Negotiations and Distributive Negotiations

Agenda• Negotiation• Distributive negotiation• Tools for distributive negotiation• Debrief BioPharm-Seltek• First offers

Negotiation• A social process in which conflict is

resolved – Results in an allocation of resources or an agreement on how

individuals will work together in the future• Five characteristics of negotiation

– Two or more parties– You anticipate a better outcome as a result of the negotiation– The parties involved prefer mutual agreement to other

outcomes– The parties involved understand that there will be give and

take– Tangible and intangible components are involved in the

negotiation

When negotiating makes sense

• When you need the help of others• When others can give you more than what

you can get on your own• When you are willing to give up resources

valued by others• When working with another party can help

you overcome challenges with other parties

The largest private equity deal of all time…

Why did this become a bidding war?

Distributive negotiation• Competitive• Win-lose• Focus on claiming value• Negotiators’ goals are in direct conflict• Resources are limited• Instrumental concerns only: do not

care about the relationship with the other party

What are examples of distributive negotiation?

Tools for distributive negotiations

• BATNA- Best Alternative To a Negotiated Agreement– What would you pursue if this negotiation

doesn’t work?• Reservation value– What your BATNA is valued at in the

negotiation– Can be dollars, points, land, flying pigs, etc…

• Aspiration value– The value you aspire to in the negotiation

Zone Of Possible Agreement

• The set of all possible deals that would be acceptable to both parties

Seller’s reservation value

Buyer’s reservation value

Bargaining Zone

Zone Of Possible Agreement

• Aspiration values help a negotiator know how far they might try to stretch their outcome beyond the ZOPA

Seller’s aspiration value

Buyer’s aspiration value

Bargaining Zone

What was the Zone Of Possible Agreement

in BioPharm-Seltek?

• What is BioPharm’s BATNA? • Buy a plot of land and build a new plant. Land will cost $500,000. Building

will cost $25 million and will take 12 months. • For each month BioPharm is not producing product, it will lose $1million in

profits. Note this is not a very strong BATNA

• What is BioPharm’s reservation price?• Given the cost of building a new plant is $25 million that could be considered

its BATNA. • However, factoring in lost profits, the FDA approval, and experienced

workforce of Seltek, one could construct a reservation price closer to the $40 million available for investment.

• What is Seltek’s BATNA?• Reconfigure the plant for general manufacturing. This would cost $3 million

and will take 6 months. • Doing so will give the plant an appraised value of $10 million. Note this is

also not a very strong BATNA.• What is Seltek’s reservation price?

• $7 million = $10 million (appraised value) minus $3 million (cost of reconfiguration)

BioPharm-Seltek

$7 M

$11 M $15 M

$13.5 M$13.5 M

$13 M

$12 M

$12 M

$12 M

$11 M

$25 M$16.5 M

$18 M$23 M

$25 M

$19 M$16 M

$17 M$29.8 M

Sale PriceMEAN: 19.8SD: 5.5

Sale Price

SALE PRICEFIRST OFFER

Above average = 62% were sellers Below average = 67% were buyersCorrelation of First Offer and Final Offer = 77*

Initial Offers

• He who speaks first: set anchors and adjustments are made from them

• How much? ALMOST 50% of variance (.72-.94)

• SO..........

• MAKE THE FIRST OFFER???

Targets

• Biopharm reservation point?• Seltek reservation point?

First offers in negotiation• First offers can– Anchor a distributive negotiation– Help to define the ZOPA– Extreme first offers can let you make concessions

(thus aggressive offers do not necessarily make you aggressive)….but it also can backfire

• Make a first offer only when you have sufficient information about your own and the other party’s aspirations and walk away points

First offers in negotiation• What if they make the first offer????

• Re-anchor with a counter offer• Typically sale price is at the mean of

the two offers• Concessions are different when dealing

with an extreme offer – make smaller concessions to give the impression that you are reaching your reservation point

Making & breaking a first offer

• Ignore other anchors• Rely on information, not influence• Have a strong first offer, then allow

for moderation• Avoid allowing your own or others’

emotions to interfere with the negotiation

Common information

• Getting to yes: Objective standards– Buyers: pick the standard that implies the lowest

price (8M)– Sellers: (20 – appraised value of 4)– Could you convince the other of your view of the

objective standard?• Fairness?• Individuals select information that is more favorable

and view it as more relevant and more plausible vs. the other side

Compaitble Issues

• The work force?• How did you use it?• Risks?

Lets Negotiate!!!

Texoil• Two-person negotiation– Station owner– Texoil representative

• Trying to negotiate the sale of a gas station

• Outcome– Sale price

Texoil - logistics• 15 minutes to prepare & break– REMEMBER: YOUR ROLE IS

CONFIDENTIAL!• Remainder of class to negotiate• Deliverable– Outcome form with names, roles, and

detail of the agreement

Station Owner Texoil

Next Wek: Critical Negotiation Analysis

• Bad news: First big assignment! (counts toward half your negotiation reflections grade ie. 10% of total grade)

• Good news: This is work you will do mostly during class time

Assignment Details• Video: On the next day of class, you and your negotiation partner will be expected to record your

negotiation and use that recording as a self-assessment tool.– Upload it to Google drive (please share your video with esblockgmail.com) titled Lastname_Lastname_NewRecruit– Failure to upload the video by September 15th/21st will result in a 25% reduction of your final grade on the paper.

• Video Watching: During the second half of this module (Sept 20th/21st) you will rotate and watch the videos of two other teams. – This will provide you with the opportunity to compare your strategies and performance in the negotiation with

others.– This portion of the class can be done in the space of your choosing, but must be done during the class time (note:

the videos will only be available to you during class time).• Assignment: Provide a critical assessment of your performance in the negotiation

– Do not summarize what you did without analysis– Consider your strengths and weaknesses (substantively)– List goals for improvement – Use course concepts linked with specific examples to illustrate your points– No more than 5 pages– I expect your writing to be clear and demonstrate a high level of critical thought. You will be graded on the quality

of your analysis, not your actual performance in the negotiation.

Buyer Seller

Buyer Seller Team Video 1 Video 2