Negotiation Genius How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond
By Deepak Malhotra
Bantam Copyright © 2007 Deepak Malhotra
All right reserved. ISBN: 9780553804881
Claiming Value in Negotiation
The year was 1912, and the U.S. presidential election was in full swing. Former President Theodore Roosevelt had decided to return to the political arena due to his frustration with the way his successor, President William Howard Taft, had been running the country. It was a tough campaign, and every day seemed to present a new challenge. But here was a challenge that no one had anticipated: three million copies of Roosevelt’s photograph had already been printed for circulation with a campaign speech when Roosevelt’s campaign manager discovered a catastrophic blunder—the photographer had not been asked for permission to use the photograph. To make matters worse, copyright law allowed the photographer to demand as much as $1 per copy of the photograph. In 1912, a loss of $3 million would be equivalent to a loss of more than $60 million today. No campaign could afford this price. The alternative was almost equally unattractive; reprinting three million brochures would be tremendously costly and could cause serious delays. The campaign manager would have to try to negotiate a better deal with the photographer. If you were the campaign manager, how would you handle this negotiation?
Now consider how Roosevelt’s manager dealt with thesituation. After carefully analyzing the problem, he sent the following telegram to the photographer: “Planning to distribute three million copies of campaign speech with photographs. Excellent publicity opportunity for photographers. How much are you willing to pay to use your photographs?” Respond immediately.
The photographer did not take long to issue a reply. He sent back a telegram with the following message: “Appreciate opportunity, but can only afford $250.”
Most people, when they hear this story, are taken aback. How did the campaign manager turn around such a hopeless situation so completely? The reason for this reaction is that even the most seasoned negotiators may not think systematically about negotiations, nor prepare for and execute negotiations strategically. Our goal is to make the manager’s solution to the negotiation problem appear obvious to you. By understanding and applying the principles and strategies of value claiming covered in this chapter, you, too, will be able to han- dle difficult negotiations with the kind of genius demonstrated by Roosevelt’s campaign manager.
Strategies for Claiming Value in Negotiation
Throughout this book, we will talk a lot about value. How do we define the term, exactly? Value is whatever people find useful or desirable. You may measure value in dollars, utility, happiness, or a variety of other metrics. Negotiation helps to create value through agreements that make both parties better off than they were without an agreement. But how much better off is each party? This depends, in part, on which party managed to claim (or capture) more of the value that was created. For example, if a buyer negotiates a very low price for an item, she claims more value; the seller claims more of the value (created by the deal) when the price is high.
For many people, learning to negotiate more effectively means one thing above all else: “How can I get a better deal for myself?” Or, put another way, “How can I claim the lion’s share of the value in any negotiation?” While Negotiation Genius takes a much broader view of negotiation, we, too, start with this basic goal: getting the best possible deal for yourself.
We begin by considering a negotiation over the sale of real estate that allows us to address key issues that you will face in virtually all negotiations. The Hamilton Real Estate case is a relatively simple negotiation: two parties (a buyer and a seller) are negotiating over one issue (price). Within this framework, we cover all of the following aspects of negotiating: preparing to negotiate, avoiding common negotiator mistakes, deciding whether to make the first offer, responding to the other side’s offers, structuring your initial offer, finding out how far you can push the other side, haggling effectively, claiming maximum value without sacrificing the relationship, and managing your own satisfaction.
When we use the Hamilton Real Estate case in our negotiation courses with executives and MBA students, we assign half of the participants to the role of “seller” and the other half to the role of “buyer.” Each side is given confidential information regarding its needs and interests, and is asked to prepare its strategy for the negotiation simulation. The two sides then meet and try to negotiate an agreement over the sale price of the property.
As you read the case from the perspective of the seller, think about how you would approach this negotiation.
Hamilton Real Estate
You are the executive vice president of Pearl Investments, a holding company that specializes in real-estate investments. Among your many real-estate holdings is a large piece of property located in the town of Hamilton. The Hamilton real estate is earmarked for divestment, and you are responsible for negotiating its sale.
The amount that a potential buyer will pay for the Hamilton property depends on a number of factors, including the buyer’s ability to pay and their planned use of the property. Each of these factors is critical. For example, your experts have estimated that if the land were developed for commercial use (e.g., a set of office buildings), the land might be worth 1.5 to 2 times as much as if it were developed for residential use (e.g., apartment buildings). Unfortunately, commercial developers are unlikely to be interested in the property because Hamilton zoning laws do not allow for commercial development. While some local politicians have recently discussed allowing commercial development in Hamilton, they have taken no action in this direction. As a result, Hamilton has fallen off the radar for commercial developers.
Over the last few weeks, you have entertained offers from a few potential buyers. All but one of these offers has fallen substantially short of your expectations. The offer of most interest to you is from Quincy Developments, a developer that is planning to construct a set of high-end apartment buildings on the Hamilton property. The offer is for $38 million.
Apart from being the highest offer you have received, this deal interests you because of Quincy Developments’ reputation for bargaining in good faith. While this gives you some confidence that the offer is reasonable, you are not necessarily ready to accept it as is. You expect that you could negotiate the price up an additional 10–15 percent if you chose to pursue the offer. You do not think that Quincy Developments would go any higher than that.
For now, however, you have chosen not to negotiate with Quincy Developments. Why? Because Estate One, a premier real-estate company in the region, has just sent word that it is also interested in the Hamilton property. You believe that Estate One would develop the property for the construction of luxury condominiums, as it does with virtually all of its properties. You should be able to negotiate a higher selling price for the Hamilton property if the land is to be used for luxury condominiums rather than for apartment buildings.
You have decided to meet with the CEO of Estate One, Connie Vega, to negotiate a sale. If these talks are not successful, you plan to return to Quincy Developments and finalize a deal. You will not wait for other offers. Quincy Developments has said that its offer expires in three days.
Here is what you know about Estate One: It is a midsize company that is one of the biggest regional developers of residential real estate. Estate One’s CEO has been with the company since its founding twenty years ago and is known to be extremely well connected politically, linked to knowledge brokers at all levels of state and local government. Estate One is not a competitor of yours.
To prepare for the negotiation, you have collected as much data as possible. The following information is public knowledge, and is certainly known to the CEO of Estate One:
•Pearl Investments purchased the Hamilton property seven years ago at a price of $27 million.
•Since the purchase, land value in Hamilton has increased substantially. An evaluation of recent sales of somewhat comparable properties suggests that the Hamilton property could be worth $36–44 million if developed for residential use.
•If the land is used for the construction of luxury condominiums instead of apartment buildings, it is probably worth an additional 20 percent.
The impending Hamilton negotiation raises many questions. What would you do first in this negotiation? How would you approach the CEO of Estate One, Connie Vega? Would you make the first offer or would you let her make it? What information, if any, would you share with her? What information, if any, would you try to acquire from her? How much would you expect to earn on the Hamilton sale? How would you know if you got a good deal?
Preparing to Negotiate
Over the course of training and consulting with tens of thousands of negotiators and dealmakers, we have become aware that, by far, the most common and costly mistakes in negotiation take place before talks even begin. Interestingly, the problem is usually not faulty preparation, but a lack of preparation altogether! Under the false assumption that negotiation is “all art and no science,” most people fail to prepare adequately for negotiation. When coupled with the belief that the “real action” begins at the bargaining table, even smart, thoughtful, and motivated people walk into substantive negotiations ill-prepared.
Thus, it is critical that you adopt a thorough methodology to help you prepare to negotiate. Our five-step pre-negotiation framework offers a simple yet effective approach. (In the chapters that follow, we will add to this list as we confront more complex negotiations.)
Step 1: Assess your BATNA. The first step in any negotiation is to ask yourself, “What will I do if the current negotiation ends in no deal?” In other words, you need to assess your BATNA, or best alternative to negotiated agreement—the course of action you will pursue if and when the current negotiation ends in an impasse.3 Without a clear understanding of your BATNA, it is impossible to know when to accept a final offer and when to walk away in order to pursue other options. Your BATNA assessment requires the following three steps:
1.Identify all of the plausible alternative options you might pursue if you are unable to reach an agreement with the other party.
2.Estimate the value associated with each alternative.
3.Select the best alternative; this is your BATNA.
In the Hamilton case, you have a number of alternatives if the negotiation with Connie Vega ends in impasse: you might wait for other offers, you might approach Quincy Developments to finalize the deal, or you might decide not to sell at all. The information available to you strongly suggests that your BATNA would be to finalize a deal with Quincy.
Step 2: Calculate your reservation value. An analysis of your BATNA is critical because it allows you to calculate your reservation value (RV), or your walk-away point in the current negotiation. As the seller in the Hamilton case, your reservation value is the lowest offer you would be willing to accept from Connie Vega. What might this offer be? If the negotiation ended in impasse, you would return to Quincy and finalize the sale. Quincy has offered $38 million. Is $38 million your reservation value? Not quite, because you could negotiate this price further with Quincy. Specifically, you believe that you could negotiate a 10–15 percent increase in the offer, yielding an amount ranging from $41.8–$43.7 million. Your reservation value should fall within this range. Continues...
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