet. I mean that's a fantastic name. Whereas Holland Sweetener has to call itself aspartame, which sounds like this weird chemical. It's true that Holland Sweetener could go and try and create its own brand for aspartame, but that would be incredibly expensive. In fact, Monsanto is known for really being the first company to do the branded ingredient strategy, even before there was Intel Inside,, there was the Sirl Swirl on cans of diet Coke and diet Pepsi. And the Sirl was bought by Monsanto, and that's how we have the branded ingredient. That's how the NutraSweet really became a household name, all right. So we don't have a better brand. We don't have better costs. And we can't expand the market. It's not looking too good for Holland Sweetener having added value. And even if it's the case that you can't get more than your added value, then what do we predict Holland Sweetener is gonna get in this case? Yeah, zero. And in fact, they enter the market. They spend $40 million to build a plant, and they end up with diet Squirt. Which is a grapefruit flavored beverage in Spain, which is worth just about what it sounds, squirt. Now, I claim, this was entirely predictable. And while it's the case that Holland Sweetener didn't make any money, Coke and Pepsi made out like bandits. They were able to renegotiate their contracts with Monsanto and save over $200 million between them. The reason for that is when Holland Sweetener comes in, it may not have any added value, but it lowers the added value of Monsanto. Because, now if Monsanto goes away we still have Holland Sweetener. So, we've lost the brand, we've lost the slightly better cost structure, but we still have this sweetener which is delicious and safe, and has no calories. So, not surprising, what happens is, Holland Sweetener changes the added values of the different players. That rearranges how the pie gets distributed, but that doesn't help Holland Sweetener. Okay, so, what should Holland Sweetener have done now that we understand this, and in fact even if we had predicted this? Well one view is, they just shouldn't enter, they should stay home, and do nothing. And that's okay, that's certainly better than losing 40 million. But I think there's something they could have done that's even better. And that is, they should have done the negotiations with Coke and Pepsi, before they built the plant. Before they've entered the market, they should say to Coke and Pepsi, look we're thinking about entering and making generic aspartame. We realize that you're happy with Monsanto, you just don't like the price that you're paying. And we think what's going to happen when we come in, is we can help you get a much better price, which is good for you. But doesn't help us so much. So if you want us to enter, you have to do things to make it worth our while. And that could be, you could pay for the plant, so you could give us 40 million up front. That works. You could give us a guaranteed contract. You could say, look, we're paying $85 a pound today. We'll agree to buy from you at $70 a pound. Yup, that works. You could also say, you don't have to buy from us, but give Holland Sweetener, 10% of the cost savings that we make possible from your new contract with Monsanto. So if you're able to save 200 million to them, give us 20 million of that. Okay, you won't give us the cost share. You won't give us the contract ahead of time. You won't help pay for the plant. You know, I think you're kind of giving me the indication that I'm not gonna get very much when I come into this market. Because if you're not willing to do a deal with now, when you need me, I don't see why you're gonna do a deal with me once I build the plant. Again, my point here is there's two times you can do the negotiation. You can do the negotiation once you're in the market or you can do the negotiation before you've entered. Here, Holland Sweetener's real power is in the ability to change the game, and change Coke and Pepsi's ability to negotiate with Monsanto. And if your power is in changing somebody else's negotiation, you had better do your negotiation ahead of time, before you change the game. As to what actually happened, Holland Sweetener lost so much money that eventually, it was about to pack its bags and shutter the plant. And at that point, it said said to Coke and Pepsi, guys, we're about to leave unless you now give us a long term contract. So time for you to pay us to stay, and sure enough Coke and Pepsi didn't want to find themselves subject to just having Monsanto as the only supplier, and so they said okay. And as a result, Holland Sweetener got enough money to make it worthwhile to stay in the market. But that will never make this plant justified in terms of return on investment, so while it's better to get paid to stay than to just leave, they should've gotten paid to play right up front. I imagine a few of you are also thinking, why didn't Monsanto just go and give Holland Sweetener money not to play, just to stay home? Well, there's a couple reasons for that. One is, that if you pay people not to come into the market, there's a lot of people saying hey, pay me not to come in, okay? So it's a little bit, you're holding yourself up to be hostage, and the other reason is, it's illegal. If you have a monopoly, and there's a potential entrant, you can't go and pay that one entrant not to be in the market. So I'm not a fan of paying people not to come in, but there's nothing wrong with paying somebody to enter. It's not as if Holland Sweetener has any economic, moral or other obligation to come and enter a market and lose money. Holland Sweetener should understand that the real value it brings is its ability to change negotiation power, and there's nothing wrong with getting paid to do that. And this is true in lots of circumstances. There'll be many times when advertising agencies are asked to do a proposal. Or architects are asked to do a proposal. And you wonder, am I gonna be spinning my wheels, am I gonna get the ultimate clients or are they just gonna get my ideas? And if it's the case that the buyer really values your participation in this game then there's no problem with you getting paid upfront before you've done the work. So you could say to a potential buyer, thank you for the opportunity to bid, I really appreciate that, I think you're going to learn a lot from my bid, and so I'd like you to help cover the cost of preparing that bid. And if they say no, then guess what? You just learned they don't care about you participating in this competition. And if they don't care about you participating in the competition, what's the chance that you'll ultimately win? Probably close to zero. What you should do is focus your attention on other cases, in which they really do value your participation. Now I would bet that most times you're unlikely to be paid in cash. But you can be paid in terms of information or access to people. So you can say, I'm prepared to bid but what I'd really like to do is understand why my bid last time wasn't chosen. What was it about the proposal that I made that really didn't quite work for you? Or, I'd like to understand more about all the different change orders you've had with your last client, so I understand a little bit more how it is you work together. Or, I'd like to understand your KPIs, your key performance indicators. So that I can make sure that the proposal I do is going to allow you to be successful in your job. A lot of times, firms aren't willing to invest a lot in the companies they've asked to make a bid. They just want to use those bids to help them get a better price from their incumbent supplier. And if you are the potential new entrant here, you want to make sure you're not being used in that way. And so, you can ask to be rewarded. And not only that, the information that you're asking for will allow you to make a better bid and thereby help the company save money. Another example is you can ask for access to people. You can say great, I appreciate the opportunity to bid. I'd like to meet the person in charge of your ISO 9000, I'd like to meet your CFO. Because you might be concerned the person who's evaluating the bids is going to be entirely focused on who has the lowest price, and you want to be sure that you can meet the person who's gonna understand and appreciate the quality that you bring, the experience that you have, the seniority that you have. And so, your cost is, if you're willing to give me access to these people, I'm willing to provide a great bid for you. Now if you're not, you're kind of telling me something up front, that you don't really care about my participation. So, the big lesson, when you have added value, then you have an ability to get things in the game. You have power, and you can succeed in a negotiation. If you don't have any added value, then you're gonna be in big trouble when it comes to the negotiation. But that doesn't mean you should go home. Instead, what you should do, is engage in a pre-negotation, where the access to information or people that you get might either create some added value for you, or allow you to get rewarded for helping the customer do a better job with his existing suppliers
