NEGOTIATION

Negotiation Concepts and Strategies

  • Some myths about negotiation:
    • MYTH 1: A good negotiator means taking maximum advantage of the other person
    • MYTH 2: Negotiation is about money
    • MYTH 3: To be a good negotiator, I need sometimes to fake being someone else
    • MYTH 4: Negotiation is a fixed pie, competitive situation
    • MYTH 5: Effective negotiators are tough
    • MYTH 6: Good negotiators are born
    • MYTH 7: Good negotiators rely on intuition

In contradiction to these widely believed myths:

  • A good negotiator is someone who is good at claiming and creating value while building relationships, protecting their reputation, and maintaining their self-respect Taking advantage of others or being fake are at odds with this definition
  • Negotiation is not about money; it’s about Value and can take many different forms
  • Negotiation is not a competitive sport with winners and losers. There is a cooperative element to all negotiations, even distributive ones. Oftentimes, you can work together with your counterpart to grow the pie. This potential will remain untapped if you insist on seeing every negotiation as zero-sum
  • Effective negotiators are neither tough nor soft. They act in a principled way and do not let others take advantage of them, without needing to posture as tough
  • Negotiating is a skill that everyone can learn—it’s not about being born with the right personality or intuitions. In fact, effective negotiation takes a lot of systematic analysis and preparation
  • Distributive negotiations are about who gets how much (i.e., dividing the pie). There is often only one issue on the table (and sometimes multiple issues that the parties prioritize identically).
    • Interests are not entirely opposed in distributive negotiations. If there is a positive bargaining zone, both parties will be better off with a deal within the zone.
    • The trick in distributive negotiations is finding out whether such a range exists.
  • Integrative negotiations involve multiple issues and allow the opportunity to create value (i.e., expanding the pie).
    • Since created value has to be distributed, all integrative negotiations also have a distributive aspect
  • You should NOT negotiate when the cost of negotiating exceeds what you can get out of it or when it is culturally inappropriate.

Negotiation Concepts and Strategies

Preparation

  • Preparing is perhaps the single fool-proof strategy in negotiation. It is said failure to prepare is preparing to
  • To prepare for a distributive negotiation:
  • Know your BATNA and define your reservation point
  • Define your aspiration level (i.e., target)
  • Exhaust all sources of information about the other party’s BATNA/reservation point.
  • Think about how you can justify your goal to the other party
  • Organize all your planning in a planning document

 Target point

  • Your target is your highest legitimate expectation. A target would be considered legitimate if you can justify it to yourself or the other party with a straight face.
  • Not having a target is like negotiating with a defense but no offense.
  • Always set a target. Otherwise, you might be happy to settle just above your reservation point when the bargaining zone was large, and you could have done much better
  • After setting a target, commit yourself to it by writing it down or mentioning it to
  • Ironically, if you go into a negotiation with a high target, you may do objectively better but feel subjectively worse because you compare your outcome to your high target

BATNA (Best Alternative To a Negotiated Agreement)

  • Your BATNA is the answer to the question: “What are you going to do if you don’t make this deal?” It’s your Plan B
  • Your BATNA is your source of power because it allows you to walk away from the table
  • Since your BATNA is your major source of power, don’t be passive about it. Always work on improving it. Even when you feel like you have found your dream house or car, options will make you stronger
  • Your counterpart’s perception of your BATNA – It makes sense to talk about your BATNA:
    • If your counterpart is severely underestimating your BATNA o If you have a fantastic BATNA and are happy to obtain a trivially better outcome o If you are about to impasse with little time left to negotiate, and there’s a chance the other party may meet or beat your BATNA

Reservation point

  • The reservation point is your bottom-line or your walk-away point. It’s where you are indifferent between a deal and no deal
  • Your reservation point tells you when to walk away, not when to make the deal
  • Any outcome that is worse than your reservation point should not be accepted. That’s why it’s important to be crystal-clear about your reservation point
  • Your reservation point is a function of your BATNA. It sets a limit in a negotiation given a particular BATNA o Your reservation price might be different from the value of your BATNA, depending on preferences, transaction costs etc. For example, you may be willing to pay more for a particular house than the price of your best alternative because you like its location or architecture
  • Many people focus on their BATNA and reservation point during a negotiation. Focusing on your target will get you better
  • Do not change your reservation point during a negotiation, UNLESS:
    • Your BATNA changes
    • The terms of the deal change (such as when rezoning suddenly makes a plot of land more attractive)
  • Revealing your reservation point is generally not a good idea because:
  • Knowing your reservation price, the other party can push for a deal that is only marginally acceptable to you
  • It doesn’t always help establish trust as the other party may think you are bluffing o It leaves you no room for concessions

Bargaining Zone [Also called Zone Of Possible Agreement (ZOPA)]

  • The range of outcomes where a deal benefits both parties more than their best alternative
  • Put differently, it’s the range of outcomes between the reservation points of the parties – The size of the bargaining zone is the size of the pie
  • If there is no such range (e.g., when the buyer’s reservation price is smaller than the seller’s reservation price), we talk about a negative bargaining zone. In this case, the economically optimal outcome is no deal

Anchoring

  • People make estimates by starting from an initial reference point and adjusting from there o However, they generally do not make sufficient adjustments (like a boat that cannot get too far from an anchor)
  • Available information becomes an anchor, relevant or irrelevant
  • Anchoring effects are extremely robust and nobody is immune

First Offer

  • Making the first offer gives you the opportunity to anchor at a value that is advantageous to
  • It is much more powerful to justify your offer with relevant information and facts than just stating
  • Final agreements are more strongly influenced by initial offers than by subsequent The mid-point between the parties’ opening offers is a typical outcome.
  • Therefore, it is generally a good idea to make as extreme a first offer as you can rationalize and
  • However, if your first offer is too extreme, it may lose its anchoring power and lead to a chilling effect, where a negotiator grows cold to the deal in the perception that the counterpart is not bargaining in good faith
  • It’s not wise to make the first offer, IF:
    • you don’t know the market well. You might end up undercutting the bargaining zone and giving up too much early on o it goes against prevailing norms
  • If the other party makes an aggressive first offer: o Do not talk more about it (e.g., do not ask the other party to justify it, and do not try to explain to them why it doesn’t make sense). This would bolster the anchoring effect of the offer
    • Immediately discount it and make your counteroffer o Turn your mental focus to your own target

Concessions

  • Concessions create goodwill because people expect negotiations to be a back-and-forth process and obtaining concessions makes them happy
  • That’s why you should give yourself room to make concessions. If you start too close to your reservation point, you won’t be able to make concessions and will appear inflexible
  • Watch the size and number of your concessions. Don’t make unilateral concessions when the other party is not Don’t reward obstinate behaviour with concessions
  • Do not downplay your concessions—when you are giving up something make the other party see that. Reciprocity is a strong human urge and your concession will likely create an obligation on the other party to concede something as well
  • But also, do not oversell your concessions as this might look manipulative
  • Don’t flatter yourself on your concessions (“You should consider yourself lucky”). This will be irritating
  • You can explicitly invite reciprocation by saying “I would be happy to give you X if you could give me Y
  • As you approach your goal, start making smaller concessions to signal that you are getting close to your limit
  • Although the even-split proposal is appealing to our sense of fairness, note that it won’t really be fair unless parties are equally distant from their reservation points

CONCEPTS AND STRATEGIES FOR INTEGRATIVE NEGOTIATING

 Pareto efficiency

  • An outcome is Pareto efficient if the only way to make one party happier is to hurt the other party
  • On the Pareto optimal frontier, the size of the pie is as large as it can possibly get, given one party’s outcome
  • A Pareto efficient outcome doesn’t necessarily make parties equally happy. A disturbingly unequal distribution can still be Pareto efficient
  • Without full access to the other party’s information, you will never know whether an outcome is Pareto efficient. However, chances of a suboptimal deal are high if the following characterize your negotiation:
    • You don’t know the other party’s priorities o You didn’t reveal your own priorities
    • You discussed only a few potential deals rather than exchanging multiple offers back and forth
    • One issue dominated your discussion (e.g., price)
    • You discussed and settled issues separately rather than talking about packages

Positions vs. Interests

  • A position is what you want (an orange). An interest is why you want it (orange juice, orange zest).
  • Positional bargaining often results in compromise (cutting the orange in half) or impasse –

A single position may mask different interests:

  • By exploring underlying interests, you can sometimes find an alternative position which meets both side’s interests
  • Be firm on your interests but flexible on positions
  • Conversely, one interest can be satisfied through multiple positions:
    • The most common mistake is assuming that others value exactly what we value as a means to satisfy an interest. Ironically, people are more likely to make these assumptions about close others
    • Do not make assumptions about what will satisfy a particular interest. Instead, try to understand the best means of satisfying it from the other party’s perspective
  • Give effectively! Always try to locate the source of value to the other party and look for creative ways to provide it

Package Offers

  • Instead of trying to settle issues one-by-one, offer packages including all issues
  • Note the difference between discussing issues one-by-one vs. settling them one-by-one. It’s okay to discuss issues in Just don’t settle anything before you settle everything
  • The exception to this is when you can get your desired option on a high-priority issue. If that happens, go for it and bundle everything else – Package offers are effective because:
  • Settling issues one-by-one amounts to a sequential distributive negotiation. It will be more contentious and impasse will be more likely
  • By offering package deals, you can trade across issues, i.e., concede on issues of lower relative importance so you can obtain concessions on issues of more importance to you

MESOs (Multiple Equivalent Simultaneous Offers)

  • Instead of offering one package deal at a time, propose multiple offers that are of equivalent value to you
  • MESOs are very beneficial because:
    • People like having a choice
    • They make you look cooperative. Research shows that individuals who use MESOs are perceived as more flexible, and their counterpart wants to negotiate more in a team with or against them
    • Using MESOs, you can anchor and re-anchor at a value that is advantageous to you o They are time-efficient as you are offering multiple deals simultaneously rather than going through iterations
    • They allow you to infer the relative priorities of the other party. While some people might misrepresent their priorities if you ask directly, few people will pick a package of lesser value just to mislead their opponent
    • They allow Pareto improvements since the packages are of equal value to you but your counterpart will pick the package with the highest value to them. Put differently, you are giving value to the other party at no cost to yourself

Scoring Systems

  • A scoring system provides a shorthand by reasonably translating qualitative preferences into numbers
  • A scoring system is very handy in multi-issue negotiations because it:
    • Makes you systematically think about issues, priorities, and options
    • Allows consideration of all issues rather than just the most salient or quantifiable ones
    • Provides a common metric for comparing qualitatively different issues o Aids in determining a total reservation point
    • Allows efficient communication of issues and preferences to team members or those who are going to negotiate on your behalf (agents)
    • Allows easy comparison of package deals and creation of MESOs o Allows for quick assessment of trade-offs and concessions – To create a scoring system:
    • List all relevant Completeness is crucial
    • Assign relative weights to issues by importance (should sum to 100%) o Quantify the value of all options for each issue o Calculate weighted values (=Issue Weight x Option Value) o Do checks and adjust accordingly

Trading-off on Issues

  • To get to a Pareto optimal outcome, you need to trade-off across issues o That means giving the other party what they want on issues of relatively lesser importance to you and getting what you want on issues of relatively higher importance
  • To get information from the other party:
    • Ask diagnostic questions about priorities and Listen carefully. o Use MESOs
    • Reveal small bits of information and try to get the other side to reciprocate
  • In integrative negotiations, a tension exists between sharing enough information to create integrative deals and sharing so much so that the other party has the advantage. Here is what to reveal and what not to reveal:
    • Generally, there is nothing wrong with revealing your priorities (i.e., a rank ordering of issue importance). Again, this kind of information is needed to identify trade-offs that will create value

   Do NOT lie about your priorities! You may fall into a trap where you get things that you don’t want and are expected to reciprocate

  • Do NOT reveal your reservation price

Adding Issues

  • In any negotiation, try to add as many issues as possible. Each additional issue is new currency that you can trade-off against other issues – Adding issues may:
    • Create opportunities for additional concessions and trade-offs o Overcome a negative bargaining zone and avoid impasse
    • Get past a difficult and antagonistic spell
    • Re-engage the other side after they have made a “final offer” that you are not willing to accept

Contingency Contracts

  • Negotiators may have different expectations about the future. When you find yourself arguing and debating, stop and think about whether you can make a bet on these differences – Contingency contracts do not create actual value but change the expected value from a deal – Contingency contracts are useful because:
    • They allow negotiators to solve problems of trust without confrontation o They are good lie detection devices: Parties will not be willing to enter a bet if they were bluffing
    • They may create additional incentives for parties to perform well (e.g., when an actor’s payment is tied to revenues or a contractor’s payment is tied to timely completion)
  • Be careful with contingency contracts when:
    • You can’t afford to lose (i.e., when losing will take you below your reservation point)
    • The other side has more or higher-quality information than you

Post-Settlement Settlements

  • After reaching an initial agreement, both parties can engage in a search for a deal that could be preferable for one or both parties
  • Conceptually, this is a new negotiation in which the initial deal is the new BATNA, and both sides must agree to change the deal
  • Post settlement settlements can lead to improvements to the deal because both parties may feel freer to state preferences and interests in the safety of their new BATNA