This paper examines the landmark negotiation between Walmart and Procter & Gamble, which spanned from 1987 to 2003 and transformed an adversarial supplier–retailer relationship into a model of supply chain partnership. The paper begins by contextualizing negotiation within the modern competitive business environment, then provides background on both companies and the history of their difficult early relationship. It analyzes the negotiation across several dimensions — including stakeholder concerns, key issues such as pricing strategy, value creation and claiming, positions and BATNAs, strategies and tactics, and the role of agents and third parties. The paper concludes with practical recommendations for organizations entering complex, long-term negotiations.
Throughout recent decades, the business community has undergone endless transformation. Employees became organizations' most valuable assets, generating a need for increased on-the-job satisfaction in order to achieve corporate profits. Customers became the other key determinants of organizational success, as they would no longer purchase whatever organizations produced but would instead set trends and drive demand. Finally, as markets opened and globalization took hold in various countries, barriers were lifted and economic agents were able to enter new markets. As a result, competition increased exponentially, as did the demands from customers, employees, non-governmental and governmental institutions, and other categories of stakeholders.
In this dynamic environment, economic entities need to possess superior strengths that allow them to overcome competition and reach a leading position within the market. The list of such strengths is extensive, beginning with a high degree of dedication and competence from the management team and ending with ready access to resources — capital, labor, and technology. The ability to conduct negotiations is one important skill an organization must possess; those with an advantage in negotiation technique are more likely to succeed in a highly competitive market.
The specialized literature on negotiation is rather extensive, offering significant insight on the subject. Two of the most relevant definitions are as follows:
Richard Luecke (2003): "Negotiation is the means by which people deal with their differences. [...] to negotiate is to seek mutual agreement through dialogue. [...] a business negotiation may be a formal affair that takes place across the proverbial bargaining table, in which you haggle over price and performance or the complex terms of a partnership venture. Alternatively, it may be much less formal, such as a meeting between you and several fellow employees whose collaboration is needed to get a job done."
L.J. Nieuwmeijer (1992): "Negotiation is a process through which two or more parties communicate with one another in an effort to resolve their opposing interests. It occurs in fields as diverse as labor relations, international conflicts, political and constitutional issues, socio-economic development, and personal relations."
This paper focuses on an actual negotiation that occurred between two major economic agents — Walmart and Procter & Gamble. Both organizations operate at an international scale and must therefore be able to negotiate their contracts effectively. Before analyzing the negotiation itself, the paper first examines the two parties and any prior relationships between them. Once the background has been established, the paper discusses the negotiation and then provides a detailed analysis of the situation.
Walmart was established in Rogers, Arkansas in 1962 and operates in the retail industry. It represents one of the largest supermarket chains in the world, with a market capitalization of $232 billion. Its net income for 2007 was $12.731 billion, and it employed an estimated 2,100,000 individuals at the time of writing (Walmart website, 2008). Public perception of Walmart is divided: the stores attract both strong supporters and strong opponents. Supporters argue that Walmart creates new jobs, thereby supporting the U.S. economy, and that it offers products at low prices, increasing consumer access to commodities. Critics, on the other hand, argue that the retail giant does not treat its employees fairly and that its stores destroy local businesses.
Whichever side one takes, the fact remains that Walmart is an epitome of corporate success and holds a strong position at the negotiation table. It has even been noted that Walmart leverages its organizational strengths to secure favorable contracts with its suppliers.
Procter & Gamble was founded in Cincinnati, Ohio in 1837 and operates in the consumer goods industry. The company manufactures a wide variety of products — from diapers and detergents to other hygiene and wellness items. The organization is highly regarded within the industry and has appeared on numerous Fortune lists, including the Fortune 500 and Fortune's Most Admired Companies. For 2008, it was estimated to register a net revenue of $12.075 billion, with 138,000 employees (P&G website, 2008).
The relationship between Walmart and P&G rests on a straightforward principle — Procter & Gamble manufactures various items and Walmart sells them through its supermarkets. Both organizations are leaders in their respective industries and have managed to use their strengths in ways that further consolidate their market superiority. However, this was not always the case. Before the widespread use of technology — around 1988 — the two organizations had developed an adversarial relationship: P&G was inflexible and focused on individual daily transactions; Walmart wanted more freedom; and long-term planning or product testing did not occur.
In 1985, Sam Walton, founder of Walmart, called P&G to announce that the retail chain had awarded the company its Vendor of the Year Award. He was transferred five or six times and, unable to reach P&G's CEO, ultimately gave the award to another supplier.
Following this incident — though not directly linked to it — P&G began to rethink its sales strategy and entered negotiations with Walmart. Sam Walton felt it was a shame that two strong organizations could not collaborate more efficiently for their mutual benefit. As recounted by Grean and Shaw (2003): "Mr. Walton indicated that it was a shame that two quality companies could not work together effectively. He shared that P&G had an extremely overcomplicated and inflexible sales organization. He stated if P&G thought of Walmart stores as an extension of the P&G Company, P&G would treat Walmart differently. This challenge became the rallying cry for the two companies."
With the introduction of technology, the relationship between Walmart and Procter & Gamble improved significantly. Today, the two organizations collaborate at all levels of the supply chain, working as a unified team toward shared goals. As stated in the partnership's mission: "The mission of the Walmart/P&G Business team is to achieve the long-term business objectives of both companies by building a total system partnership that leads our respective companies and industries to better serve our mutual customer — the consumer" (Pharma Focus Asia, 2008).
Once the executives of Walmart and Procter & Gamble decided to improve their relationship, several negotiation processes commenced — some linked, others independent. All had the purpose of improving collaboration between the two organizations, and each party had to compromise, win, and concede in various instances. The proposals advanced by Walmart were framed around a win-win scenario. Since the retail giant desired increased flexibility from the manufacturer, it made most of the demands. However, Walmart could not conduct fruitful operations if P&G decided to end the collaboration. As Hanna (2008) noted: "Walmart could clearly live without Frey Farms, but it's pretty hard to live without Tide and Pampers." Therefore, the "hard-ball" retailer had to accept some of the demands made by Tom Muccio, P&G's lead executive on the account.
The negotiations began in 1987 and concluded in 2003. Throughout that period, Walmart increased its purchases of P&G products from $350 million to $7.8 billion. Among the major outcomes of the negotiation, one could identify the following:
Procter & Gamble relocated to Walmart's home territory in Arkansas. Walmart and P&G eliminated elaborate legal contracts from their relationship and replaced them with Letters of Intent. The two companies came to share a joint vision, and their problem-solving processes became unified. They began to share information more effectively. Both parties also worked to move away from the root of their past disputes — the question of retail pricing, with Walmart using low prices to attract customers while P&G resisted cuts to protect its revenues.
The success of the negotiation was built on years of dialogue and a commitment to aligned goals. It was made easier by proximity and mutual trust (Hanna, 2008).
Both organizations were striving to better satisfy the end buyer. P&G translated this into a commitment to high product quality. Superior quality, however, meant higher prices — a source of dissatisfaction for both retailer and customer. Walmart, on the other hand, was willing to carry items of lower price points as long as they adhered to its Everyday Low Prices (EDLP) principles. P&G did not subscribe to the EDLP agenda, and numerous disputes emerged. These disputes were never fully resolved; the two organizations ultimately agreed to disagree. Both serve the needs of their consumer stakeholders, just with different philosophies.
The well-being of shareholders was also constantly on the minds of the negotiating executives at both Walmart and Procter & Gamble. All endeavors were ultimately focused on increasing shareholder value, which materialized as an ongoing desire to improve profitability. Higher profits would produce larger funds available for dividends, increasing satisfaction among shareholders of both companies.
"Stakeholders, issues, BATNAs, and strategies examined"
"Synthesis and practical negotiation recommendations"
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