Negotiation Genius Malhotra & Bazerman

Introductory example

In 1912, Roosevelt was rerunning for president. 3 million photographs with his face on had
been printed for distribution. The campaign manager discovered that the photographer had not
been asked for permission, and that intellectual property law could allow him to claim up to $1
per photograph. No campaign could afford such a price, and there was no time to reprint
different . The campaign manager sent the photographer a telegram saying:

Planning to distribute three million photographs for the campaign. Excellent opportunity for
publicity. How much are you willing to pay to use your photographs? Respond immediately

To which the photographer replied: Appreciate opportunity, but can only afford $250.

I. Claiming value

Under the false assumption that negotiation is all art no science, people fail to prepare
adequately for negotiation. When coupled with the believe that the real action begins at the
negotiation table, people tend to walk into the negotiation table unprepared.

5 step pre-negotiation framework

1. Assess your BATNA which must be realistic

2. Calculate your reservation value (linked to BATNA)
3. Assess the other partys BATNA
4. Identify their reservation value
5. Evaluate the ZOPA once you have an idea of each partys reservation value

The first offer

Making the first offer

The primary benefit of making a first offer is that it establishes an anchor. An anchor is a
number that focuses the other negotiators attention and expectations. Making an aggressive
first offer in a negotiation can have benefits, though it imposes a ceiling for what you can ask
for.

Whether this should be done depends on how much information you have about the other
sides reservation value. If you believe that you lack precise information about the ZOPA, you
should defer the offer until you have collected more information. In this case, it may even be a
good idea in letting the other party do the first offer. You lose the chance to anchor, but at least
you do not risk not anchoring aggressively enough. A lack of information can also lead you to
anchor too aggressively, leading the other side to walk away offended.

Responding to their first offer

The best thing to do in response to an aggressive first offer whether their offer is high or low
is to ignore it. This doesnt mean pretending that you didnt hear it. Rather, respond by saying:
Judging by your offer, I think we might be looking at this deal in very different ways. Lets try
to bridge the gap by discussing. In this manner, you can move the conversation to a
complete different topic, one that allows you to reassert control of the situation.

The more an anchor is discussed, the more powerful it becomes. Therefore, ignoring is
best than asking for a justification for their offer (contrary to common belief). They are
likely to come up with some pre-fabricated reason that makes some sense. It may also lead them
to get stuck with positional bargaining in order to prevent losing face.

Once you have ignored it and acquired information, you can offset the influence of their offer
by making an aggressive counteroffer. However, this brings the risk that the parties will become
entrenched and reach an impasse. After making the counteroffer, you can then suggest that you
need to work together to bridge the gap. In addition, you should offer to make the first move
towards moderation by discussing your own perspective (ie justifying the counteroffer). This
allows you to deflate their anchor whilst shifting from an aggressive exchange to the search for
common ground.

Well, based on your offer, which was unexpected, it looks like we have a lot of work ahead of
us. From our perspective, a fair price would be closer to $X. I will explain to you how we are
valuing this deal, but it appears to me that if we are to reach any agreement, we will both have
to work together to make it happen.

Giving them time to save face

If the other partys initial offer is very extremefar outside the ZOPAyou may need to
inform them that their offer is not even a basis for starting the discussion. This assertion should
be followed by information regarding your own perspective and a candid invitation to reopen
negotiations from a very different starting point.

Of course, it may not be easy for them to quickly reduce their demands so drasticallydoing so
would reveal that they were simply posturing when they made their initial offer. If they decide
to moderate their demands, they will need time to save face. They can return to the bargaining
table in a day or a week, after having figured out a way to make this happen.

What should the first offer be?

1. Keep the entire ZOPA in play by making an offer that falls outside the ZOPA, one you
know that the other side will not accept. The idea is to force the other party to negotiate their
way into the ZOPA, so you can claim as much value as possible. What is the most aggressive
offer that I can justify?

2. Provide a justification in most cases, you do not want to be too far outside the ZOPA,
otherwise you will lose credibility. However, the more aggressively the other party is
negotiating, the further out you can be.

3. Set aspirations high (the target price) this is linked to making an aggressive offer, and
motivates you to haggle in order to maximise the value you obtain.

4. Consider the context and relationship - your offer and your justifications should be informed
by your understanding of the needs and sensitivities of the relationship. Your goal should be to
get the best deal while strengthening the relationship and your reputation. You may have to
forgo some short-term gains to meet this goal, but this sacrifice will almost always be worth the
price.

Collecting information and dealing with lies

It is unlikely that you will have perfect information regarding the ZOPA; you will need to
estimate your negotiation partners reservation price by collecting information. This can
be done by talking to other informed players and asking for their valuation of the deal or how
they view the other party. Information can be collected from the negotiation partner itself by
asking open or/and indirect questions.
Lets suppose we have exhausted all sources of information have been exhausted. You lack
certain vital information perhaps because the other party is refusing to disclose it, or you do
not believe with certainty what another player has said. You can consider the use of a
contingency contract. Contingency contracts are agreements that leave certain elements of
the deal unresolved until uncertainty is resolved in the future.

Imagine that you are selling a piece of land. If it is used for commercial development, its value
will be much higher than if it is used to build residential housing. You ask your partner and are
unsure of whether they are saying the truth. You can include a clause saying The sale will be
made at a base price of $x, with the condition that if the land is used for commercial
development in the next seven years, Estate One will pay an additional $y.

The moment this clause is included in the agreement, the other party no longer has a motivation
to lie. They may refuse to include the clause not only protecting you from lies, but also
helping you detect them. Further, even if they werent lying but they change their plans in the
future, you can derive value from that change.

Effective haggling making effective concessions

Haggling is a necessary component of every negotiation. It is not sufficient that parties

discuss options that exist within the ZOPA; to reach a specific negotiated agreement,
they must coordinate and ratify a mutually acceptable final deal. Since neither party
wants to concede more than the other, each tends to concede slowly and, typically, only
in response to the other sides concessions.

Good negotiators are willing to be flexible and to make concessions, but they also
demand reciprocity. It is important to avoid making unilateral concessions. I
understand that we are still millions of dollars apart. Im willing to moderate my
demands, though this will be very costly to me. Im making a concession with the
understanding that you will reciprocate with concessions of similar magnitude. This is
the only way we will be able to reach an agreement we both can accept.

Contingent concessions come in form: I will do X if you do Y. These are amongst the
safest concessions that a negotiation can make. However, if they are abused, it will be
more difficult to build trust and strengthen the relationship.

Many people are uncomfortable with silence. As a result, they speak when they should
not. A particularly dangerous time to speak is after you have made your offer and the
other side is considering it. If the other side seems to be taking too long to respond,
negotiators often grow nervous and start bargaining against themselves.

In most negotiations, concession rates follow a pattern: early concessions are

larger in size than later concessions. In other words, negotiators tend to offer
diminishing rates of concessions over the course of the negotiation. This may be a
reasonable trend; as a negotiator gets closer to his reservation value, there is less
room for large concessions. As a result, most negotiators expect this pattern and
take it as a signal that the other partys RV is approaching. However, this pattern can be
manipulated strategically too.

Negotiating the relationship

Many people believe that you can either get a great deal for yourself, or you can play nice and
make the other side happy. As it turns out, this is not the way it works (Fisher & Ury agree).
Whether the relationship is strengthened, weakened, or destroyed in the negotiation depends on
how satisfied each party is with the final outcomebut satisfaction has less to do with how
well someone actually negotiated and much more to do with how well they think they
negotiated.

In terms of satisfying yourself, remember to have high aspirations during the deal, but compare
the outcome obtained with your reservation value after it is completed. Having a low reference
point pays when there is nothing more you can do to change the outcome.

Responding to an offer you love

If you accept too quickly or too enthusiastically, you are likely to upset the other party
(they realise they blew the chance to get more). To increase their satisfaction from the
deal, you might take some time to ponder the offer.

Accepting the other partys first offer, even if you take time to do so, may still
ultimately leave the other party longing for a better deal. A different approach would be
to make a counteroffer and ask for additional concessions. Even if you take up more of
the other sides money, they will feel more satisfied.

A third approach is offered by Professor Richard Shell in Bargaining for Advantage. In

the 1930s, Princeton was in talks to recruit Einstein and wrote to him asking how much
he expected to be paid. Einstein wrote back saying $3,000 (annually), unless you think
I can get by with less. Princeton, however, responded with: Well pay you $15,000 a
year. Einstein accepted and the deal was done.

Why did Princeton take this approach? As the adage proclaims, time reveals truth.
Writing from Austria, Einstein may not have known how much he was worth to
Princeton, but this would change when he joined the faculty in the United States.
Princeton administrators sent a strong signal about the schools integrity, their interest
in his well-being, and their desire to negotiate in good faith.

If you are surprised by an offer, it is also important to reflect did you misestimate their
reservation value? Maybe the item you are selling is more valuable than you thought. Maybe
they are more desperate than you expected, or have a lot more money than you thought.

II. Creating value

In business negotiations, price is often the divisive issue. The more issues there are available to
play with, the more likely it is that each party will obtain what it values most and become
willing to compromise on issues of relatively less importance. Here are some examples:

delivery date
financing
quality
contract length
last-look provisions
arbitration clauses
exclusivity clauses
level of service support
warranties
future business

Pareto improvements create value in negotiation. One of your goals in every negotiation should
be to look constantly for Pareto improvements until you have reached an agreement that is
Pareto efficient ensuring no value is left at the table.
Unfortunately, there is no definitive way of knowing when Pareto efficiency has been reached;
bells will not sound and flowers will not fall from the sky. But one good test is to consider how
well you understand the concerns of the other side. If you leave the negotiation table without
knowing very much about their interests and priorities, you have probably left value on the
table.

Strategies to create value

1. Identify your multiple interests

2. Create a scoring system
3. Repeat this process for the other party

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