In this post we talk about the framework for real world negotiation strategy. The content of the post follows lengthy discussions with Frank Gong on the matter.
Expertise and Experience
In the real world there are two key elements to success: expertise and experience. Expertise implies a certain level of proficiency in your job or field, particularly when it comes to understanding the matter in a structural way. Typically you obtain expertise by studying a course or going to school. Experience is the skill and knowledge you build up over the years as you’re practicing in the real world.
Expertise and experience are both important in the real world. They can help you find a solution in a structured way, or come to a solution faster or more efficiently.
While it is advised to gather expertise first, then gain experience in the real world, it is not the only way to be successful. As a general rule of thumb, it’s good to have both. If you are experienced in a certain field it pays to improve your expertise further. If you have great expertise, it’s valuable to return to the field and gain experience through practice.
In this post we will discuss a negotiation strategy shared with me by Frank Gong.
System 1 and System 2 Thinking
Broadly speaking you can separate the way we think in two categories. System 1 thinking is fast, and System 2 thinking is slow.
You can conceptualize System 1 thinking as using your intuition to make a decision in a split second. It requires little to no conscious effort and is largely automatic. You may not even be aware you’re using System 1 thinking! The drawbacks is that it is strongly biased towards false positives and is often distracted by appealing narratives.
On the opposite side, System 2 thinking is slow and conscious. It requires you to focus your attention to the problem and carefully consider the implications. It is more logical and rational, therefore people like to believe they use System 2 thinking most of the time.
In real world negotiation, in particular in the business setting, it is advise to always rely on System 2 thinking processes.
Five Step Negotiation Strategy Preparation
In preparation of a negotiation, there are five essential steps
- Define your Target Point (TP), your Reservation Point (RP), and your Best Alternative To a Negotiated Agreement (BATNA)
- Improve and expand your BATNA
- Determine your opponent’s BATNA
- Define the Zone Of Possible Agreement (ZOPA)
- Determine the Negotiation Fit
In the next section we will cover each step more in detail.
1 – Target Point, Reservation Point and BATNA
Based on the outcome of a System 2 thinking and analysis process, you should define two key situations that may occur in the negotiation: when to agree and when to walk away. Your Target Point defines what you ideally want from the negotiation, whereas the Reservation Point defines the point you do not wish to cross.
For example, when you are buying new running shoes your Target Point may be $60 for a pair of shoes and your Reservation Point may be $80. If the listed price is $90, you may haggle with the shop owner to lower it to $60. If the shop owner drops the price to $70 you can accept the offer even though it’s not as low as you wanted.
Setting a Target Point and Reservation point helps us override the urge for System 1 thinking to take over. In the example above, it would prevent us from buying shoes we really want for a price that is higher than our reservation point.
To determine your Reservation Point, it is important to determine what is your Best Alternative To a Negotiated Agreement or BATNA. A BATNA is nothing more than alternatives to your negotation. In the example of the running shoes, a simple BATNA is to go to the store next door and look for better priced running shoes
2 – Expand and Improve Your BATNA
The best time to look for a job is when you already have one
Common wisdom as the quote above teaches us that the best antidote to the lack of a good alternative, is to always work on improving or expanding your alternatives. The better your alternatives are, the more power you will have within the negotiation. You have the power to say no, walk away and still create a win-situation.
You can ask a couple of simple questions to work on your BATNAs:
- Can you do without any agreement?
- What is the cost of walking away from the negotiation?
- Are there any alternatives available?
Once you have identified the possible outcomes, it’s important to continue to work on improving them
For example: you have stagnated in your career and are looking to improve this. In first instance you may consider to negotiate a raise and promotion. If you don’t have a BATNA, four things may happen:
- Success: you are given a raise and promotion
- Partial success: you are given a raise or a promotion, but not both
- No success: you are denied either a raise or promotion
- Failure: you are let go
To avoid disappointment, or disaster, let’s consider the BATNAs in this situation.
One alternative is to consider looking for employment outside the organization. Applying for open positions on the job market gives you a good understanding and appreciation of your worth on the market. Perhaps you find a job that pays better, that is more interesting, or is closer to home. In this case, expanding your BATNA means looking for other job opportunities. Improving your BATNA means going to interviews and impressing the potential employer.
Another alternative to consider is the worst possible outcome: getting fired. If you have been in a high-paying position and saved up plenty over the years, then maybe it’s not such a bad idea to take a couple months off. However, if you have little savings and a lot of expenses then taking time of is a weak alternative. If you want to expand your BATNA with the option of taking time off, you can improve the BATNA by looking for a second part-time job.
3 – Determine Your Opponent’s BATNA
To know your Enemy, you must become your EnemySun Tzu
An obvious aspect of preparing for a negotiation is to understand the position of your opponent. The best way to prepare is to think about what you would do if you were your opponent. So consider what are their Target Point, Reservation Point and BATNAs.
Thoroughly evaluating your opponent’s BATNAs gives you the advantage of knowing if their are negotiating in good faith. It will also help you determine their possible Reservation Points which will increase your power in the negotiation.
However, even though you can spend a lot of time on the analysis, be aware that you are not your opponent. There will be information asymmetry, meaning there will be things you are aware of that they are not and vice versa. Factors that you deem important may be unimportant for your opponent. Therefore beware of over-valuing information you are able to gather.
4 – Zone Of Possible Agreement
The zone of possible agreement (ZOPA) defines the virtual area between two parties where an agreement can be formed where both parties agree. Within the zone an agreement is possible. Outside this zone, an agreement is not possible. This zone is sometimes referred to as a Win Set.
Typically the ZOPA lies between the reservation points of both parties. In the example of the running shoes, the zone of possible agreement is between $70 (lowest price the shop owner is willing to sell) and $80 (the highest price you’re willing to pay).
- $90: Target Point Seller
- $80: Reservation Point Buyer
- $70: Reservation Point Seller
- $60: Target Point Buyer
- ZOPA: $70-$80
Considering this example, it is also easy to understand the concept of a win-win negotiation. There’s a clear win for the shop owner for making a sale, and there’s a clear win for the buyer as they own a new pair of running shoes. There is a negotiation surplus
5 – Determine the Negotiation Fit
Within the context of a negotiation, it is important to aim for maximum profit. However, the negotiation usually exists within a broader context that may impact the probability of reaching an agreement. If you pursue maximum profit within the context of the negotiation, you may risk minimizing the probability of the deal going through. In which case you end up with no profit, or worse.
Having a good understanding of the broader context of the negotiation will help you determine the negotiation fit.
In the example of the negotiation for a raise and promotion, the broader context implies that in case of success it is likely you will have to continue to work with your colleagues. Squeezing your boss for every penny in the salary negotiation may leave a bad impression. That may cause your boss to be unwilling to keep you in the loop or not having your back in case a project goes wrong.
Win-Win: Distributive and Integrative Bargaining
To wrap up this post let’s return to point four of the five-step program: the zone of possible agreement. As mentioned, it is possible to create a win-win as opposed to a zero-sum situation in the negotiation. This is the difference between distributive and integrative bargaining.
In distributive bargaining everything is a zero-sum negotiation. That means the size of the loss of one party is the exact size of the win of the other party.
For example, let’s consider two children who are tasked with dividing 30 M&M chocolates. Any amount higher than half, or 15, for one child is the same amount of loss for the other side. This is a clear zero-sum negotiation. The optimal strategy for this kind of situation is to have one child divided the candy into two groups and allow the other child to first pick the group of choice. That ensures the division of candy will happen in good faith.
Does that mean this situation is always a zero-sum negotiation? No.
In integrative bargaining we come to a win-win agreement by gathering more information so we better understand the needs and desires of both parties. The size of win of one party may
For example, let’s consider the 30 M&Ms come in 5 different colors distributed equality. Child A loves Red and Black, and is neutral about Green, Blue and Yellow. Child B loves Red and Blue, is neutral about Green, and is allergic to Black and Yellow.
In a distributive agreement each child would have 3 M&Ms of each color. The final result would be that 6 candies are not eating as Child B is allergic to both black and yellow.
In an integrative agreement Child A can choose to give up 3 of their blue candies (which they feel neutral about and the other child loves) in exchange for all of the yellow and black candies (which Child B is allergic to). The final result is that both children will eat more candy.
- Distributive Bargaining
- Child A: 15x candy (Red, Black, Green, Blue, Yellow)
- Child B: 9x candy (Red, Blue, Green)
- Throw away: 6x (Blue, Yellow)
- Integrative Bargaining
- Child A: 18x candy (3x Red, 6x Black, 3x Green, 0x Blue, 6x Yellow)
- Child B: 12x candy (3x Red, 3x Green, 6x Blue)
- Throw away: 0x
The main take-away from this article is that negotiations are best done by applying System 2 thinking (rational and logical) and that information gathering and evaluation is your best friend.