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Negotiations: Just Another Board Game

negotiation1Why do we negotiate?

  • Obtain favorable terms: you try to win the biggest share of the pie for yourself, e.g. buying a car for below market price, get an increase in salary or a better terms of employment
  • Build personal relationships: negotiation isn't always all about winning - it can also create win-win settlements, and develop mutually beneficial relationships

What? Building relationships and "winning" aren't necessarily at odds. This means that you don't have to be a stubborn son of a bitch to come up with an agreeable settlement.

Distribute vs. Integrative Negotiations

Distribute negotiations:

  • Focus on claiming value. It's usually a zero-sum game: what one party wins, the other party looses
  • Typically involve a single issue
  • Example: buying a used car: if the market price is $x, and you get it for $x+500, it means the dealer has a $500 surplus (or "win"), and you are stuck with a $500 loss.

Integrative negotiations:

  • Focus on creating value: enlarge the pie by adding more issues on to the table. Some of the issues may be distributive, but both parties might have similar interests for the rest
  • The negotiation as a joint problem-solving task
  • Opportunity to trade on issues that are more important to you, and less important to the other party
  • Example: job offer negotiation: housing might be a critical issue for you, but for your employer who is a real estate developer, they would actually prefer to have you stay in one of their condos.

The goal is to try and convert all negotiations you care about to integrative - integrative negotiations ensure that both parties maximize their share of wins, while not destroying any relationships. Speaking of wins, there are a few things one needs to keep in mind when negotiating:

BATNA (Best Alternative To a Negotiated Agreement)

This is your greatest source of power. Your BATNA is your fallback plan: if the negotiation doesn't result in a deal, what alternatives do you have? For example, if you are negotiating a job offer with one employer, you are in a position of power when you have a good BATNA, e.g. a comparable job offer. In this situation, you are able to negotiate compensation, benefits, etc. - whereas without the BATNA that is the other offer, this discussion might not lead to such favorable terms for you. Therefore, while negotiating, it is in your best interest to increase your BATNA. Find other options that you equally like, may it be a second house you'd be willing to purchase, or a hoverboard when negotiating for a car.

Reservation Price

Reservation price is your "bottom line". If this price is not met, you do not do a deal - lest you are subjected to the agreement bias, where you go into an agreement just for the sake of reaching a deal, even though you will actually be worse off than you currently are.

Making the first offer

Usually, it's a good idea to make the first offer, because it anchors the other party on YOUR terms: research shows that final agreements are more strongly influenced by initial offers than by subsequent concessionary behavior. An aggressive first offer gives you room to concede and thus appear flexible and cooperative, while also letting you get a better deal. On the other hand, weak first offers tend to make you appear stubborn, as you do not have room to make any concessions.

The only exception to the "always make the first offer" rule is when you know the other party has a lot more information than you do, in which case you might make a misinformed - and hence dumb - first offer.

How aggressive should your first offer be?

  • “As high as you can go without embarrassing yourself in front of a respected third party” (Fisher & Ury)
  • Use target price to set your first offer
  • Use references (past prices, similar products) to rationalize the offer
  • Most important: ensure it is reasonable - especially when you want to build a relationship with the other party. An irrational first offer will set a tone of distrust.

Notes: I wrote this as a recap of my Negotiations class at Kellogg, to aid in my exam  studies and real world negotiation project. I hope this was as helpful to you as it was to me!

Comments (6) Trackbacks (0)
  1. Thank you, I’m interested in notes like this.

  2. Thanks John, I hope to write more about what I learned at Kellogg 🙂

  3. Hi Pamela,
    This is a very interesting post. We negotiate pretty much every day and its good to see a framework and rationale around the negotiation process… Seems like an interesting class. Its pretty cool that you were able to use this as post in studying! I am wondering if it would be OK to send you an email to introduce myself, and solicit a discusson on your experience at Kellogg if you are available.

  4. Most certainly! Please do, will be happy to share my Kellogg experiences.

  5. Thank You so much Pamela! What would be a good email address via which to reach you? If you would rather not publish it, you can shoot me an email via my email address (which should be listed with this comment). Thanks again! its sincerely appreciated.

  6. Hi – my email address can be found at the About page. Hope I can help!


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