WELCOME
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Introduction to Economics and Business
STUDENT: Hello, Teacher. Yes, I know what's coming up now! For several coming Modules you are going to lecture me about "Microeconomics"!
And I also know that "Macroeconomics is the study of how the economy functions in broad outline", because you lectured me on that one before. You have also told me before that "Microeconomics is the part of economics dealing with the activities of individual markets and firms".
TEACHER:. Good for you. I see that you remember my previous lecture on the subject of economics very well.
STUDENT: Yes, and I also remember having asked you "why should I, as a business person, be interested in macroeconomics"? Now, I will ask you this... why should I, as a business person, be interested in microeconomics?
TEACHER: Simply because economics is a very relevant subject if a business person is to understand the environment in which he or she operates. A skill that may help the business to be successful, of course.
STUDENT: You mean to say that to be a good business person I need to be a good economist?
TEACHER: Not exactly. A deep knowledge of economics is neither necessary nor sufficient for being successful in business. However, a good grounding in economics will help you to analyze business situations much better. Now let me ask you something? Do you know what kind of science economics is?
STUDENT: I remember something like "the dismal science".
TEACHER: That was ages ago, when Malthus made very negative forecasts about what would happen as population increased faster than food production. No, the answer I was hoping for was "economics is a social or behavioral science". And this is so because basically economics deals with how people behave in different circumstances. By the way, you know who Malthus was, don't you?
STUDENT: Thomas Robert Malthus (1766-1834) was an English economist, sociologist, clergyman and pioneer in modern population study. Malthus argued that poverty and distress were unavoidable because population, when left unchecked, increased faster than the means of subsistence.
And getting back to your definition of economics, what it means is that what economists do is theorize on behavior. Is that all?
TEACHER: After congratulating you for your encyclopedic knowledge, let me tell you that economics is a social science that tries to explain the behavior of the economy; more exactly, the behavior of the economic agents which are, after all, people. Naturally since economics is not an exact science, economists develop theories which are sometimes called economic models.
STUDENT: And why and when are these models useful to a business manager?
TEACHER: Economic models are simplifications of the real world. They may be useful in explaining how the world works. Of course, the ultimate test of how useful economics is to business is... does it really explain or accurately predict what is going on in the real world?
STUDENT: Fine. And so which is the subject we will discuss in this first Module of microeconomics?
TEACHER: We will outline some of the key topics that are of interest to both economists and business persons. Later you and I will discuss them in greater detail.
To begin with, let me state that all business firms operate within a market. Would you attempt to define what a market is?
STUDENT: Sure. A market is the environment in which suppliers and demanders of a given product or service interact. And let me add that this interaction determines what is produced and consumed and in what quantities.
TEACHER: A very good "economic" definition. Obviously you mean that this "determination of what is produced and consumed and in what quantities" is reached via the price mechanism, the result of the interaction of suppliers and demanders in the market.
STUDENT: Sure. And I may add that this is why any business person must have a very good understanding of the markets in which he or she operates. But I have a question. Do all activities of a firm actually take place in a market?
TEACHER: Not necessarily. A key question for managers of firms to be asking all the time is: should we be doing activity X within the firm, or should we buy it the market from another firm? In other words... should we make it or purchase it?
STUDENT: So, an activity conducted within a firm is an alternative to a transaction in the market.
TEACHER: Exactly. While firms always operate in some market, they also perform internal activities, and one of the key economic issues managers face is to decide which transactions should be internal to the firm and which ones should be left to the market.
STUDENT: I see; and it seems to me that lately there has been a strong tendency towards "farming out" functions.
TEACHER: True. From administrative tasks to manufacturing, more and more functions are contracted in the market. EDS and IBM have dramatically increased their taking over of IS activities from firms; and farming out manufacturing to "toll producers" has also increased very much.
The theory of the firm
But allow me to expand on the subject of markets, and mention "the theory of the firm". When we discuss how markets work, we are primarily interested on the determination of the price and quantity sold of specific products.
* The theory of the firm will be used to study the supply decisions of firms.
* Consumer demand theory will help us to generate predictions about how demand will change in response to changes in key economic variables, such as the price of the product and the incomes of consumers.
The Economics Of The Firm
While in a large economy decisions are made by an enormous number of participants, many of which are individuals, one of the key economic decision-making units is the business firm. Can you imagine why this is so?
STUDENT: Well, the business firm is an economic actor that hires workers, buys inputs, and produces some product that it then sells in the market. Of course, a firm may be organized in many different ways from a legal point of view; sole proprietorships, partnerships, corporations, etc.
TEACHER: True, but from the economics point of view the firm is an entity in itself that is conceptually separate from its owners and workers.
STUDENT: And what is the conceptual difference between the word 'firm', and others such as 'business', ‘enterprise’, 'company', 'corporation', etc. ?
TEACHER: Conceptually, there is no difference at all, according to the broad definition given above. When I use the word 'firm' I will be referring to this broad definition. Obviously, sometimes I will refer to specific types of firms, since in fact there are important legal (although not economical) differences between a partnership and a corporation, for instance.
Now please allow me to discuss...
The elementary theory of the firm
We call it the elementary theory of the firm because in order to simplify the "model", we discuss a single-product firm; usually the product is assumed to be a manufactured one.
STUDENT: Is this not an over-simplification?
TEACHER: No, because the principles involved can be applied to any firm. What is it that any firm typically needs in order to manufacture any product?
STUDENT: I’m sure it needs plant and equipment, and workers to operate the equipment and for ancillary tasks. It must also buy inputs, such as components, raw materials, energy, etc.
TEACHER: Right. How would you, in general, call the plant and machinery a firm employs?
STUDENT: You are obviously referring to land, buildings, machines, tools, vehicles, etc. This is often referred to as capital or capital goods. But I am a bit confused. There is no question that land, buildings, etc., are capital. But we also often speak of capital when we talk about money in the bank and other financial assets.
TEACHER: Good point. In the theory of the firm "capital" will generally be used to refer to physical capital, such as plant and equipment. Of course the word capital is also validly used to mean financial assets, such as "working capital", which is not invested in physical capital. But again, in the theory of the firm we will in general use it meaning physical capital
STUDENT: Fine, now I understand. But I have another question. Since the theory of the firm is based on a single-product firm, does this mean that economics can not deal with multi-product firms?
TEACHER: Economics can deal perfectly well with multi-product firms. As a matter of fact, these firms are an important topic in the branch of economics known as Industrial Organization. Don’t worry, we will discuss this matter in one of the following Modules of this Subject.
STUDENT: Would you please summarize what exactly the theory of the firm is about, in practical terms?
TEACHER: Sure. In the theory of the firm, we analyze how the technology used in production, combined with input prices, affects unit costs as the volume of output is changed. We also discuss how the demand for the firm's product changes at various prices.
STUDENT: Sounds great. And what is the usefulness of all this analyzing?
TEACHER: The importance of all this is that, given the cost structure at different levels of output and the market demand at different prices we can conclude what level of output will maximize the firm's profit.
STUDENT: A precise way to put it, Teacher.
TEACHER: Thanks. And since I mentioned "market demand", let me tell you that the choices available to firms in the markets they sell to are very much influenced by the competition in those markets.
STUDENT: Easy to agree with; and I’d add that, to some extent, the firms may also be constrained by the competition in the markets where they purchase their inputs.
TEACHER: True. Competition in the market a firm sell in may be more or less intense depending upon the availability of similar or superior products, potential substitutes, and the number and characteristics of competing firms. There are basically three types of markets from the point of view of the structure of the competition.
Perfect competition
Under perfect competition, there are many firms in the market producing an identical product and none of the firms is sufficiently large to influence the market price. Can you think of an example?
STUDENT: I guess they are not too many examples for manufactured products, but in general producers of commodities such as those of grains, crude oil, etc. operate under perfect competition. An let me add that you forget one conditions, which is that for a market to operate under perfect competition all buyers and sellers must be constantly informed of the prevailing price at which transactions are taking place.
TEACHER: Good observation. Not let’s describe...
Imperfect Competition
The most common structure in which firms operate is imperfect competition. In this type of market there are a finite number of competing suppliers, each selling differentiated products that can, to varying degrees, be substitutes for each other. What type of situation do you think firms face in these types of markets?
STUDENT: I guess most firms will have to make decisions about how much to produce and at what price to sell.
TEACHER: Correct. And also of course they have to worry in varying degrees about what the competition is doing. Now let me ask you ... what type of competition do you think would be in extreme contrast to perfect competition?
STUDENT: This is the M word: monopoly!
Monopoly
TEACHER: Right, monopoly. This is a situation where there is only one producer of a product; the single producer faces no competition from other local producers and the product can not be imported.
A monopolist has the power to set not just output but also the price of the product.
STUDENT: Nice situation for any business to be in!
TEACHER: Sure. No other suppliers can take market share from a monopolist. But while monopoly may be good for the firm involved, it will generally be bad for consumers, because the monopolist will tend to charge higher prices than those that would prevail under a competitive situation.
STUDENT: Naturally, I’m sure this is why most countries have regulations to prohibit monopolies, or to control them when they can not be avoided –cases like water, electricity or local telephone service.
TEACHER: The latter are examples of "natural" monopolies, where under prevailing technologies consumers would have to pay more if several firms were competing in the market, than they pay if a well regulated monopoly is allowed. The key word is "prevailing technologies"; long-distance phone service used to be a natural monopoly years ago, but this is no longer so due to modern communications technology.
The basic condition for a monopoly to operate is the existence of some barriers to entry, like those given by patent protection.
But let’s return to the commonest type of market, imperfect competition. This type of market lies between the two extremes of perfect competition and monopoly, and involves a range of different cases. In general, imperfectly competitive markets involve products that, actually or in the mind of the buyers, are similar but not identical. Can you think of another condition?
STUDENT: There are a limited number of potential producers, each of which can influence the others by its own behavior; changing output, prices, advertising, etc.
TEACHER: True. The most common cases of imperfect competition are oligopoly and monopolistic competition.
Oligopoly
Oligopoly exists where the market is dominated by a small group of competing firms. Most large firms operate in this type of markets. Just as an example, let me mention the PC (Personal Computer) industry. Here each firm is greatly affected by what its close rivals do in terms of product prices and innovations.
Monopolistic competition
In this type of markets there are many firms but in general their products or services are differentiated. The restaurant business is a good example, especially if we exclude large chains. Each individual restaurant not belonging to a chain, has a small share of the market as in perfect competition; but the difference is that the restaurant has some discretionary power on the prices it charges. Why do you think this is so?
STUDENT: Because, in contrast to perfect competition markets, here the products are not exactly alike. Restaurants are differentiated by physical location, the type of food they offer, the quality of food and service, ambience, prestige, etc. I am sure this is why they have some price fixing power, but it certainly is a limited one. At some point customers will be willing to travel farther for a meal and/or accept other types and qualities of food and service.
TEACHER: Exactly. Now let’s discuss the following theme: What determines the behavior of the business firm?
Motivation Of The Firm
What do you think is the best answer to that question?
STUDENT: I’d say, as a first approximation, that a firm attempts to maximize profits. Let me add that profits are defined as the difference between the firm's revenue (or gross income) and its costs.
TEACHER: That all firms attempt to maximize profits is not an unreasonable assumption indeed, since most businesses appear to be interested in making money. The decisions a firm should make in order to maximize its profits are determined by the current state of technology.
Technology, Inputs, And The Production Function
Technology is the total knowledge available concerning the production of certain goods or services. Firms are limited by the current state of technology. In making its decisions, the firm must take this into account.
Input is anything the firm uses in its production process; machines, energy, raw materials, labor, etc.
The Production Function
For any final product, the production function is the relationship between the quantities of various inputs used per period of time and the maximum quantity of the product that can be produced per period of time.
Now, Student, in analyzing production processes we suppose that all inputs can be classified into two categories. Can you guess what these two categories are?
STUDENT: I sure can try. Some inputs are fixed (such as the machines available at a certain point in time) and other inputs are variable; those whose quantity can be changed during the relevant period. In the latter category we may mention, with natural limitations, labor and raw materials.
TEACHER: Good. Whether an input is considered variable or fixed depends on the length of the period under consideration. The longer the period, the more inputs are variable, not fixed. In general we can define two time periods: the short run and the long run.
The short run is defined as the period of time in which at least one of the firms inputs is fixed. Since the firm's plant and equipment are among the most difficult inputs to change quickly, the short run is generally understood to mean the length of time during which the firm’s land and equipment are fixed.
The long run is that period of time in which all inputs are variable. In the long run, it is assumed that the firm can make a complete adjustment to any change in its environment.
Average Product Of An Input
In order to determine which production technique -that is, which combination of inputs- a firm should use, it is necessary to define the average product and marginal product of an input.
The average product of an input is the total output divided by the amount of input used to produce this amount of output. Example: In an eight hour shift a machine can produce 800 units of product; the average product of the machine is 100 units per hour.
The marginal product of an input is the addition to total output due to the addition of the last unit of input while other inputs used being held constant. Example: assume that a machine makes chocolate tablets which are then put into cases by hand. With the same machine and ten workers putting tablets into cases we can produce 1000 filled cases per hour, an average of 100 cases per worker. If we add one worker, we can produce 1090 cases per hour. The marginal product of a worker is 90 boxes per hour.
STUDENT: Why is it that the additional worker only adds 90 cases of product, while the average of the first ten workers was 100 cases each?
TEACHER: Ah, this is because you have the infamous law of diminishing marginal returns working against you! Which is perhaps the best-known, and certainly one of the least-understood, laws of economics
In short, the idea is that if equal increments of an input are added, the quantities of other inputs being held constant, beyond some point the resulting increments of product will decrease. That is, the marginal product of the input will diminish. The reasons for that general law to apply are different in different situations. In our example we can assume that the chocolate tablets coming out of the machine move on a conveyor belt from which the workers take them to put them into cases. As you put one more person to work on the same conveyor belt, the workers will possibly have less space to work efficiently. It is also possible that the 11th. worker is less trained and efficient than the first ten. By the same token, if you add a twelfth worker it is likely that the marginal product of this additional person will be less than 90 cases per hour, an so on.
THE OPTIMAL INPUT DECISION
Now we are in a position to answer a very important question; what is the optimal input combination to maximize profits? In other words, assuming that the firm is going to produce a particular quantity of output, what combination of inputs should it choose to maximize profits? Any comment?
STUDENT: Well, obviously to maximize its profits the firm must minimize the cost of its output.
TEACHER: Yes, this seems obvious enough. OK, the let me tell you now that "the firm will minimize cost by combining inputs in such a way that the marginal product of a dollar’s worth of any one input equals the marginal product of a dollars worth of any other input used".
STUDENT: Now is does not sound so obvious. Can you explain what this means?
TEACHER: Sure. Going back to our chocolate tablets example, let’s assume that the firm could either change the speed of the machine –consuming more or less energy per hour- and/or change the number of workers operating the packing line.
Within the practical limits of the machine and the space available for workers, the firm will combine speed of the machine and workers in such way that the additional cost of producing one more case is the same whether machine speed is increased or a worker is added.
more
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Negotiation Basics
What is "Negotiation"?
Let’s define a very simple situation. A has something B wants and is in a position to deliver it; and B has something A wants, and would also be able to deliver it. These are the necessary conditions for any type of negotiation; if either of these conditions are not met, there is no point in conducting any negotiation.
The more basic form of negotiation is barter. Let’s assume that:
* A has shirts and B wants shirts. A is in a position to deliver shirts
* B has pants, and A wants pants. B is in a position to deliver pants
A negotiation may now begin, with a lot of components.
To name just a few of them:
* Quality of the merchandise
* "Terms of the exchange": how many shirts for how many pants? Or, in a monetary environment, "price of the goods and payment terms".
* When and where will each party will deliver?
* In case of differences, who will be the arbiter?
On the other hand, if A is not interested in pants, and/or B does not care for shirts, there will be no reason for any negotiation to take place.
The same is true if, regardless of both parties having something the other party wants, one or both of them is not in a position to deliver the goods.
One of the most distinguished authors in the subject, Gavin Kennedy, defines negotiation as "the management of movement, because without movement no negotiation can succeed". A very concise and to the point definition. Incidentally, the only books on Negotiation we will mention as recommended reading, are Kennedy’s "Everything is Negotiable" , "The Perfect Negotiation" and "Pocket Negotiator". If you are specifically interested in the subject, they are highly recommendable.
What Kennedy’s definition implies is that to enable a negotiation to take place, both parties must be flexible. They very likely have an ideal target (get as much as they can for as little as possible) but they must be willing to settle for less in order to close a deal.
If one of the parties is not flexible, there is no possible negotiation. If you go to a fixed price store (Wal-Mart, for instance) to buy something, you find out Wal-Mart’s price for the item and you either purchase it or you don’t. There is no room for negotiation, because Wal-Mart is not "flexible"; their position is "this is the price, take it or leave it".
Usually in any negotiation both parties have an ideal target and a minimum point at which they are willing to deal (which of course they will carefully hide from their counterpart). For the negotiation to end with a deal, there must be some overlapping of both positions.
A simple example:
* You want to purchase a bike and are willing (secretly) to pay up to $100 for it.
* You go to a store and tell the seller you are willing to pay $80 for the bike (your "bid")
* The seller asks for $120 (his "ask")
* If the seller is willing (in secret) to finally sell it for say $90, a deal may be closed at any point of the overlapping bid and ask positions: between $90 and $100.
The final price will be closer to $90.- or to $100 depending on the negotiating skills of both parties.
Effective Negotiation
What is the meaning of "effective" in this context? Some people think that negotiating effectively means using whatever tricks, bluffs and ploys serve their purpose to obtain what they want from the other party, giving away nothing or as little as possible of their own goodies the other party may want.
This is not a realistic approach for serious professional business negotiators. Bluffs and tricks usually create a negative reaction. The "Machiavellian" approach is best left to unserious amateurs.
STUDENT: What do you mean by "Machiavellian"?
TEACHER: Machiavelli was an Italian statesman, historian, diplomat and political theorist. His famous treatise The Prince (written in 1513, published 1532), is a handbook for rulers. Though admired for its incisive brilliance, the book has long been widely condemned as cynical and amoral, and "Machiavellian" has come to mean deceitful, unscrupulous, and manipulative.
Anyway, the purpose of this course is not to teach you tricks and ploys to trap the people you negotiate with.
STUDENT: No? And why not?
TEACHER: Because as a businessperson you will usually negotiate with peers, not with gullible neophytes. These people will not be easily tricked. And many times your negotiations will be repetitive with the same party and you will not want to antagonize them by using bluffs and tricks which will jeopardize a mutually beneficial long-term relationship.
STUDENT: Then what is this course about?
TEACHER: This course is about realistic, effective techniques for getting the best possible results in serious, professional negotiations.
We will also teach you all known tricks, ploys and traps etc. But not to induce you to use them in serious negotiations. The aim is to prepare you for what the other party may throw at you, because "a ploy identified is a ploy neutralized". And we will also describe the basic types of tricky and difficult negotiators you may encounter, and help you to learn how to deal with them.
STUDENT: Are you serious about your statement that "tricky" negotiators always fail? Because there are many seminars about negotiation which endorse these strategies.
TEACHER: Seminars are good business for many people conducting them. They are mostly advertised in flight magazines, and aimed at business people coming back from frustrated negotiations. More often than not participants walk away from this type of seminar happily convinced that they have become skilled negotiators... only to fail again next time.
Naturally there are situations were being tricky pays off. When the deals are "one time" transactions –as opposed to repetitive- and one of the parties is a professional conducting several negotiations every day, and the other is an amateur negotiating once every five years or so, the chance of tricks paying off is high. Typical examples are car, real estate and time-sharing transactions.
On the other hand, over the years people selling those goods have earned a reputation of being tricky, and nowadays even inexperienced buyers enter into negotiations very suspicious of the other party. Not being skilled negotiators, this extreme self-protective attitude may lead them to reject proposals which are in fact advantageous for them. Which in turn means the seller fails; the reputation of being a tricky negotiator, even if not a fact in a particular case, may work against him or her.
Planning a negotiation
A basic condition you should meet before entering into any negotiation is doing some planning. Naturally the time and effort devoted to this planning must be proportional to the importance of the negotiation. If you are going to purchase a bike, you need less planning that if you are going to purchase a new home. But in all cases some planning is very useful.
Planning consists basically of:
* Making the best possible estimate of which facts you don’t know about your counterpart and the products and services you are interested in.
* Determining which of these facts you are not able to find something about.
* Getting as much information as possible about those facts you are in a position to find out about.
Establishing objectives
First question to put to yourself: Why do I want to negotiate? In other words, what is my objective in this negotiation?
Once you know exactly what you want to get from a negotiation (your goal), you must be as sure as possible of what the other party can do for you to help you reach your goal. Your counterparts in a negotiation are your adversaries because your interests are different; but at the same time they must be your collaborators, because without them you can not reach your goal.
Simple, obvious (and almost stupid!) example: if your goal is adding a garage to your home, your counterpart in negotiating the construction must be a building contractor, not a car mechanic!
And naturally the remarks made above work both ways; your potential counterparts must believe that YOU can satisfy all or at least most of their own goals. Continuing with example of the addition of a garage to your home, you may identify a very good contractor, but if this business person does not think you can satisfy his own minimum goal (as say getting $4,000 for building the garage) there will be no possible negotiation.
STUDENT: I notice you used the plural of "goal", "goals". Would you please elaborate?
TEACHER: All negotiations except the simplest ones, will contain different elements. Your main goal may be to get a nice garage added to your home; but you will also have sub-goals for cost, timing of starting and finishing the job, automatic or manual door for the garage, etc.
Once your objective is clear to you, and you have identified a suitable counterpart you think will be willing to negotiate with you, you should establish, for your main goal and for all the sub-goals, a MinAO (Minimum Acceptable Objective) and a MaxDO (Maximum Defensible Objective).
Understanding what a MinAO is easy. As for the MaxDO, it is your estimate of the maximum benefit for yourself you can realistically expect your counterpart may consider acceptable.
Your mix of MinAOs and MaxDOs will be your "opening environment"; you will enter negotiations offering your MaxDOs. Naturally your different sub-goals will have different priorities, but we will talk about this later on.
In our example the MinAO for the main goal may look easy to establish; you will not settle for anything less than a well built garage of a certain size.
But for the sub-goals, your may define a MinAO for total cost (say, no more than $5,000), having it completed for next winter, etc. To keep it simple we will stick to one single goal, cost.
STUDENT: Pretty easy. But how about establishing a MaxDO?
TEACHER: You are right, the MinAO is exclusively your own decision, but in order to establish a MaxDO, you must have some information or insight about your counterpart.
In our example, obviously if you attempt to begin negotiations with a MaxDO of paying $1000 for the garage and make this opening offer, you may be asked to leave the contractor’s office at once, maybe with some use of force involved. The MaxDO must be realistic, and as said before, you need as much information as possible to estimate a realistic level. In our example you may find out how much the contractor charged for comparable jobs, or the average going rate per surface unit (square foot or meter, depending on where you live). If you know of a case when the contractor charged say $3,000 for a comparable garage, you may realistically think that a MaxDO for cost might be this amount.
STUDENT: Let me see if I understood.
You will make an appointment with the contractor, show him a plan (blueprint) of the garage which you took from a specialized magazine, and tell him:
* That you want a garage added to your house as explained in the plan
* That you have a budget of $3,000 (your MaxDO for price) without revealing that you actually might settle for up to $5,000 (your MinAO).
* The contractor may be interested in the job and at this point negotiations may start; or else the contractor will show no interest and you will have to look for someone else to build the garage.
TEACHER: Your got it right. I love to have clever students!
STUDENT: Oh yes, and I’d love to have clever teachers, too!
TEACHER: I won’t comment on that. But since your are such a wise person, please answer the following question. If I were willing to accept no less than $10 an hour for teaching a clever person like yourself, but would start our negotiation demanding $20 an hour... which would be my MinAO and which my MaxDO?
correct answer : MinAO: $10 MaxDO: $20
STUDENT: OK, but if my MinAO is paying you no more than $5 an hour, then what?
TEACHER: There is no chance of a successful negotiation (reaching a deal). There is no "overlapping". For a negotiation to be successful, as explained before in different words, your (the buyer's) MinAO must be higher than my (the seller's) MinAO. Since the former is $5 and the latter $ 10, we would never reach an agreement unless one of us or both changed our objectives enough for them to "overlap". For example, if you decide to change your MinAO to $9 and I to change my own MinAO to $8, then our negotiation could succeed at a price of between $8 and $9.
Planning a Strategy
For some types of negotiations (say, selling time-sharing on a resort hotel) standard strategies have been developed by the sellers based on experience and are applied to every counterpart. There may be slightly different approaches for mature couples and for newlyweds, but all people in the same "category" will be faced with the same strategy.
In serious business negotiations a strategy must be "tailor made" for your counterpart. In order to develop, apply and if necessary change a successful strategy, you need to prepare yourself for this particular negotiation.
* Be as much informed as possible about the subject of the negotiation, even if your counterpart is the specialist. When you deal with your contractor he is obviously the specialist, but the more you know about construction jobs the better. It will prepare you to understand his arguments and make it easier for you to recognize fallacious arguments. Indicating, even subtly, to your counterparts that you are well informed on the subject matter of the negotiation, will also win their respect.
* Know as much as possible of you counterpart values and beliefs. This is a very large array of information and you will never know all there is to know. But try hard. Talk to people who have already negotiated with this person or group, and if possible with people inside the organization they belong to. One example: finding out about your counterpart’s situation and ambitions in his own organization, you may use as part of your strategy stressing how closing a deal with you may help them in their career. It does not sound so nice, but you may also "scare" your counterpart about the risk of dealing with your competition. But be careful and subtle, because of what is explained on the following paragraph.
* Know as much as possible of you counterpart values and beliefs. This is a very large array of information and you will never know all there is to know. But try hard. Talk to people who have already negotiated with this person or group, and if possible with people inside the organization they belong to. One example: finding out about your counterpart’s situation and ambitions in his own organization, you may use as part of your strategy stressing how closing a deal with you may help them in their career. It does not sound so nice, but you may also "scare" your counterpart about the risk of dealing with your competition. But be careful and subtle, because of what is explained on the following paragraph.
Forecast future consequences
If you enter into a one-time negotiation, you will probably not worry too much about what will happen in the future.
But if as it is frequent in business negotiations you are entering or already committed to a long-term relationship, each of your possible moves must be evaluated considering the probable effect not only on the specific negotiation you are engaged in, but also in a valuable long-term relationship with your counterpart.
A customer with the urgent need of a specific good may agree to pay your outrageous price for a time: but he will probably look for a substitute good and/or another supplier.
Let me tell a real life example. The subsidiary of the American company K&H in a certain country enjoyed a quasi-monopolistic position in the local market of a certain branded food product. They manufactured the product locally and were protected by heavy tariffs from competitive imports of similar products. Every time K&H negotiated with its customers (wholesalers and supermarkets) they behaved in a way the latter interpreted as abusive; but since the consumers wanted the product and the points of sale had to have to product available, they had to give in most of the times. H&H felt very secure in its position because for a competitor to build a plant in this country would have meant a considerable investment. They did not worry too much about possible future consequences of their negotiating behavior with its customers.
But at a certain moment the tariff barriers were almost eliminated, and imports of the same product from a neighboring country became competitive in price.
K&H paid dearly for their use of strong arm negotiating tactics in the past. It’s customers were more than happy to deal with the new competitor. No doubt that K&H would have lost market share and price in any case, but if they had built good will over the years with their traditional customers, the entrance of the new competitor into the market could have been resisted more effectively.
Defensive Planning
Certainly your counterparts are doing the same as you are supposed to do. They are trying to find out things about you to define a strategy for the negotiation process.
Defensive planning means identifying your own weak points and decide what (if anything!) you can do to avoid your counterpart finding out about them. Ask yourself questions like: How important is it for me to reach a deal in this negotiation? What actions from the counterpart may hurt me?
Sometimes the best strategy resulting from defensive planning is to clearly tell your counterparts about some of your weak points, especially if you think they already know about them or are likely to find out. This may position you in the mind of the others as a good faith negotiator, which in turn may be a strong point during the negotiation.
OK, now we may hold a session of questions and answers. But you may want to review this Module before we start with it.
Question 1
What is the basic condition for two parties to enter into a negotiation?
Each of the parties must be in a position to deliver a good or service the other party wants
Question 2
Gavin Kennedy, defines negotiation as "the management of .... what?
Gavin Kennedy, defines negotiation as "the management of movement"
Question 3
Do you agree with the statement "when a customer purchased a good in Wal-Mart, it was a successful negotiation? If not, why?
There is no negotiation for customers at a fixed price store. The store, of course, negotiates with its suppliers
Question 4
You are willing to pay up to $100 for a good and are negotiating with a seller who is ready to sell it for as low as $70. At what price can the deal be closed?
Between $70 and $100, depending on the negotiating skill of the participants
Question 5
What is the rationale of this course teaching you ploys, tricks and bluffs if their use is discouraged?
To prepare you for what the other party may throw at you., because "a ploy identified is a ploy neutralized"
Question 6
Are tricky negotiators never successful?
Sometimes they are successful, especially when the deals are "one time" transactions
Question 7
Which is the basic thing you should do before entering into a negotiation?
Before entering into any negotiation doing some planning is crucial
Question 8
What is it you are doing when you ask yourself: "Why do I want to negotiate?"
Establishing your objectives
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Negotiation Practice: Different Approaches Part 1
Possibly the subject of the largest number of seminars and courses being offered today is "Successful Negotiation Techniques" or some similar title. Also many books can be found on the shelves of any bookstore, written by authors of very different backgrounds, from academicians to business executives. The reason for the high demand for these seminars, courses and "how to" books is obviously the perceived need of possessing, and the perceived possibility of acquiring the very valuable skill of being a successful negotiator.
Since negotiation can be defined as an art and not a science or a technology, it is natural that the advice given at seminars and found in books differs very much.
According to the basic approach taken, the type of advice given can be grouped into three differentiated schools of thought:
* Streetwise Tactical Ploys (STP)
* Principled Negotiation, and
* Negotiation as a phased process
In this Module of the Effective Business Negotiation course we will discuss the first of the three approaches:
Streetwise Tactical Ploys (STP)
This system was probably practiced since prehistoric times, but in modern times it was first promoted by Chester Karass of the Center for Effective Negotiation in Southern California.
Since it is natural to perceive at first sight that our counterparts in a negotiation are our rivals or even our enemies, it is not surprising that the promotion of the STP method was very successful, especially during the 80´s.
Karras belonged to the academic world holding nothing less than a Ph.D. in negotiation behavior from the University of California. But he also had considerable "real world" experience acquired as an executive of Hughes Aircraft. He published a first book targeted at an academic audience (The Negotiating Game) in 1970.
But in 1974 he published a second book (Give and take: The Complete Guide to Negotiating Strategies and Tactics), targeted to a wider audience. It was very successful, because many people felt that their counterparts in past negotiations had taken advantage of them and were desperate for some way to stop being street dumb. They wanted to be able to defend themselves from the plots of their streetwise adversaries and come out on top in their negotiations.
The STP approach is still quite popular, and very expensive; and professional seminars concentrate in teaching the ploys supposed to help attendees to "defeat" their adversaries. The STP approach defines negotiations as duels where the "strong" will always defeat the "weak". And to evolve from a weakling to a strong fighter, you need to know these ploys. You can then use them yourself in your negotiations and defeat your adversaries.
STUDENT: Very nice, but what if your counterpart happens to have attended a seminar of the same kind and also knows about the ploys of the STP approach?
TEACHER: This is a good point. The value of knowing the STP ploys lays more in the fact that you will be able to recognize them and defend yourself against them, than in using them yourself against your counterpart.
STUDENT: As you wrote on the previous Module, "a ploy identified is a ploy neutralized".
TEACHER: Exactly, because practically for any ploy there is a defense or counter. This is why it is important for any negotiator to be able to recognize ploys when used by a counterpart.
On the other hand, while knowing the STP is a necessary condition to be a successful negotiator, it is not sufficient in most cases. Admittedly, you can sometimes use them yourself against some "street dumb" counterpart, but there seems to be a scarcity of this type of negotiator, and in most cases your counterpart will belong to the streetwise species.
Also, in complicated, long term and repetitive negotiations the use of ploys and counter-ploys is useless and tends to create hard feelings between the negotiators.
STUDENT: Which is the best approach, then?
TEACHER: Have a little patience, please. First let me tell you about those famous ploys you ought to know about in order to recognize them and defend yourself.
Karass did not claim to invent them, but he standardized and popularized three basic ploys: The Bogey, the Krunch and the Nibble.
The Bogey
According to Karass, this ploy is simple, effective and ethical. We can also call it "the poor boy approach", because it consists in claiming you as prospective buyer love your counterpart’s product or service (be it a piece of candy or a tractor) but that you can’t afford it (because your parents cut your allowance or because the giant corporation you represent is stingy and you have a very restricted budget).
The meaning of these statements is that the seller will make a sale if he comes down in price to the buyer’s price range. The promoters of the Bogey claim that it tests the seller’s asking price credibility. They also claim that the seller may be inclined to review his or her estimate of the buyer’s economic possibilities. And eventually, in trying to justify the asking price, the seller may come forward with information which can be useful to the buyer. To quote Karass, "before long it is discovered that some things in the original price can be trimmed away, others can be changed and still others can be adjusted by the buyer himself to meet the budget. Each party has helped the other reach its overall goals".
Actually most of the times the Bogey works it will mean a confirmation of the fact that all prices are padded in advance in order to be protected from the buyer’s possible use of the Bogey.
This writer has perceived a seller’s trick Karass did not describe. We may call it "the seller’s voluntary Bogey". This trick usually disarms the Bogey before the buyer uses it, or at least makes it more difficult to propose.
STUDENT: Give me an example, please.
TEACHER: Sure. Let’s assume I am trying to sell you a car. I would tell you: "Dear Student, the regular price of this car is $10,000. I already sold three today at this price. But I know you are a student, and I am sure you are on a tight budget. I will give you my best possible price at once; for you, only $ 9,500. And I hope my boss will not fire me for this. And of course, you have to close the deal today".
The Krunch
At this point in our negotiations you (the buyer) might resort to the Krunch, the second of the most popular proposals of Karass.
The buyer tells the seller: "You have to do better than that to close a deal with me".
In our example, the car salesperson, after a lot of protestations, will come down say to $ 9,000 for the car. You may be happy to see that the Krunch worked and accept the lowered price. But most probably the car seller has anticipated your possible use of the Krunch and has padded his price. It is very likely that he could give you a better deal.
STUDENT: You mean the Krunch never works?
TEACHER: Most of the times it is self-defeating, because the sellers anticipate it and the buyers may be tricked into believing their use of the Krunch got them the best deal when it actually did not.
STUDENT: Let me draw attention to a weak point in your reasoning. If sellers have already padded their prices in preparation for these ploys, it becomes necessary to use them in order to get a better price. It would be silly to accept the first, padded price of the seller. Even (and especially) if we think the seller has padded the price in preparation for them, we MUST use the ploys.
TEACHER: Certainly, in the type of negotiations illustrated, such as purchasing a car (especially an used car!). Not necessarily in serious, repetitive business negotiations.
The Nibble
The third ploy Karass mentions as useful is the Nibble. I assume you already know what it is.
STUDENT: Oh, come on, writer, you have to do better than that to teach me!
TEACHER: Fine, I see you just applied a variant of the Krunch to me! I will give you a good explanation, but please be aware that I had anticipated your ploy and was ready to give you a good explanation anyway!
Nibbling means "to take tiny bites at something", as in "fish nibbling at the bait".
According to Karass, the philosophy of the "nibbler" is "if I can’t get a dinner, I'll be happy with a sandwich". Karass argues that the Nibble pays; while it may not do much for the nibblers ego, it helps their pocketbooks.
Karass says "buyers nibble on sellers and sellers nibble on buyers. Sellers nibble by making over shipments, by supplying slightly inferior merchandise, by not performing promised services, by delivering late, by adding special charges".
"Buyers nibble by paying bills late, by taking discounts not earned, by requesting special delivery or warehousing services, by asking for slightly better quality than contracted for, by demanding extra reports, certifications or invoices, by getting free engineering charges and by requesting extra consulting and training help for nothing".
The Nibble may work in some special instances, but it is the source of a lot of conflict. A nibbler is soon recognized as such and this will surely damage the business relationship. As Kennedy says, "ultimately this kind of behavior is self-destructive". This is true, because the use of these type of tricks creates hard feelings and participants tend to get angry with each other. This may be acceptable in a disarmament treaty between potential enemies who already hate and are angry at each other anyway; but it is deadly in business relationships. Most business people will accept and even admire a tough negotiator, but once an agreement is reached, they will expect the other party to respect the terms of the deal.
STUDENT: I have prepared myself a little for these classes, and I browsed through a book by Kennedy. He asks the following question, which I will put forward to you: "How do we stop the cycle of ploy-counter ploy by those who are trying to do business together".
TEACHER: I can’t tell you how to stop it, but I can tell you why it should be stopped or not started at all. Because most of the time people who use these ploys and simultaneously keep on the defensive can not advance in complex negotiations. Ploys and counter ploys mean constant confrontation between negotiators and a total lack of confidence in their counterpart’s good faith and fairness. To quote Kennedy again, "Only by addressing each party’s interests, through debate and proposals on issues and positions, is it possible to secure a lasting and implementable deal". And we want to stress "implementable". Many times negotiators finish a negotiation with a deal they are very happy about because they are sure they got the upper hand, only to discover later that it can not be implemented. Many times this is only discovered after both parties have wasted a lot of time, money and energy.
STUDENT: I’ll buy this, especially because I was involved in such a deal. A well known hardware supplier I used to work for sold a powerful computer to a large wholesaler. Both parties tricked each other in some ways. Basically the buyer exaggerated his capability and commitment to adapt his manual procedures to a computer, and the seller started to nibble at the support he was willing to give to the conversion effort. Soon a period of continued confrontation began, resulting in delays. As may happen with computer hardware, this specific model became obsolete before installation and the contract had to be re-negotiated. This was used by the buyer as a pretext to cancel the contract without penalty; in the process both parties lost a lot of time, money and effort.
TEACHER: Good real-life example. In this case, obviously the parties did not address each one’s interests.
Aim High ("shock them with your opening offer")
This is Karass’ advice: aim high, do not be modest with your opening offer. This is valid for buyers and for sellers. The reasoning behind this streetwise injunction is that the party using it will make the other believe he or she has a lot of bargaining power, this not being actually true.
In other words, the maxim means "go ahead and bluff". Because if you actually had a lot of bargaining power, as, for example, being a monopoly supplier of a scarce good, you wouldn’t need Karass’ advice. You would just use your power and force your counterpart to deal with your terms.
Followers of this method are convinced that, as Karass claims his research proved, behaving as if you had power and "aiming high" will increase your chances of getting a good deal. The experiments conducted by Karass are supposed to show that negotiators aiming low are frequently "losers", making large concessions and settling for a mediocre deal; while negotiators aiming high are frequently "winners", making smaller concessions and getting better deals.
The idea is that "a high unexpected demand or offer can succeed rather than lead to a deadlock because the initial high demand is likely to structure the other negotiator’s expectations" (Kennedy, "Pocket Negotiator").
STUDENT: Let me tell you something that happened to me when I was in my early teens, and we may try to see how it relates with the subject of this Module.
Once I saw a nice stereo in the window of a store selling used goods (I now suspect some were stolen). I didn’t have any money, but I wanted to have a look at the equipment. So, I walked into the store and said I was interested in the merchandise. The owner let me listen to it and told me the price was $300. I wasn’t going to purchase it at any price, simply because I had just enough money for the fare back home. But being reluctant to confess it, I decided to make a ridiculous offer assuming that the seller would reject it and then I would walk out with my ego intact. I decided that $30, compared with the asking price of $300, was low enough. Showing regret, I told the owner that I loved the stereo, but that I had only $30 and that I would be ashamed to make such a low offer. The owner looked at me in surprise and told me: "Why, is $30 not money". There I was: the guy was ready to give me for $30 a good he had previously told me was worth $300, and I did not have the $30. I don’t remember the excuse I used to get away, but I always remember the incident as an interesting practical learning experience.
TEACHER: Interesting story. Let’s try to see what happened. To begin with, the owner seems to have used the "aim high" approach, thinking he could convey that he had power over you, a young inexperienced person fascinated by a shining stereo device. He certainly had padded his price a lot, just in case you were not as stupid as you looked (sorry!) and came out with the Bogey.
STUDENT: Yes, and then I responded with a "fake Bogey" telling him I had only the imaginary $30.
TEACHER: Sure, and we can also say your false counteroffer was also a "aim high" (in this case you being the buyer an "aim low") countermove, and an unintentional bluff. The owner may have felt that you had "power" because he actually believed your statement that you had only $30, because of you being so young. In his mind this gave you the power of refusing any higher price, even if you thought the price was fair.
But I feel that the best part of this anecdote is the conclusion we may draw that many times the limits of a negotiation are wider that the participants think at the entry point. And that even an experienced negotiator as the owner of the store surely was, after using a "aim high" ploy, may be persuaded to reduce his price considerably when confronted with a believable Bogey and/or a "aim low" countermove by the other negotiator.
STUDENT: Also, I think this episode shows how some of the "streetwise" ploys can be self-defeating. After this experience I never returned to that particular store even when I actually had money, because I concluded that a seller asking for $300 for a good he was prepared to sell for $30, was the type of person I would not want to deal with.
TEACHER: OK, now we may hold our customary session of questions and answers. But you may want to review this Module before we start with it.
Question 1
What is the name of the negotiation approach based on the theory that "negotiations are like duels where the strong will always defeat the weak"?
Streetwise Tactical Ploys (STP)
Question 2
If the opinion of experienced negotiators is that streetwise ploys are not effective in serious business negotiations... what is the use of learning them?
The value of knowing the STP ploys lays more in the fact that you will be able to recognize them and defend yourself against them.
Question 3
Define The Bogey in your own words.
Basically, claiming that the prospective buyer loves the seller’s product or service but that he or she can’t afford it. This is supposed to induce the seller to lower his or her price.
Question 4
You quote the price of a product to a prospective customer and he or she tells you: "You can’t be serious. You certainly have to lower this price a lot if you expect me to even consider buying from you". What type of streetwise ploy is the buyer using on you?
The Krunch
Question 5
How would you call a negotiator who thinks "if I can’t get a dinner, I’ll be happy with a sandwich"?
A "nibbler".
Question 6
What does it mean that a deal must be "implementable"?
That it should be capable of being successfully completed
Question 7
"Shock them with your opening offer". What is the name of the maxim recommending this behavior?
Aim High
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Negotiation Practice: Different Approaches Part 2
In Module II of this course we mentioned that the three basic competing approaches to good negotiation practice are
* Streetwise Tactical Ploys (STP)
* Principled Negotiation
* Negotiation as a phased process
In Module II we described the Streetwise Tactical Ploys (STP). We will now continue with the next approach.
Principled Negotiation
In 1982 Roger Fisher and Bill Ury of Harvard University published "Getting to Yes without Giving in", a bestseller about negotiation. The proposals made in this book can be called "Principled Negotiations". The view on negotiations proposed in the book is almost the opposite of the Streetwise Tactical Ploys method. At least it is radically different, from its basic assumptions to the practical tactics it suggests.
The theoretical basis of Principled Negotiations is that "issues and controversies are decided on their merits rather than through a haggling (dickering) process. Under Principled Negotiations you are supposed to look for mutual gains wherever possible, and where your interests conflict, you should insist that the result be based on some fair standards independently of the will of either side. The method of principled negotiation is hard on the merits and soft on the people. It employs no tricks and no posturing. Principled negotiation shows you how to obtain what you are entitled to and still be decent. It enables you to be fair while protecting you against those who would take advantage of your fairness".
STUDENT: Very nice and clean sounding. It suggests that in negotiations you can get what you deserve. While the motto of most the Streetwise Tactical Ploys Seminars is "get what you negotiate, not what you deserve". I guess they actually mean that by negotiating effectively you can get more and not less of what you deserve!
But I see a couple of problems here. How is it possible to define what each party "deserves"? And how does this approach deal with real life realities like the relative power of the parties?
TEACHER: Your points are very valid and we will discuss them later on. But to confirm your reservations, at least in relation to political negotiations, let me tell you a real story. When Mexico, after 70 years of a One Party government system evolved towards a multi-party political environment, the newly democratically elected President appointed a famous writer as Foreign Minister, obviously as a gesture to the country’s cultural world. A reporter interviewed the writer and asked him what was the basic difference between the academic world and the world of politics. The writer answered: "I was used to an environment where issues are debated and decided on the basis of who is right. In politics issues are decided according to power, alliances and pacts, not on who is right."
But we shall go on describing the Principled Negotiations approach and then discuss its merits with you. It may not be perfect, but it certainly has its merits.
Haggling has no basis in principled negotiations. They should be avoided because they tend to create antagonism between the parties.
STUDENT: I notice a strong cultural bias here. This may be true in a certain business environment or for specific people. But remember my experience (Module II) when the seller of the stereo set asked for $300 and I counter-offered $30. He could not understand why I said I was ashamed of making such a low offer. He said "Why, is $30 not money". He was not offended nor antagonized.
TEACHER: Yes, but you decided not to visit that store again; you actually made a judgment and defined the other party as disreputable. And this is another of the reasons why the proponents of principled negotiations do not like haggling: because it is disreputable. Anyway, I concede your point. Haggling, in certain circles, is the normal way to negotiate. It is not only accepted but expected. Let’s go on.
The four components of Principled negotiations are:
* People: separate the people from the problem
* Interests: focus on interests, not positions
* Options: generate a variety of possibilities before deciding what to do
* Criteria: insist that the result be based on some objective standard.
As you can see, in many aspects the contrary of the streetwise method.
People: separate the people from the problem
It is important to separate the issues themselves from the people who hold opinions on those issues. Obviously people are an important part of a negotiation. They can be a part of a negotiation problem. Or they can be the single problem.
STUDENT: Easier said than done. How do you go about this "separation"? Does it mean you accept the issues and opinions of the other person but not the person itself? And is it implied that the solution is to get that person replaced by some other more acceptable individual?
TEACHER: Obviously you rarely have the power to do the latter. What the principle of "separating the people from the problem" means is that you should separate them in you own mind.
Your counterpart in the negotiation may hold a view you disagree with.
He or she may insist that your company must deliver separately to 20 of his company’s points of sale. You are prepared to deliver to a single distribution center. This is a problem.
Now let’s assume the other person is a bigot, supports a political party you despise, and in general expresses opinions which you consider biased and wrong. But this fact is not part of the negotiation nor of the specific problem of the delivery process you and your counterpart disagree on.
You have to separate the person from the problem in your mind. The (in your personal opinion!) negative qualities of the other person should not be part of the problem. You should not let your dislike of your counterpart and of his or her views be reflected in your movements in the negotiation. Quietly but firmly you should insist on your reasons for wanting to deliver to a single central warehouse. Do not show your irritation at the other person’s views on politics, economics or any other subject. This also applies to any other characteristic of the other person, no matter how irritating they can be to you. Concentrate on the problem, not the person.
STUDENT: I do not disagree with the advice. But sometimes it is hard to apply. Once I was negotiating an important sale with a man I really did not like for several reasons, but I kept trying to separate him from the problem which was the delivery schedule. At the time there was one of those little wars somewhere, and this person said the war was good and would bring great benefits. I asked him what he thought about the victims of the conflict. And he answered: "Come on, we are talking about only two to three thousand dead, about the same number of people a large theater can contain". At this point I could not stop myself from saying; "Would you feel the same way if it was your own son or daughter instead of other people’s sons and daughters that were among those ‘few’ dead?" He took offense and quickly found an excuse to reject my whole proposal, in spite of having agreed to it previously.
TEACHER: As much as I can understand how you felt, and while I agree with your opinion, I must tell you that you did not act as a good negotiator should. You did not separate the views of your counterpart on matters not related with the problem, from the problem itself. You could have worked out your disagreement on the delivery schedule if you had separated it from the other person’s valuation of human life versus economic advantage, an issue not related to the problem under discussion.
But let’s advance to the following principle.
Focus on interests, not positions
The most effective way of solving a problem in negotiation is to avoid putting too much stress on positions as compared with interests. Fisher and Ury call people who do that "positional bargainers"; these people attach great importance to their positions in a negotiation. For them positions are all-important and they defend them vigorously. This is usually done by attacking the other party’s positions. The result is usually a stand-off. Neither side will move and both expect the other to yield.
STUDENT: Reminds me of two car drivers meeting on a very narrow road. Unless one moves to the shoulder of the road and lets the other pass, they will be locked in place, each one expecting the other to yield.
TEACHER: Exactly. In fact one assumes that the interest of both drivers is to proceed to their respective destinations. But if their position is "I won’t move, you have to let me pass", then both are "positional bargainers". They give their position so much importance that they will act against their own interests. Kennedy says that "neither side will move but both sides expect the other to move first. Not moving at all is a strange form of bargaining, so it is more correct to describe this as positional posturing rather than bargaining".
STUDENT: Let me see if I grasped the differences between interest, position and issues. My interest in my negotiations with a customer is to close one or more profitable deals. An issue under discussion might be payment terms. And positions would be if I insisted on payment within 7 days, and/or my counterpart demanded 60 days.
TEACHER: Good example. According to Fisher and Ury, interests and not positions should become the focus of negotiation. This is good advice because as in your example of the two drivers, negotiators often neglect interests and come to a stand-off because they maintain their positions with total inflexibility.
But eventually issues and positions must be negotiated; the idea is that they should be considered without forgetting the all-important interests. This will allow actual bargaining to take place; movement and flexibility on issues and positions while focusing on interests. In your example your basic interest is to close a profitable deal, and we assume that your counterpart’s interest is also to close a deal advantageous for him or her. If both parties focus on their interest, the issue of payment terms and the positions on the credit terms would be solved. At least movement and bargaining would be possible.
Options: generate a variety of possibilities before deciding what to do
The third component suggests that the negotiator should encourage his or her counterpart to work together to invent or discover options and possibilities for mutual gain.
To be able to do this it is necessary that both parties recognize that in most negotiations there is not a "zero sum" situation in every issue. "Zero sum" means that whatever one party gains the other party loses. In other words, the pie has a fixed size, and if one party takes a larger piece, the other party gets a smaller piece.
If both parties recognize that "the pie can be made larger" by inventing options for mutual gain, there is a good chance that these options can be found.
One technique often used is "brainstorming". We can describe this method in a few words: "Everyone offers ideas while everyone postpones criticism and judgment".
Basically the brainstorming procedure is based on the following sequence:
* Participants express their thoughts trying not to suppress any idea that comes into their minds.
* All ideas are written down without anyone commenting on them.
* Only when the brainstorming session is completed (usually a time limit is fixed at the start) are the options reviewed, discussed and judged.
Normally most of the ideas are rejected but many times interesting options for mutual gain can be discovered. Naturally the brainstorming process can also be performed separately by the parties within their own organizations and promising options can be later brought to the negotiating table.
Within the framework of the third component of Principled Negotiations we should also mention the good practice of helping your counterpart to find solutions to his or her problems. A creative negotiator can imagine being in the position of the other person and cooperate in finding solutions to the other person’s difficulties.
STUDENT: You are so good at telling real life stories; can you mention a case where a brainstorming session was successful?
TEACHER: No problem. Some time ago I was negotiating with a customer and we could not agree on the price. He was very firm on it; he behaved as a "positional bargainer" on this. I went back to my office and called a meeting of medium-level managers from all departments. We did a brainstorming session. Among the many suggestions a good one appeared. The option was: "Offer them to share logistics". The suggestion made sense because both firms produced goods of the same kind but not competitive, and their factories and distribution centers were not far from each other. We knew that the trucks we rented many times were not loaded to capacity when moving goods from factory to distribution center. Possibly our customer had the same problem. It was worthwhile to explore this option.
I met with my customer again and suggested that if they accepted our price, we would be ready to share transportation facilities. A quick study showed that by doing this both companies could save a lot of money in transportation costs. The customer realized that my proposal would make him more money than reducing my price. The deal was completed and led to a long term relationship of mutual benefit.
STUDENT: Was it really that easy?
TEACHER: Well, not exactly. Of course our proposal was the subject of a "sub-negotiation" on how the savings in transportation would be shared. But this is another story! Let’s move to the next component.
Insist that the results be based on objective standards
The key here is: what is actually a really objective standard? Of course, the idea is wonderful. But its practical application is very difficult. Parties have very different views on how to define "objective".
STUDENT: Well, laws and regulations are objective standards. They do not depend on the wish of the parties.
TEACHER: Sure, but there is a lot of room for disagreement on many matters not subject to laws or regulations. And in these cases the parties will have to agree first on what are the objective criteria. And even after they agree on the criteria, they must agree on a way to settle disputes on facts.
Kennedy says that the "universal application (of this component) is doubtful". But still the advice is very useful in assuring that an agreement is implementable. The fact that an agreement contains specific objective criteria and a specific arbitration system is very important. This is especially true in respect of the technical or chemical specifications of products.
STUDENT: I see a story coming!
TEACHER: If you insist. One large multinational food company I worked for made a deal with the former Soviet Union to export a large quantity of dehydrated chicken broth manufactured in South America. The agreement did not contain specific objective data like maximum acceptable bacteria count. The agreement referred to samples which would be used as basis of comparison for the inspection of shipments. Apparently this was an objective criteria. But dehydrated chicken broth contains a lot of salt. And bacteria do not like a salty environment, and so the bacteria count on the samples diminished substantially as time passed. When the bacteria content of the samples was compared with recently produced dehydrated chicken broth, the soviet inspector argued –rightly- that the bacteria content was much higher than the sample, and did not allow the product to be shipped. There was a long delay in implementing the agreement and the matter was only resolved after a lot of haggling and confrontation.
Best Alternative to a Negotiated Agreement: BATNA
According to Kennedy, " besides the four components, principled negotiation’s main contribution to negotiating practice has been that of a negotiator’s BATNA".
BATNA means that a negotiator must have a clear idea of the best that could happen if he fails to reach a deal. The best, not the worst.
Let’s go back to the dehydrated chicken broth case. After the soviets rejected the product before shipment, the producers came up with their BATNA, which was to sell the product in their home market. Since they would have to repack the cubes (in general South Americans can not read food labels written in Russian), this had a certain cost. They compared this cost with the penalty the soviets demanded for accepting the "below standard" produce. As long as their BATNA was better than the deal offered by the Soviets, they continued the negotiations, insisting that the penalty was excessive. Finally the Soviets made an offer topping the seller’s BATNA.
STUDENT: And the sellers quickly agreed, of course. Right?
TEACHER: Wrong. When you have an offer on the table better than your BATNA, this is not the end of the negotiations. To the contrary, it signals that from that point on you can keep negotiating for a better deal. As long as your counterparts' offers are below your BATNA, you do not actually "negotiate" because you can not "move"; all you can do is insisting that the position of your counterpart is unacceptable. And if eventually you do not get a better offer you will have to abandon negotiations, because your BATNA is better than the best you can get from a deal at this moment.
Take the Questions and Answers Session whenever you are ready
Question 1
Which is the missing word in this statement: "the theoretical basis of Principled Negotiations is that "issues and controversies as decided on their .......... rather than through a haggling process".
Merits
Question 2
Consider the statement that you should "get what you negotiate, not what you deserve". Does it reflect the Streetwise Tactical Ploys or the Principled Negotiations approach?
The Streetwise Tactical Ploys
Question 3
You are in the middle of an important negotiation. You and your counterpart disagree on the way your product should be packaged. And your counterpart also keeps annoying you by making negative comments on the racial group or faith you belong to. Which of the components of the principled negotiations approach should you apply in this case?
Separate the People from the Problem
Question 4
You are dealing with a prospective customer and you have already agreed on price and delivery schedule. But your counterpart is demanding a 5% discount on cash payment and tells you that unless you accept this demand, there is no deal. You know that the deal would be advantageous to your counterpart even if you did not grant the 5% discount. What is the other party doing wrong according to the Principle Negotiations approach?
The other party is focusing on a position (the "non-negotiable" 5% discount) instead of focusing on interests (your mutual interest in closing the deal). Your counterpart is acting as a "positional bargainer".
Question 5
We said that "in most negotiations there is not a ‘zero sum’ situation in every issue". What does ‘zero sum’ mean?
"Zero sum" means that whatever one party gains the other party loses.
Question 6
The writer tells us a story of a negotiator who offered his counterpart the sharing of transportation facilities.
1. Which of the components of the Principled Negotiation approach was applied in this case?
2. And which method was used to discover this proposal?
1. The generation of options and possibilities of mutual benefit.
2. Brainstorming
Question 7
You are about to enter into a negotiation. You have decided the best thing you could do if you can’t reach an agreement. What do we call this "best thing you could do" if your negotiation fails?
Best Alternative to a Negotiated Agreement: BATNA
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Negotiation Practice: Different Approaches Part 3
In Module III of this course we mentioned that the three basic competing approaches to good negotiation practice are
* Streetwise Tactical Ploys (STP)
* Principled Negotiation
* Negotiation as a phased process
In Modules II and III we described the Streetwise Tactical Ploys (STP) and Principled Negotiation. We will now continue with the next approach.
Negotiation as a phased process
This third approach can actually be applied to the other two.
The first published work on a phased approach was Anne Douglas’ book "Industrial Peacemaking". As the title indicates, the book concentrated on labor negotiations.
Ms. Douglas proposed a three-phased approach:
1. Establishing the negotiation range
2. Getting intelligence (knowledge) about the range
3. Precipitating the decision-reaching crisis
STUDENT: Phase 1 is not too difficult to understand. If I intend to negotiate with my employer, I must decide if I am going to negotiate one or more of the following items: salary and or wages, health insurance, vacations, overtime, etc. What about phase 2?
TEACHER: It means you should find out as much as possible about the range your have decided upon. For example, if you intend to negotiate on salary, you should find out about salary levels for comparable positions in your industry and within your own company.
And before you ask me about phase 3, let me emphasize that Ms. Douglas’ work was centered on labor negotiations. We may interpret the decision-reaching crisis to be a strike or the threat of a strike or a lock-out. In your hypothetical negotiation with your employer you might indicate that you have been receiving calls from headhunters lately, or something like that. Of course, this may be a risky tactic, since a strike or a lock-out may cause serious damage to both parties. And your boss may react by telling you to go ahead and quit. Your decision whether to advance to phase 3 or not must be based upon your research in phase 2. If you are a specialist in a high-demand technical area you may go ahead and try it. If you are an easily replaced clerk you should think twice.
Gavin Kennedy observed what negotiators did and concluded that they followed 8 steps. The hypothesis is that all negotiations have a common structure, independent of the subject, the environment, the culture, or any other particular characteristic (G.Kennedy, J.Benson and J.McMillan "Managing Negotiations")
The 8 steps are:
1. Prepare
2. Argue
3. Signal
4. Propose
5. Package
6. Bargain
7. Close
8. Agree
STUDENT: This is very neat as a clinical description. But what is the practical use of having discovered that these steps are followed almost universally by negotiators?
TEACHER: Good observation. The answer is that the steps or phases actually do not describe what negotiators should or should not do. But once these steps have been identified, negotiators can concentrate in improving their skills in each individual step. Naturally the better they become in their behavior in each of steps of the process, the more effective they will be as negotiators.
It is also helpful for negotiators to be aware of which of the steps they are working on. The steps must not necessarily be followed in the order given, and frequently the process may jump back and forth from one to another; say, between proposing and bargaining. But a negotiator must know at each moment what he and his counterpart are doing, without confusing one step with another.
But let me give you a short description of each of the points Kennedy defined.
1. Preparation. For any negotiation good preparation is crucial, and the more important the negotiation, the more important the preparation. Basically it is necessary to:
* Identify the negotiable issues
* Issues have different priorities and these priorities must be defined
* Define the entry point of the negotiation: how are you going to start?
* Define the exit point: the situation at which you will be prepared to abandon the negotiation
2. Arguing
This word has two meanings. One of them involves conflict and destructive behavior; in this sense it usually includes the word "with". As in "he argued with his boss". The other meaning is about constructive exchange of ideas, as "he and his boss argued about the best way to solve their problem". It is the latter meaning that is used in our list of steps. Arguing, in the former sense, is usually bad for both parties and not advisable. But in any negotiation parties "argue" in the sense of debating, explaining their reasons for certain positions, discussing issues, and exploring alternatives.
Debate is a constant in any negotiation. But sometimes participants get stuck in debate and do not progress. Trained negotiators are skilled in ways to "escape" deadlocks in debate, most based on telling the other party something like: "OK, we can’t agree on this right now, lets move on and come back to this issue later on". Many times the deadlock is not on the basic issue under debate but on an ancillary issue. In this case a skilled negotiator diplomatically suggests that the discussion return to the main point of debate.
If a debate is going to progress towards agreement, it is necessary for the parties to "move", that is to change their positions. This is natural because for every issue there are two initial solutions, since each party will have their own. So the problem you have as a negotiator is how to move without giving in. It is necessary to discover a third solution different from the initial ones.
STUDENT: Let me see. Assume I start by offering a 5% discount and the other party wants 10%. We are in a deadlock, and therefore I move and say: "OK, I’ll give you 7%". Is that a good strategy?
TEACHER: I don’t think so. If you move unilaterally in the hope that the other party will move too, you will probably be disappointed. The other negotiators will interpret that you are just delaying your final surrender, which in your example means giving them the 10% discount. So they will probably insist on their demand, and your unilateral movement will not have solved the deadlock.
STUDENT: I see, but not moving at all is no solution either. The deadlock will become more serious as time passes.
TEACHER: Yes. You should make a proposal of a certain kind. We will talk about that in a moment. But let’s move to Step 3.
3. Signaling
If you ever negotiated with an experienced professional, such as a real estate or car salesperson, maybe you were aware as how attentively this person observed you and whoever accompanied you at the moment. This is because professional negotiators are very alert to signaling. A signal can be verbal or not. If you are inspecting a house as a prospective buyer and tell your spouse: "We could use this room as a home office", say goodbye to any reduction in the asking price. You have signaled that you are accepting the realtor’s price. If you look at your spouse and get a smile and a nod as mute response, you are done too.
Verbal signals can be rather subtle.
Assume you are the realtor now and your prospective customers’ first reaction was saying: "it is impossible that we spend that much money on a house". You "debate" by stressing the value of the nice garden, the view, and the proximity of good schools. Now your prospective customer repeats: "it is difficult for us to spend that much money on a house". If you are alert for signals, you must have noticed one. Which was it?
STUDENT: The prospect changed the wording, from "impossible" to "difficult".
TEACHER: Very good. There are of course many variations. But you have grasped the concept. Negotiators who are not alert for signals should better learn this lesson or change their profession.
The next step is...
4. Proposing
The effective way to make a proposal without indicating your readiness to surrender is the "if-then" format. The best way to word the proposal is the interrogative form. Let’s return to your example of the 5% vs. 10% deadlock. Instead of moving unilaterally and saying "OK, I’ll give you 7%" you might say: "If I did something for you like giving you a 7% discount, would you then do something for me, like shortening credit terms from 30 days to 7 days? Or what else would you propose?
You can make many questions of this kind without committing yourself and as your counterparts answer the questions you will learn more about their positions and attitudes. And you could advance to the next step...
5. Packaging
You can put together a proposal which, by taking into consideration the answers given to the "if-then" questions, will have a good prospect of leading to a deal.
6. Bargaining
The sixth step consists in repeating the proposing and packaging steps until both parties can agree and advance to the last two steps,
7. Closing, and
8. Agreeing
Once bargaining has reached a point were both parties are ready to close the negotiation process by reaching a deal, a written agreement is necessary. This must not be necessarily a full contract, but at least a clear outline of the agreement must be put in black and white and signed by the negotiators. Otherwise, as it frequently happens, people may think they have an agreement only to discover later that they had none. "Misunderstandings" about the terms of an agreement must be avoided at all cost, they are much harder to surmount than an interruption of a negotiation.
Very well, let us have our Q&A session.
Question 1
"Issues have different priorities and these priorities must by defined". To which of Kennedy’s 8 steps do you think this applies?
Step 1, Preparation
Question 2
A negotiation is going on about the sale of a used sports car between the owner and a couple, the prospective buyers. One member of the couple tells the other: "This car is the exact size that fits into our small garage" .
1. To which of Kennedy’s 8 steps do you think this applies?
2. Is it a good negotiating practice for the prospective buyers?
1. Step 3, Signaling
2. No, because it signals to the seller that the buyers are ready to "surrender" and accept the seller’s terms.
Question 3
You and your counterpart are in a deadlock position in a debate. They want to inspect your processing plant twelve times a year without notice, you want 4 inspections a year with one week notice. You decide to move out of the deadlock and say "Well, I’ll settle for 6 times a year and 3 days notice".
1. Is this an effective movement for you? If not, why?
2. What would be an advisable action to break the deadlock?
1. No, because a unilateral movement of this kind tells the other party that they can get more out of you without giving anything in exchange, and they will probably press for more.
2. It is advisable to make a proposal in the "if-then" format. Like "Let’s think of something you could do for me if I accepted a few more inspections a year, which as you know have a cost".
Question 4
It is widely accepted that "arguing" is not a positive behavior. Pedro is negotiating with a US company about supplying canned beans made in his Mexican factory. He tells the American negotiators that his plant has state-of-the-art equipment and very good manufacturing practices, and they answer that they do not agree. Pedro has good reasons to support his claim, like an article published in a German trade magazine about his Mexican plant. But Pedro wants to avoid "arguing", so he refrains from debating this point. What do you, being a first class negotiator, think of Pedro’s attitude?
In the situation described , Pedro did not correctly interpret the advice "do not argue". Arguing in the sense of debating, explaining your reasons for certain positions and discussing issues is not only acceptable but recommendable. Pedro should politely mention the article on the trade magazine as support of his claim and offer to send someone for a copy immediately.
Question 5
You and your counterparts in a negotiation have reached a verbal deal. What should be done before leaving the negotiation table?
All parties should sign a written agreement, in order to avoid possible misunderstandings.
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The People Factor in Negotiations
The People Factor in Negotiations: Personality
TEACHER: I will start this module by making a confession to you. I get the feeling that teaching you about negotiations is very difficult. I feel a bit apprehensive about the best way to continue.
STUDENT: Well, I understand that. It is a rather elusive subject, but I will do my best to cooperate with your teaching effort.
TEACHER: Very well. The point of my statement was to get a reaction from you and establish if you are by nature (personality) a cooperator or a competitor. Your response indicates that your Motivational Orientation is one of being a cooperator. A competitor would have answered my comment with something on the line of "Well, this is your problem, not mine. I am a good student. Maybe you are not as good a teacher as I am a good student".
STUDENT: So it was a trap. OK, I get the point. You are telling me that all people have a basic motivational orientation either to be competitors or cooperators.
TEACHER: Yes, but this is a generalization defining both extremes. Real people have a mixture of both orientations, but in general each individual has a natural inclination towards one of these extremes.
And now we begin our discussion on the role of personality in negotiations. Allow me to express a truism: negotiators are people, and people have different personalities. Therefore, it is reasonable to conclude that personality influences negotiation behavior and, in consequence, the results of the negotiation process.
As proven by your reaction to my statement at the beginning of this session, your personality traits are a predisposition to react in a given form to given stimuli. You responded in a way that was natural to you. It is safe to assume that you would respond in a similar way each time you are in a similar situation.
STUDENT: You are telling me that I am very predictable. Is that good or bad in negotiations?
TEACHER: The point is not whether it is good or bad. The point is whether a negotiator can learn to "manage" his or her personality to respond in the most convenient way. Ideally negotiators should respond to situations according to a cool evaluation of what the best response is, not automatically according to what comes natural to them.
Personality can be defined as an array of traits. The most important work describing the different personality styles of negotiators is the book by Rubin and Brown "The Social Psychology of Bargaining and Negotiation".
We shall continue with the classification of personalities in connection with negotiation behavior.
As we have already seen,
In the aspect of Motivational Orientation (MO) we have two categories:
* Cooperators, or
* Competitors
Now let me add that regarding Interpersonal Orientation (IO) people can be classified according to their degree of social awareness and social ability. The higher a person’s IO is, the more this person will be responsive to his or her relationship with the other negotiators. We can define the extremes to be
* Accommodators (high IO), or
* Avoiders (low IO)
STUDENT: Which personality style is most successful in negotiations?
TEACHER: There is no single answer to this question. Anthropologists say that the key to the survival of the human species is our adaptability. This does not mean that every individual is adaptable. The species is adaptable because individuals have very different traits, and some will adapt to almost any change in the environment, thus ensuring the survival of the species.
STUDENT: Sorry, I thought this was a Negotiation class. I am not interested in anthropology. And I'm saying this to show you that I am not always a "cooperator" nor an "accommodator"!
TEACHER: Naturally. I was using an illustration. My point is that any of the four basic negotiation styles can be highly successful or fail miserably under different circumstances.
STUDENT: Now, if personalities can not be changed, what is the point of your telling me about the different styles?
TEACHER: Two reasons. One is that if you are able to recognize the style of your counterpart, you may be able to manage your relationship more effectively. The other reason is that it may be possible for you to manage a zone of your own personality. This would allow you to be more efficient as a negotiator by adapting at least part of your own unique personality to different circumstances.
Now let me challenge you a bit. A negotiation is going on between Mary and John. John mentions that his boss is a very tough person and that he expects him to return to the office with a good deal. Give me examples of how Mary, John’s counterpart, would react if she were an avoider, and how she would react if she were an accommodator.
STUDENT: Let’s see. Mary the avoider may simply ignore the remark, shrug or even say "sorry, this is not my problem". She may interpret John’s remark as a signal of weakness and press harder. Mary the accommodator instead would show some sympathy and suggest that she is ready to work with John to find a mutually advantageous solution which would help John to please his boss. Since she is an accommodator, not a fool, she may add that this will depend on reaching an agreement advantageous for both parties, not just to make John happy.
I can tell you that much. I wouldn’t know which attitude would be more advantageous for Mary to take as a negotiator.
TEACHER: Neither would I. This depends on the circumstances. If John’s remark is a trick and he is fishing for Mary’s sympathy to gain advantage, responding as an avoider would be the best. If John is sincerely indicating his willingness to reach a deal convenient for both parties, the accommodator reaction would possibly be the best for Mary to make.
Continuing with the personality factor in negotiations, let’s look at the contribution of Andrew Gottchalk, formerly from the London Business School and a person with long time associations with professional business negotiators. Gottchalk also defines four styles, emphasizing in his successful negotiation seminars his concept of the "habit zone" and the "managed zone" of people’s personality. He maintains that the habit zone changes very slowly or not at all, while the managed zone can change quickly to adapt to circumstances if we learn how to do it. Negotiators can also expand their managed zone by learning behaviors basically alien to their particular basic style.
STUDENT: You mean that, according to Gottchalk, Mary the avoider could learn to expand the managed zone of her personality and react more positively to remarks like the one John made, if she decided that this attitude was more advantageous for her in that particular circumstance? Instead of reacting automatically according to her true "natural" style, she could learn to manage her behavior.
TEACHER: Exactly; she could widen her repertoire of behaviors to rapidly adjust to different circumstances.
Negotiators behave with a mixture of their habits and learned behaviors. The more in control of themselves they are, the more easily they will be able to change according to circumstances and to the other negotiator’s behavior. When they lose control, they will tend to relapse to their basic personality traits. Which of course depend on each person’s genetic inheritance, upbringing, life and work experience, etc.
STUDENT: You said Gottchalk had defined four styles, but did not elaborate. Are you going to?
TEACHER: Of course, what do you think I am, an incompetent teacher? Don't be pushy, will you?
STUDENT: I can see what you are trying to show me by your intemperate response to my innocent question. You are illustrating a reversion to his basic personality traits (over-sensitivity, irritability) of a person who lost control after being able to "manage" his or her behavior for a time. And no, I do not think you are incompetent.
TEACHER: I know I am not. And I know you don’t think I am. As you so quickly discovered, I was trying to drive a point home. Anyway, here are Gottchalk's four styles. Please remember, these are not real people, these are stereotypes. In practice real people possess a varying mix of these personality styles.
* The tough style negotiator. Dominant, aggressive. Power oriented. Does not avoid conflict, and many times provokes it, and enjoys it. Competitive, takes risks, and hates losing. Assertive, does not care about other people’s feelings. This style can be effective under the right circumstances. There are also negative aspects: a tough style negotiator can easily be excessively aggressive if upset about not getting his or her way; makes threats, gets into arguments (the bad kind of arguments). Can be perceived as manipulative, inflexible and obstinate, thus creating strong resistance from the other party.
Gottchalk’s advise if you have to deal with this style of negotiator:
1. Give them recognition...
2. but not flattery; they will interpret it as weakness on your part
3. Do not engage in "small talk", stay on the issues and emphasize common goals
4. You can always say no; do not allow yourself to be bullied...
5. but do not play along entering into arguments. Slow down the process to allow the other negotiator to realize that you are not going to surrender.
* The warm style negotiator. People oriented, understanding, supportive and collaborative. Friendly, interested in other people. A good listener. Supports other people’s proposals. Tends to trust others. Patient and calm under pressure. Optimistic about the final results of the negotiation. Seeks and takes advise. Is ready to concede reasonable points of counterparts. The bad aspects: too concerned with relationships, can be soft on issues and submissive. May jeopardize his or her own interests. Is easily disillusioned. Trusting others too much can turn into gullibility. May panic under pressure.
Gottchalk’s advise:
1. Build trust but keep a courteous distance.
2. Get him or her to your side, and ask for more. Do not put on excessive pressure to avoid a retreat in panic.
3. Advance cautiously and slowly.
4. Make sure his concessions will be supported by his superiors.
My own advise: careful, it may all be a ploy to trick you!
* The number stylist. Rational, analytical. Good grasp of detail and facts. Well prepared and well organized. Difficult to upset emotionally, is concerned basically with the practicality of the deal. Can it be implemented? Good at using objective data to justify positions, proposals and negatives. Negative aspects: too focused on details, may miss the basic issues. Emotionally cold. Tends to be obsessive. Despises people using wrong or irrelevant numbers and information.
Gottchalk’s advise:
1. Do not allow the agenda to be delayed by too much detail. Keep it moving.
2. Show and actually take interest in the number stylist’s facts and numbers, they may contain valuable information,
3. Any set of numbers you present must be accurate, your party can not refrain from checking them.
4. Show respect for your party’s expertise.
* The dealer. Flexible, compromising. Great persuasion skills, never gives offense. Open and imaginative, sees opportunities and finds ways to make them work. Highly articulate and willing to make progress. Good to make and accept "if-then" proposals. The negative aspects: too ready to compromise; too little command of details which may lead to sacrificing his or her own interests. A fast talker and too ready to shift positions, may impress others as tricky and insincere.
Gottchalk advises to be positive with dealers. Let them talk to get information. Insist on frequent summarizing and note taking for the minutes of the meeting. Do not let yourself be side-tracked. Insist and repeat your position as needed.
STUDENT: Gottchalk’s classification of styles and his advice on how to react to them is convincing. But I know you are very inclined towards G.Kennedy’s opinions. What does he think about personality analysis in negotiations?
TEACHER: As I said before, a book I consider important if you are seriously interested in business negotiations is Kennedy’s Pocket Negotiator, which the author himself defines as "an aide-mémoire, not a treatise". In this book Kennedy says that these "insights into personality styles" are based on a shaky hypothesis. He concedes that they may be helpful in some circumstances. But relying too much on this approach to evaluate your opponent may be dangerous. Most people, as I said before, are in real life a mix of styles. And they are often able to switch from one style to another. So, if you define your opponent clearly as having one of these specific styles and predict a behavior based on this analysis, you might make a costly mistake. Not because your judgment was wrong to begin with, but because your opponent may be able to switch styles. He or she may start showing a very cooperative behavior and suddenly become highly competitive.
Kennedy’s proposition is to rely more on the actual behavior of the negotiators than on establishing their personality style. He argues that behavior is "much more clear cut, more visible and more reliable that the negotiator’s personality traits".
STUDENT: I see. So we are now moving on to study "behavioral styles" as distinct from "personality styles". Right?
TEACHER: Correct. Let’s move on.
The People Factor in Negotiations: Behavior
Negotiation is of course a decision making process. But is different from other types of decision making processes in business because it involves trading. The decision must be finally taken by an agreement made by two parties with different interests and at least a certain degree of decision power on the final outcome. If one of the parties has no decision power, then there cannot be any negotiation.
In negotiations both parties trade something they have and others want for something others have and they want.
STUDENT: You are repeating yourself. This is the same as the example of shirts and pants on Module I.
TEACHER: Yes, but we are at a more advanced stage now, and I had to re-formulate the definition of negotiations in a more refined and general way. But you are right, the essence is the same.
STUDENT: Fine. Your definition that negotiators are traders should mean that both parties must enter a negotiation willing to reach a deal involving an exchange of goods or services. Or money, of course.
TEACHER: Ideally yes, but let me tell you that negotiations do not necessarily begin with both parties acting as bona fide traders. Many times one of the parties intends to get something for nothing by exploiting the other party’s ignorance, or by making threats. The notion of fairness is frequently absent in the mind of one or both negotiators.
STUDENT: I hope you will now tell me how to proceed if my counterpart in a negotiation does not really want to trade but wants to take advantage of me.
TEACHER: Certainly, but a little later. Let me first define the behavioral styles you will encounter in your negotiations.
* Those who want something for nothing. Kennedy calls them Reds.
* Those who exchange (trade) something for something. Kennedy calls them Blues.
As in the case of personalities, real people show behavioral styles that are a continuum going from extreme Red to extreme Blue. Most of us are naturally in some intermediate zone. But let’s describe the two extreme styles.
* Reds:
* see every negotiation as a contest they have to win and you have to lose.
* try to win by exerting some form of force or domination on you.
* believe in the zero sum concept. All they win you lose and vice-versa.
* do not have a notion of fairness in negotiations. They will lie, bluff, use ploys and dirty tricks, and will not stop short of coercion.
* Blues:
* are willing to trade, to get something by giving you something
* are ready to cooperate with you to find a solution advantageous for both of you
* do not use manipulation, tricks and ploys, believing instead in considering each party’s interests as a way to reach a solution.
* think that most of the times zero sum is not a valid concept and solutions can be found that add value to both parties.
STUDENT: So, when a Red and a Blue negotiate, who wins more often?
TEACHER: Several outcomes occur. The Reds may succeed in intimidating the Blues and make them surrender and give up something for nothing. But Reds may also encounter Blues who are assertive and resist the Reds’ aggressive behavior. This may lead to the negotiation to be abandoned, or may force the Reds to change their behavior and recognize that they must trade if they want to reach a deal.
STUDENT: I met several Reds during the many years I drove in countries where corrupt policemen are the norm. I was stopped many times without good reason and Red Cop threatened to write me a ticket. This was his way to open a negotiation on the size of the "contribution" I would make if he changed his mind about the ticket. I usually behaved as an Assertive Blue. I did not argue, I told the officer to go ahead and write the ticket if he thought it was his duty. But that of course I would dispute it in court, since both he and I knew there was no ground to write it. Red Cop was not really interested in giving me a ticket but in collecting a bribe and as he realized that I was not going to pay, in almost every occasion I got away without the ticket.
TEACHER: Very clever. But maybe you did not even notice that you acted as a disguised, devious Red rather than as an Assertive Blue. You apparently recognized the policeman's authority, but then your firmness and your statement that you would dispute the ticket in court contained a hidden threat for Red Cop. Because you did not propose a trade. You came across as maybe being somebody important with power to somehow harm Red Cop, who knew that his behavior was illegal. So he turned into a Submissive Blue and capitulated by letting you go.
And your story opens the way for me to define four combinations of Red and Blue.
Reds may be:
* Aggressive: want something for nothing. Make threats. Impress you with their power over you.
* Devious: do not make open threats but use finesse. Hide their Red behavior. (Dear Student, do not get angry at me, but this was yourself dealing with Red Cop!)
Blues may be:
* Submissive: ready to capitulate and give something for nothing.
* Assertive: firmly insist that no deal is possible without a trade of something for something.
STUDENT: And according to your interpretation of my dealings with Aggressive Red Cops, I am a Devious Red!
TEACHER: I don’t think so. What I said was that on these particular occasions, when confronted with an aggressive Red Cop, you behaved as a Devious Red. I did not mean that you are always a Devious Red.
The idea of observing behaviors rather than personalities is based on the belief that all of us may behave in different occasions as any of the described types. Sure, people may have an inclination towards one or the other types of behavior. But most of us are capable of all attitudes.
To illustrate this, we will use today’s Q&A session. The questions will define behaviors and you will answer to which of the described styles each behavior belongs.
Questions and Answers Session
Question 1
You make an unconditional offer. To which of the described styles does this behavior belong?
Submissive Blue
Question 2
You make an unilateral demand without offering anything in return. To which of the described styles does this behavior belong?
Aggressive Red
Question 3
You take advantage of somebody’s fear or ignorance hiding your real intention. To which of the described styles does this behavior belong?
Devious Red
Question 4
You keep making offers in the "if-then" format, offering something on condition that the other party gives you something in return. And you reject outright all unilateral demands from your counterpart. To which of the described styles does this behavior belong?
Assertive Blue
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Handling Difficult Negotiations... and Difficult Negotiators!
TEACHER: Hello! In this Module we will witness a very difficult negotiation process. We will comment on the ploys being used, and the behavioral styles of the negotiators.
STUDENT: Did you say a difficult negotiation? Why, are they any easy ones? My counterparts have always been difficult. They rejected my most reasonable requests and did not agree with me. Any deal I have been able to close has been difficult.
TEACHER: True. Any negotiation is difficult to a certain degree. But when I say difficult, I mean a negotiation where one of the parties is what we have previously described as "Red", be it an "aggressive" or a "devious" red or both.
My purpose is to discuss with you how to handle this type of person in the best possible way.
We will observe the negotiation between Mr. Red A. Sell and Dr. Blue A. Driver. Mr. Red is a salesman for an importer of a brand of very expensive, prestigious European sports cars. Dr. Blue is a wealthy physician and an experienced driver, and he often participates in sports car rallies.
OK, let's listen to the imaginary tape of the negotiation process. And please let me tell you in advance that the statements the participants make are exaggerated on purpose, to emphasize the concepts.
Tape play
Dr. B: Nice to meet, you Mr. R. I am interested in one of the cars from the line you sell. Your model FF211 would suit me well.
Mr. R: Yeah. Top of the line. Limited production. OK, maybe I will sell one to you. You must pay the full price in advance; that will be 1 million. Cash.
Dr. B: When can you deliver?
Mr. R: Don’t know. We’ll let you know. Got a lot of orders booked. You know that the FF211 is a limited production car. Let me bring a standard contract for you to sign.
Dr. B: I wish we could discuss the matter somewhat more. Price, delivery date, warranty.
Mr. R: Price is fixed. Payment is in advance. We deliver whenever we get delivery. And as for a warranty, our policy is "no warranty". Make up your mind, mister, I haven’t got all day to spend with you. And I may decide not to sell an FF211 to you anyway if you do not sign the order within the next 5 minutes. I am a busy person.
Tape pause
TEACHER: Let’s pause the tape for a moment. Do you care to comment?
STUDENT: Well, looks like Dr. Blue is prepared to negotiate, and Mr. Red is not. He seems to be extremely difficult and has no manners. He expects Dr. Blue to pay the full asking price in advance, go home to his patients and patiently wait for the car (no pun intended!). He is not even offering a decent warranty on his product. And he is threatening the good doctor with not selling him that lovely sport car.
TEACHER: Very good analysis. The A in the seller’s name Red A. Sell stands for Aggressive. He is a typical aggressive Red.
STUDENT: But there is something I don’t understand. He is not selling bananas, he is selling automobiles. I do not think buyers come in droves to buy them. Why does he behave in such a way? It looks that most buyers would simply walk out and go to some other seller.
TEACHER: You are right; some buyers certainly would leave when treated so badly. But the point we are illustrating here is that Mr. R. confuses aggression with toughness because this behavior worked for him more than once. He has experienced that many prospective customers have submitted to him and accepted his conditions. So he convinced himself that being "tough" is effective for quickly closing a sale on his own terms, and he continues displaying this aggressive behavior.
What he does not know is that the A in Blue A. Driver stands for "Assertive". Let’s push Play and continue listening to the tape.
Tape play
Dr. B: My dear Mr. R, allow me to respectfully tell you a few things: I am not buying any car on these terms; I came to negotiate, not to be bullied into purchasing a high price item on the seller’s unilateral conditions.
I am ready to consider the merits of your propositions, and I expect to trade. You have cars, I have money. I want a car, you want money. That’s a good beginning, but we must agree on how much of a car for how much money, timing of payments and delivery, and the degree of support you give to your product. That is what I mean by trading. No trading, no purchase. There are several good sports cars comparable to the FF211 available for sale. And no hard feelings, this is not personal, it is just business.
Tape pause
TEACHER: We have just seen how Dr. Blue, being an assertive Blue as his name indicates, has reacted to Mr. Red’s aggressive tactics. He has made it clear that he will not submit to intimidation, that bullying does not impress him, and that he is not scared by empty threats. And he has done this in a firm but reasonably polite format. He was firm, not rude. Let’ see if Mr. R has got the message.
Tape play
Mr. R: You are talking bull, Driver. You probably can’t distinguish a good sports car from a jalopy. And you know what, I think you don’t have the money to purchase a FF211, you are just fooling around with me. For the last time, do you want to buy the car or not? (He looks at his watch and then looks at Dr. B). And by the way, are you a real doctor? Or are you trying to impress me with a fancy title you don’t have?
Dr. B: I can’t understand how this company allows an incompetent character like you to represent them. I bet you did not sell a single expensive car like the FF211 in your life. What are you, the dumb son of the owner? Come on, don’t be stupid and you may still make the first sale of your life. Now, let’s talk business, will you?
Tape pause
TEACHER: What Dr. B has done now is match Red’s style. He is responding by switching from an assertive blue to an aggressive red. The tactic may work, but is very dangerous. The two parties may start trading insults instead of trading in the real sense of a negotiation’s give and take. Matching styles must be carefully controlled and the party initiating it must have a clear idea of how to return to civilized negotiation. Usually offering the other party a chance to change behavior without "losing face" is an effective tactic.
Dr. B may add to his last remark something like: "I do not intend to offend you. I am a bit tense after the long trip here, and I understand your being anxious to make a sale on your terms. But a negotiation involves two parties with different interests; so, may we give it another chance and start again?". If Red is not completely bull-headed, he may take up Dr. B’s offer which allows him to abandon his aggressive conduct without losing face and without giving the impression of surrendering. But again, matching styles is dangerous. Mr. R may continue with his aggressive and insulting behavior and Dr. B may respond the same way. An escalation of aggression and insult may start and may lead to results unwanted by both parties. In our example the worst that can happen is that Dr. B walks away without purchasing a car. But in other types of negotiations, like in labor relations, the results may be very damaging, leading to a bitter strike, a lock-out or even sabotage. And more than a few bloody wars started this way.
STUDENT: So, when is resorting to matching the red style justified?
TEACHER: A controlled match of style may be useful to avoid giving the Red the impression of what is called constructive submission. This is the name given to a situation where the submissive Blue is only saving face with his responses to Red, in fact surrendering in all but name.
Let’s rewind the tape and go back to the aggressive opening remarks of Mr. R, and then illustrate a hypothetical response by Dr. B which possibly Mr. R would interpreted as constructive submission, a surrender disguised to save face.
Tape play
Mr. R: Price is fixed. Payment is in advance. We deliver whenever we are ready. And as for a warranty, you won’t need one. Anyway, our policy is "no warranty". Make up your mind, mister, I haven’t got all day to spend with you. And I may decide not to sell an FF211 to you anyway if you do not sign the order within the next 5 minutes. I am a busy person.
Dr. B: Mr. R, I like your car, but I certainly would like a better price, a fixed date of delivery, and some kind of warranty on the car. I guess you will be able to satisfy these requests.
Tape pause
STUDENT: I see. The doctor may not be willing to surrender, but his rather bland response may be interpreted by Red as a surrender all but in name. Now tell me, which is the best attitude to negotiate with the likes of Mr. Red A. Sell?
TEACHER: I will quote G.Kennedy again. His advice is:
* Speak more quietly than they do
* Speak more slowly than they do
* Give way to their interruptions, but pause for a few seconds each time they finish
* Not respond in kind if they swear
* Not argue with their attacks on you and their apportioning of blame
* Not defend yourself against ascribed motives
* Ignore all threats
* Respond positively but specifically and without rancor to any Blue moves they make even in the midst of their Red-dominated activities
* Not respond at all to their Red moves, other than to say "no"
* Affirm whenever appropriate the two principles on which you will agree to a solution (merits of the case and trading)
STUDENT: Good advice. I am sure I will be able to handle aggressive reds. Assertive blues are no problem, I intend to behave like one and negotiating with a counterpart with the same style should not be too difficult. But what other kind of dangerous wild animal can I encounter in the jungle of business negotiations?
TEACHER: A very dangerous one. A wolf covered with a lamb’s hide: a "devious Red". The name tells it all. The problem is how to recognize them, because in general they act as assertive Blues until they gain your confidence and then they strike showing their true style.
STUDENT: Scary. I have met them. And the worst part is that sometimes I created the monster myself.
TEACHER: Exactly. Because there is a "Red side" in all of us (even inside yourself, although you claim to be mostly an assertive Blue). It is human nature to grab an opportunity of getting something for nothing. This is why you "created the monster yourself" on occasions when you offered your assertive Blue counterpart a chance to turn into a Red and get something out of you for nothing. Tell me, what types of mistakes did you make to tempt the Blue to become a Red for a moment at least?
STUDENT: Well, once I confided to the other party after they quoted a price I assumed to be final and was ready to accept, that I needed their services very urgently and did not have another supplier. Blue instantly turned Red and said: "Oh, I forgot to mention that the price I quoted did not include my provision for income tax. I was talking of my net pocket income. I am in the 40% marginal tax bracket, so it’s the quoted price plus 67%."
And I was trapped, because I really needed the services urgently. And his arithmetic was correct! Say he quoted $1000 at opening. He then asked for $1670, a net income of ca. $1000 after a 40% income tax. Due to my mistake I had to pay 67% more than the opening offer from my counterpart!
TEACHER: Well, you mentioned that you knew that the other party was normally an assertive Blue. You "created the monster" yourself. But the same may happen if the other party is not a Blue tempted by a chance to gain something for nothing, but a devious Red. The results would have been the same. And the problem is that one can never be sure of what the other party’s true style is, or when an authentic Blue will act as a Red if we tempt him by showing a weakness, as you did.
STUDENT: What you are saying is that a clever negotiator should never not even when dealing with known Blue counterparts, expose himself to exploitation by revealing expectations or true interests.
TEACHER: Right. Also, our clever negotiator will never make an unconditional offer in the expectation that the other part, being also a Blue, will reciprocate automatically. You must never allow yourself to slip from the assertive Blue attitude of insisting that you are open to trading, not to making concessions.
If you keep making conditional proposals (the if-then format) you may be able to deal with all styles of negotiators.
The Reds, once they are convinced that you are serious about your proposals, will realize that they can not bully you into accepting their terms.
STUDENT: Yes, but if the other party is a submissive Blue, I may be losing the chance of getting something for nothing!
TEACHER: You are showing your Red side. I am assuming you are not trying to exploit the other side. Anyway, you avoid the always present danger of scaring a submissive Blue away from the table; and a serious conditioned offer will be quickly accepted by a submissive Blue and you can move on.
As for devious Reds, they must be very careful in handling your proposal because they may show their true style if they reject it emphatically. They must continue being devious and at least make you a counteroffer. And honest assertive Blues will easily understand your movement because it is the way he or she normally acts, and will respond in the same way.
STUDENT: Fine, I guess we have covered the subject of how to proceed with difficult negotiators quite well. I have learned about personalities and styles. But at the beginning of this course you told me that you would teach me all "manipulative ploys".
TEACHER: I will, but remember that I am not recommending their indiscriminate use. Leaving apart any ethical considerations, most of the times they do not work in serious business negotiations. Why? Because most business negotiations are repetitive, with the same counterparts. If you use tricks and ploys with a customer, you may win once. However, you will probably say goodbye to the customer, he won’t return. Also, most experienced business negotiators will immediately recognize a ploy and counter it, and possibly identify you as an aggressive Red and treat you as one.
I said I will describe these ploys and tricks for you to be able to quickly recognize them and counter them when used against you. I am not encouraging you to apply them as a way to become a successful negotiator.
But it will be useful for you to recognize ploys and tricks that might be used against you, both to counter them and to recognize that your counterpart is an aggressive Red stylist. A "red" light will be turned on inside you, and this is good.
Most tricks, bluffs and ploys are targeted to influence your perception of the relative power of your counterpart and yourself. Perception of power influences your expectations. If you perceive that they have less power relative to you, you increase your expectations. And vice-versa. People using these tricks try to manipulate your expectations according to their interests and the strategy they apply. They may feign weakness making you believe that you have a lot more power than they have, to make you jump into a dubious deal by believing you have the upper hand. Or they may feign power to get concessions out of you.
In any case, these are manipulative actions.
Manipulative ploys are usually applied in three phases. To illustrate how a typical manipulator works, let me return to our friend Dr. Blue A. Driver. He did not purchase the car from Red A. Sell, and since he felt he was street dumb he attended a seminar, learned lots of ploys and tricks, and decided to become a manipulator himself. He visited a different sports car importer. Let’s play the tape. Once again, the example is exaggerated to emphasize the concept.
Tape play
Driver: (in phase 1, establishing his dominance)
"I am interested in your car, but you must give me a 10 year free warranty" (establishing preconditions)
"I am not negotiating payment terms, I need a 5 year interest free loan to pay for the car" (defines issues as non-negotiable)
"Also, we must finish our talks within two hours, I have another meeting" (deciding the Agenda unilaterally)
"And you better give me a good deal, I am very friendly with the head of the Better Business Bureau" (hinting at threats)
"And don’t forget that your car is not the best in the market, and your company has not the best of reputations. And I understand you did not fulfill your sales quota last year" (disdainfully dismiss your product, your company, and yourself)
Driver: (in phase two, shaping the deal in his favor)
"We are almost there, just give me a free voucher for 1000 gallons of fuel"
The seller agrees, and Driver says: "Oh, and I would need you to pay half of the insurance on the car the first year". (using "salami" –cutting a slice at a time to his advantage)
Driver (in phase three, working to close the deal on his terms):
"OK, our two hours are almost up, I have to leave very soon" (a phony deadline) "If I don’t walk out of here with a deal, I’m not coming back" (claiming it is now or never)
Tape pause
STUDENT: That was really a metamorphosis of our doctor / driver. Anyway, did he succeed by using these manipulative tactics?
TEACHER: Well, he bought the car and he is convinced that he won the negotiation. I suspect the seller played along and outwitted him; the doctor was fresh out of a seminar, and the salesman had been at this work for many years. Anyway, we saw how the doctor applied a few manipulative ploys. The rest of this course will be an A to Z of negotiation concepts, including ploys and counters. And whenever you are ready, let’s move to our questions and answers session.
Take the Questions and Answers Session whenever you are ready Top
Homework Assignment Before advancing to the next Module please do the Homework Assignment of this Module click HERE. Thanks.
Questions and Answers Session
These are self-evaluating questions, not to be sent to the school for grading. They are intended for your own evaluation of the knowledge you have acquired. If you feel you need it, just review the Module again. When comparing your responses with the Model Answers, do not expect them to be exactly the same. The idea is to make sure that you have grasped the concepts, not the exact wording.
Question 1
Why is it that so many negotiators continue displaying an Aggressive Red attitude when this is often a negative behavior?
They have experienced that many prospective customers have submitted and accepted their conditions. So they have convinced themselves that being "tough" is effective for quickly closing a sale on their own terms, and continue displaying this aggressive behavior.
Question 2
When Dr. Blue firmly stands up to Mr. Red’s aggression, with what style is he behaving?
As an Assertive Blue
Question 3
When Dr. Blue is quoted as responding insults with offense, what strategy is he following?
Matching Styles
Question 4
What would be the useful purpose of a controlled style matching strategy?
Avoid giving the Red the impression that we are showing constructive submission
Question 5
What type of attitude may turn a Blue counterpart into a Red?
Revealing expectations or true interests, or making unconditional concessions
Question 6
Which is the basic purpose of bluffs, tricks and ploys?
Most tricks, bluffs and ploys are targeted to influence your perception of the relative power of them and yourself
Question 7
Manipulative ploys are usually applied in three phases. Which are they?
Establishing dominance - Shaping the deal in their favor - Closing the deal on their terms
Question 8
When Dr. Blue, in his new manipulative style, stated: "OK, our two hours are almost up, I have to leave very soon", what trick is he using?
Setting a phony deadline
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