Harvard Business School Confidential

by Emily Chan

  A classic story often cited to expose the weakness of position negotiation is the breakdown of the talks between the United States and the then Soviet Union on a ban of nuclear testing in both countries during John F. Kennedy’s presidency. Both sides were agreeable to the idea of introducing a ban, which was a significant step. But to make sure the ban was enforced, they needed to agree on the number of annual on-site inspections each side would be allowed to make on the other’s territory to investigate suspicious seismic events.

  The United States insisted on no less than 10 inspections a year, but the Soviet union would agree to three at most. The two positions could not be reconciled and the talks failed. in hindsight, some negotiation experts believed an agreement could have been reached if the two sides had put their positions aside and focused on their interests by trying to work out a mutually acceptable definition of inspection. The experts pointed out that the negotiators never fully clarified what “an inspection” would involve—would it be a small team of inspectors going to the other country for a specific, limited time, focusing only on investigating suspicious seismic events, or would it be hundreds of inspectors allowed to pry indiscriminately for an extended period? Many negotiation experts felt that a well-defined inspection guideline and procedure balancing the interests of effective enforcement of the ban and protection of national security could have led to a successful solution.

  So how do you understand the other party’s interest? Ask and listen. Ask other people who have knowledge of the other party or similar situations elsewhere (benchmarking). Even ask the other party directly. In many negotiations, real interest is not that confidential. The other side may be willing to discuss what is important and what is not important to them.

  Besides asking the others, put yourself in the other party’s shoes and ask yourself, “Why are they asking for this or that? Why are they not agreeing to what I am offering? What would I like and not like if I were in their shoes?” An example of this is how Microsoft won the browser war in 1996. At that time, Netscape and Microsoft were both negotiating with AOL to be the service’s browser partner. Netscape was the technology leader. Microsoft was relatively weak in technology. So instead of focusing the negotiation on technology, Microsoft figured out an even more important “hot button” for AOL—Microsoft offered to place an AOL icon on the Windows desktop right next to the icon for MSN, Microsoft’s own online service, which directly competed with AOL. Hence, instead of focusing on the “obvious interest” of technology, Microsoft was able to identify the even more important interest through thinking from the other party’s perspective.

  However, while many situations are negotiable, that does not mean you should negotiate all the time. Even when you choose to negotiate, you do not necessarily use the “real interest” approach every time. Sometimes positional negotiation with give-and-take could suffice. This is because negotiation, especially “real interest” negotiation, takes effort and time.

  Is it worth the time and effort to negotiate? Is it worth the time and effort to explore “real interests”? Different people have different views on their time and effort. I love haggling on price (which is a form of negotiation) with street vendors when I am on vacation in developing countries. I haggle even over items as low as US$2 or US$3. This is because I just hate overpaying. I hate being taken for a ride. So I feel it is worth my time and effort, but my haggling drives my husband crazy. He feels the time and effort could be better spent elsewhere.

  KNOW THE BATNA

  Using the “real interest” approach helps identify a win-win agreement. Understanding the importance of the “Best Alternative to a Negotiated Agreement” (BATNA) can help you maximize the win for your side. The advantage in negotiations often does not depend on how big and powerful each party is, but on who has a better BATNA: who can better afford to walk away without an agreement.

  The power of BATNA is seen in everyday life. When supply is less than demand, the seller has a strong BATNA. If you won’t agree to a price, many other customers will do so. In a depressed economy where supply is more than demand, buyers have all the leverage. They can always buy from another seller if they cannot get the price they want. Even toddlers understand BATNA; when they scream in a restaurant, they capitalize on an intuitive sense that their parents must either yield to their demands or risk more embarrassment and inconvenience.

  The power of BATNA is also seen in more complex business situations. A classic example is the battle between Sky Television and British Satellite Broadcasting (BSB) in the early 1990s to dominate British satellite television. it would be a lose-lose situation if both firms were to stay in the market and compete vigorously. It would be a win-win if they could negotiate a deal for one to pay the other to exit. These are the estimates for the financial implications as documented in a HBS case study:1

  For BSB: Loss of £190 million if both BSB and Sky stay in game and fight; profit of more than £2 billion if Sky exits; loss of £180 million if BSB exits.

  For Sky Television: Gain of £700 million if both parties stay in game and fight; profit of almost £3 billion if BSB exits; loss of £70 million if Sky exits.

  Figure 2.1 displays the financials in a 2 × 2 matrix.

  It would be a win-win if they could negotiate a deal for one to pay the other to exit. But who has a stronger negotiating position in this example? Some would say Sky has a stronger position, since it would still make £700 million even if BSB does not exit the market. BSB is weaker because it would lose £180–£190 million if Sky chooses to fight. So BSB must negotiate for Sky to exit.

  However, that is not true if you look at the BATNA more carefully. Compare the fight versus exit option for each company if they fail to reach an agreement. if no agreement is reached for one of the players to exit, then:

  For BSB: Fight versus exit means losing £190 million instead of £180 million. The difference is relatively insignificant. So BSB has flexibility of choosing whether to fight or not should Sky decide to fight. It has a strong BATNA.

  For Sky: Fight versus exit means £700 million profit compared to a £70 million loss!

  Figure 2.1 Comparing Results

  Sky has no choice but to fight. If it has to fight, then it will increase its profit substantially (from £700 million to £3 billion) if it can negotiate to pay BSB to exit. In fact, theoretically, if BSB does its homework and understands Sky’s BATNA, it would know that Sky should be willing to pay anything up to £2.3 billion for BSB to exit! In the end, Sky did pay BSB to exit the market.

  While sometimes the BATNAs for both sides are more or less fixed (as in the Sky/BSB case), many times a BATNA can be changed. Here are some of the most effective levers for changing BATNAs:

  Improve your own BATNA by creating competition.

  Weaken the other side’s BATNA by adding parties that can increase the threat of negative consequences to no agreement.

  Weaken the other side’s BATNA by teaming up with the BATNAs themselves!

  Create Competition

  This is intuitive: when you are a seller, you want to have many alternative buyers; when you are a buyer, you want to have many alternative suppliers. In the HBS case “Strategic Deal-Making at Millennium Pharmaceuticals,”2 Steve Holtzman, ex-chief business officer, explains how the company’s negotiation strategy helped grow it from a small start-up to a multibillion-dollar company in less than 10 years:

  Whenever we feel there’s a possibility of a deal with someone, we immediately call six other people. It drives you nuts, trying to juggle them all. But number one, it will change the perception on the other side of the table. And two, it will change your self-perception. If you believe that there are other people who are interested, your bluff is no longer a bluff; it’s real. It will come across with a whole other level of conviction.

  It should also be noted that sometimes it could pay to become someone’s BATNA. A few years ago, my small investment fund was invited to submit a proposal to bid for the development of a
piece of land in Hong Kong. The property was only average in attractiveness and chances of winning were slim since many believed one of the leading property firms (call it Company C) was determined to win the bid. Therefore, we felt we could not justify putting in our time and resources to draft a high-quality proposal. When we called the seller to decline the invitation, the seller actually offered to compensate us for putting the proposal together in case we did not win. At that point, we realized we were being used as a BATNA: a bargaining chip for the seller. Company C had spread the word on its determination to win the bid and no other company wanted to waste resources competing.

  Another example of improving BATNA through generating competition: when I was about to graduate from Stanford, I interviewed with the Boston Consulting Group (BCG) and got the offer. I thought the terms of the offer were standard. Since BCG was my first choice, I thought I should stop interviewing with other firms. But I quickly found out from some Stanford alumni already working in consulting that often, even though the key terms were standardized, other issues such as location and mentor assignment could be negotiated. In general, the more competing job offers a candidate had, the more a consulting firm saw the competition for getting the candidate, and the harder they would try to get the candidate to accept the offer. When I found out, I quickly changed my strategy and worked hard on my other interviews. (And I tactfully let BCG know I was doing that!)

  Weaken the Other Side

  It can help your case to add parties who increase the other side’s exposure to negative consequences if they do not come to an agreement. When I was working at BCG, Seagram’s was one of my clients. I heard many times the story of how Edgar Bronfman, the former CEO there, won a very unlikely negotiation against the Swiss banks. David A. Lax and Professor James K. Sebenius cite the same example:3

  When Edgar Bronfman, former CEO of Seagram’s and head of the World Jewish Congress, first approached Swiss banks asking them to compensate Holocaust survivors whose families’ assets had been unjustly held since World War II, he felt stonewalled. Swiss banking executives saw no reason to be forthcoming with Bronfman; they believed they were on strong legal ground because the restitution issue had been settled years ago. After eight months of lobbying by Bronfman, the World Jewish Congress, and others, the negotiations were dramatically expanded—to the detriment of the Swiss. The bankers faced a de facto coalition of interests that credibly threatened the lucrative Swiss share of the public finance business in states such as California and New York. They faced the divestiture by huge U.S. pension funds of stock in Swiss banks as well as in all Swiss-based companies; a delay in the merger between Swiss Bank and UBS over the “character fitness” license vital to doing business in New York; expensive and intrusive lawsuits brought by some of the most formidable U.S. class-action attorneys; and the wider displeasure of the U.S. government, which had become active in brokering a settlement.

  Given the bleak BATNA the Swiss faced, the bankers yielded and the parties reached an agreement, including a commitment from the Swiss bankers to pay US$1.25 billion to survivors. It was an “almost unimaginable outcome” at the beginning of the negotiation when “the Swiss seemed to hold all the cards.”

  Team Up with the BATNAs Themselves!

  A classic example of this is “club deals,” which have been a hot topic in investment circles. Club deals are where several investment firms will bid for an acquisition target together rather than against each other. This certainly eliminates some of the BATNA for the seller. To counter such moves, some sellers—like GE, which was shopping around to sell its plastics division for US$10 billion or so a while back—would announce they would not sell to a club deal. It should be noted that in some countries club deals may violate antitrust regulations. I am not advocating club deals here. I am just using them as an example.

  Because BATNA is so important in determining the size of the win, and there are so many ways to change the BATNA, it is critical to invest time and resources in understanding the issues. As Tom Peters, a best-selling author seen by many as a management guru, advises, “She (he) who is best prepared wins! Out-study, out-read, out-research the competition” and “Know more (lots more!) than the person on the other side of the table.”4

  REFRAME

  A young man asked a priest, “May I smoke while I pray? The priest answered angrily, “Certainly not.” Another young man asked the same priest: “May I pray while I smoke?” The priest answered, “Good child.”

  Another story—as Professor Deepak Malhotra of HBS tells it— when President Theodore Roosevelt of the United States was campaigning for reelection in 1912, his campaign office made a brochure. The brochure included a picture of the president, together with information on his campaign. Three million copies were made, but only days before the brochures were supposed to be distributed, the campaign office realized they did not have the rights to use the picture. The rights belonged to a privately owned studio (call it Studio X). There was not enough time for a reprint.

  The first reaction to solving the problem would be to send a representative to negotiate with Studio X as soon as possible. But this approach could have cost millions as copyright law allowed the copyright owner to demand up to a dollar a copy. What did the campaign office do? They sent a telegram to Studio X with the following content: PLANNING TO PRINT 3 MILLION COPIES OF CAMPAIGN SPEECH WITH YOUR PHOTOGRAPH. HOW MUCH ARE YOU WILLING TO PAY FOR OPPORTUNITY? Studio X quickly responded: APPRECIATE OPPORTUNITY, BUT CAN ONLY AFFORD $250. The campaign team accepted graciously.

  These two stories illustrate the power of reframing (a concept also referred to as framing): gaining an advantage by changing the perception of a situation. Reframing is especially powerful if you can reframe to appeal to the interests of the other side of the negotiation. There are two ways to reframe: change the context of the situation or change the meaning of the situation. “Context reframing” means taking the same behavior, experience, or event but seeing it in a different context. The story about smoking and praying is context reframing. The behavior, praying and smoking at the same time, remains unchanged. What is changed is the context of the behavior—whether it takes place when one is smoking or when one is praying.

  The story about President Roosevelt’s brochure has an element of “meaning reframing.” Meaning reframing is taking the same situation and context but changing what it means. The situation in the Roosevelt case is that the campaign wanted to use the picture from Studio X. The situation could be interpreted to have two very different meanings for Studio X. One meaning was this was another customer that wanted to use its picture. So the natural reaction would be to charge the campaign office. But the campaign office got Studio X to interpret the situation differently. Instead of “just another customer,” it was a privilege and a marketing opportunity for the studio. So the natural arrangement would be to ask studios to bid for the privilege. This is content reframing.

  LISTEN

  Listening helps in the gathering of critical information like real interests and BATNA. It also makes the other side feel that they are heard and understood, helping you develop a positive relationship and an atmosphere conducive to discussion. This is not too different from what they teach in marriage counseling and parenting. In fact, I remember from one of my HBS classes that one of the most powerful strategic moves in a negotiation is to show the other side that you are listening, hearing, and understanding. This is applicable to both your personal and your professional life. However, it must be noted that hearing and understanding do not mean agreeing. In fact, they often provide ammunition for you to disagree later because you understand the other side’s argument well enough for an effective rebuttal. This observation was a revelation to many HBS students, who tend to be accustomed to doing most of the talking rather than listening.

  To make the other side feel heard and understood, these are the key techniques:

  Focus on listening.

  Paraphrase what you have heard in a positive,
nonthreatening way.

  Ask questions that help the other side clarify their points.

  Focus on Listening

  Do not try to work on counterarguments in your head while the other side is talking, even if the speaker is repetitive, illogical, and long-winded.

  Paraphrase

  Retell what you have heard in a positive, nonthreatening way. Some key phrases:

  “I can understand where you are coming from. Let me try to explain it to make sure I am not making any mistake . . .”

  “I think what you are saying is . . . am I right?”

  “I can see your point. You mean . . . Is my understanding correct?”

  When you paraphrase in a positive way, the other side feels heard and understood.

  Ask Questions

  Help the other side clarify their points. This way, they feel you really want to understand what they say. Sometimes when you ask these questions, the other side can see the weakness of their own arguments. Questions must be asked tactfully, framed in terms such as these:

  “I got a little confused by that point. Do you mind elaborating?”

  “If I understand you correctly, you mean xxx. But what do you think about yyy?”

  BUILD A GOLDEN BRIDGE

  “Building a golden bridge” is another key concept taught in HBS negotiation classes. It means giving a face-saving way for the other party to concede or to agree. This concept of face-saving is well explained in the book Getting to Yes by Professor Roger Fisher from Harvard Law School and Professor William Ury from Harvard Business School, both very much involved in the negotiation projects and programs at Harvard: