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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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