Week 2 - Distributive Negotiation - Post Class

BUSINESS NEGOTIATIONS Leighton Wilks HROD 493 Fall 2015

Agenda - Week 2

•Hardball tactics •Negotiation – “BioPharm/Seltek” •Distributive negotiation

Hardball Tactics • What kind of tactics used in negotiations could be described as “hardball tactics”?

• How should we deal with such tactics?

Opening Stance

• Will you be competitive or moderate?

• Negotiators tend to respond in kind

• Try to send a consistent message • Difficult to switch • Sends mixed messages

The Flinch (Demur) • An extreme reaction to an

opening offer • Generates a feeling that

your counterpart has gone beyond a reasonable level in their opening offer

• Causes your counterpart to make two consecutive concessions

• Bad guy presents tough position, then good guy tries to reach an agreement

• Very transparent with repeated use

Good Cop/Bad Cop

• Open the negotiation with an extreme (high or low) offer

• Anchors the negotiation toward a very high or very low bargaining range

Highball/Lowball

Silence

Bogey • Pretending that an issue of

little importance when really it is not important

• Allows you to trade this issue off at a later date for something that is really important

• Ask for a proportionately small concession on an item that hasn’t been discussed previously in order to close the deal

The Nibble

Intimidation/Aggressive Behavior

• Attempt to force the other party to agree by means of an emotional ploy—anger, fear, guilt

• Constantly pushing or attacking the other side's position

Snow Job

• When the negotiator overwhelms the other party with so much information that he or she has trouble determining which facts are real or important, and which are included merely a distraction

Exploding Offer

• Giving an offer with a time limit attached

• Create unnecessary pressure

• Restrict choice • People are notoriously bad

at making decisions given time constraints

Using Hardball Tactics • Can you claim more from the other party if you are a tough and offensive negotiator?

• Research suggests no: • Counterpart may just walk away rather than negotiate

with you • Counterpart may understand your reputation and use

competitive tactics of their own • People are more accommodating to people that they

like than people they dislike

Dealing with Typical Hardball Tactics

• Four main options: • Ignore them • Discuss them • Respond in kind • Co-opt the other party (befriend them)

Discussion

• What was your strategy going into this negotiation? • Who made the first offer? Why? • What “arguments” did you use to persuade your counterpart? • Buyers/Sellers – what numbers did you gravitate towards?

• How many people feel they were “successful”?

Results Group # Agreement Price

($million)

1 8.1 5 9

20 9 11 10 10 10.8 6 11.5

18 12 9 12.5

19 13.75 7 14.5 8 14.8

14 15.5 12 16 15 16.2 17 19 4 20 2 21 3 21

16 22 21 No

Discussion

• Was this negotiation distributive or integrative? • Were there any issues that we could agree on?

• Did any BioPharm CFOs buy Petrochek? • Why? • What would you tell The Board & CEO?

INTRODUCTION TO NEGOTIATION Class #2

Learning Objectives • Identify & understand distributive bargaining situations

• Understand the importance of targets, reservation points, and BATNAs

• Understand the varied tactical approaches used in distributive situations

• Recognize and defend yourself from hardball tactics used by others

Distributive Negotiation • Also known as fixed pie, zero sum, win-lose

• One person’s gain is the other’s loss

• Directly conflicting interests • Each person is trying to maximize

his/her share of the payoff (pie) • Value claiming!

Distributive Negotiation (Win/Lose) Total Value

Key Point

Negotiation is: 80% preparation 20% implementation The next slide will help you prepare!

Key Concepts in Distributive Negotiation

Minimum preparation for any negotiation will involve establishing the following:

• Target point (aspiration point) • Resistance (reservation) point (walk away) • Asking price, initial offer • BATNA – This will influence the other three points!

Target • Your goal in the negotiation

• What price would you like to sell/buy the item for?

• Should be realistic, based on available information

• This is NOT your opening offer!

Resistance Point • The point at which you are indifferent to whether you achieve a negotiated agreement or walk away

• Beyond the resistance point, you prefer no agreement

• Never reveal your resistance point!

Putting it Together “Buying a House” Role of the “Buyer” • Target – You would like to buy the house at a price as

close to $220,000 as possible • Resistance point – You would be willing to pay up to

$235,000 before walking away

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Buyer’s Target Buyer’s Resistance

Putting it Together “Buying a House” Role of the “Seller” • Target – You would prefer to sell as close to $240,000 as

possible • Resistance point – You have decided that you would

settle for any offer that yielded at least $225,000

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Buyer’s Target Buyer’s Resistance

Sellers’s Resistance Seller’s Target

Bargaining Zone • The bargaining zone (or zone of potential agreement) is

defined as the space between the two parties’ reservation points • $225,000 – 235,000

• This is referred to as a “positive bargaining zone” and some form of agreement should be possible

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Buyer’s Target Buyer’s Resistance

Sellers’s Resistance Seller’s Target

Positive Zone

Bargaining Zone • What happens if:

• The Buyer will pay no more than $225,000 (Buyer’s resistance) • The Seller’s wants at least $235,000 (Seller’s resistance)

• This is referred to as a “negative bargaining zone” • It is better to walk away rather than to negotiate!

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Buyer’s Resistance

Sellers’s Resistance

Walk Away!

Negative Zone

BATNA Best Alternative To a Negotiated Agreement • Alternatives give the negotiator power to walk away from

the negotiation • If alternatives are attractive, negotiators can:

• Set their goals higher • Make fewer concessions

• A good negotiator will establish a BATNA prior to the negotiation

• A good negotiator will do everything possible to improve his/her BATNA

• A good negotiator will walk away from the negotiation based on his/her BATNA

So What Exactly is this BATNA Thing?

Role of the “Buyer” • Target – $220,000 • Resistance point – $235,000 • What would happen if you could buy a similar/same

house for $230,000?

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Buyer’s Target Buyer’s Resistance

So What Exactly is this BATNA Thing?

Role of the “Buyer” • Target – $220,000 • Resistance point – $235,000 • What would happen if you could buy a similar/same

house for $230,000?

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Buyer’s Target Buyer’s Resistance

The buyer’s resistance point is stronger!

So What Exactly is this BATNA Thing?

Role of the “Buyer” • Target – $220,000 • Resistance point – $235,000 • What would happen if you could buy a similar/same

house for $230,000?

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Buyer’s Target Buyer’s Resistance

The buyer’s resistance point is stronger!

The buyer’s target may also be influenced!

So What Exactly is this BATNA Thing? Role of the “Buyer” • Target – $215,000 • Resistance point – $230,000 • We still have a positive bargaining zone • If we “meet in the middle” then the buyer gains value!

• $227,500 instead of $230,000

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Buyer’s Target Buyer’s Resistance

Sellers’s Resistance Seller’s Target

So What Exactly is this BATNA Thing? Role of the “Buyer” • Target – $215,000 • Resistance point – $230,000 • We still have a positive bargaining zone • If we “meet in the middle” then the buyer gains value!

• $227,500 instead of $230,000

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Buyer’s Target Buyer’s Resistance

Sellers’s Resistance Seller’s Target

BATNA and Resistance Point are Not the Same!

• Reservation Price is BATNA +/- things that make you want to do the deal (premium) • switching costs, ego, miscellaneous preferences

• You know you can purchase a similar/same house for $230,000 (BATNA) however: • You have negotiated for hours on this deal • You like the person you are dealing with • Cute guy/girl living next door

• You are willing to pay $231,000 • Your BATNA ($230,000) plus the $1000 premium

Switching Costs

Why Not Switch? • Koodo & Fido have the same plan & no contract • RBC & CIBC have the same accounts • You can get the same job at another company

The Bottom Line • The BATNA serves to help you set the correct resistance point

• The resistance point is what you use in bargaining

• Knowing the value of your BATNA helps you protect your resistance point from influence by the other party

Putting it Together “Seltek” • Target:

• About $25million – if you knew BioPharm’s resistance • May have used the common information to give you guidance

• BATNA: • Reconfigure the plant - $3 million + 6 months = About $10 million

• Reservation price: • $10 million (appraised value) – $3 million (reconfiguration)

= $7 million

Putting it Together “BioPharm” • Target:

• About $7million – if you knew Seltek’s resistance • May have used the common information to give you guidance

• BATNA: • Buy a plot and build (land - $500,000, building - $25 million,

shutdown costs – 1 million per month) • This is a fairly weak BATNA

• Reservation price: • Cost of new building ($25 million) + lost profits + experienced

workforce + FDA approval = $40 million?

Putting it Together BioPharm • Resistance point: $25 million • Target: ???? • Seltek • Resistance point: $7 million • Target???? Buyer’s Target

= ??? Buyer’s Resistance = $25 million

Sellers’s Resistance =$7 million

Seller’s Target = ???

Positive Zone

Key Points • It is easy to talk about targets, resistance points, & BATNAs, but in reality it is often very difficult to establish these points

• Different individuals may assign different value to intangibles • What is an experienced workforce worth?

DISTRIBUTIVE NEGOTIATION - STRATEGY AND TACTICS

Concession Making • When one party agrees to make a change in his/her position, a concession has been made

• When a concession is made, the bargaining range is further constrained

• Concessions can signal when negotiations are reaching a conclusion • Getting smaller, and smaller, and smaller

• Never, ever, ever make two concessions in a row • Sign of a bad negotiator (negotiating with yourself)

Guidelines for Making Concessions 1. Give yourself room to make concessions (don’t start at

your target) 2. Be the first to concede on a minor issue, but not the first

to concede on a major issue • Different value on different issues

3. Make unimportant concessions, and portray them as important

4. Make the other party work for the concession 5. Backtracking on concessions is very difficult 6. Keep a record, especially in complex negotiations 7. Do not concede “too often, too soon, or too much

Fundamental Strategies • Push for settlement near opponent’s resistance point

• Get the other party to change their resistance point

• If bargaining range is negative, either: • Get the other side to change their resistance point • Modify your own resistance point (better to walk away!)

• Convince the other party that the settlement is the best possible

Keys to the Strategies

As a buyer I want to: • Discover the other party’s resistance point • If I know the seller will sell for $225,000 then I am going to try to push for a final price that meets the seller’s minimum requirements

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Buyer’s Target Buyer’s Resistance

Sellers’s Resistance Seller’s Target

Keys to the Strategies

As a buyer I want to: • Influence the other party’s resistance point • There is a comparable house in the neighborhood for $220,000

• Property value has gone down lately

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Buyer’s Target

Buyer’s Resistance

Sellers’s Resistance Seller’s Target

Making an Opening Offer • People believe it is best to sit back and wait for the first offer

• Research suggests that it is best to make the first offer

• This is due to the anchoring effect

Results Group # Agreement Price

($million) First Offer ($million) Offer by

1 8.1 3 buyer

5 9 3 buyer 20 9 8 buyer 11 10 13 seller 10 10.8 10 buyer 6 11.5 7 buyer

18 12 9 12.5 20 seller

19 13.75 9 buyer 7 14.5 14 buyer 8 14.8 25 seller

14 15.5 16 seller 12 16 12 buyer 15 16.2 15 buyer 17 19 37 seller 4 20 12 buyer 2 21 11.5 buyer 3 21 16 buyer

16 22 13 buyer 21 No

A Quick Experiment!

The Power of an Anchor! • Is the population of Turkey greater than 100 million?

• What is the population of Turkey?

The Power of an Anchor! • Is the population of Turkey greater than 10 million?

• What is the population of Turkey?

The Power of an Anchor! • What is the population of Turkey?

• 74 million (2011), but that doesn’t matter

• People tend to attach themselves to any number

• I could have done this with a roulette wheel

The Power of an Anchor! (Tversky & Kahneman) Five seconds to answer: 1x2x3x4x5x6x7x8

• Median = 512

• 8x7x6x5x4x3x2x1 • Median = 2250 • Actual = 40,320

Closing the Deal At some point the negotiation must come to an end. Here are some signals: • Provide alternatives (2 or 3 packages)

• Counterpart chooses – equal value to you • Assume the close

• Act as if the deal has been made (Hardball) • Split the difference

• Ok if a small concession, poor strategy if a large concession • Exploding offers (Hardball) • Deal sweeteners

• I’ll give you ??? If we agree to close this deal

Leighton’s Life Lessons • Do your Homework!

• Negotiation is 80% preparation and 20% negotiation

• More on this next class • Hardball tactics can work (sometimes)

• Best used sparingly and in moderation • Best used in a distributive negotiation where there is little chance of negotiating in the future (spoils the relationship)

• Sometimes the best deal is no deal at all • No shame is not reaching an agreement

QUESTIONS?