BFA_ch2 PDF - Bargaining for Advantage

# BARGAINING FOR ADVANTAGE: NEGOTIATION STRATEGIES FOR REASONABLE PEOPLE ## 2 The Second Foundation: Your Goals and Expectations > High achievement comes from high aims. > -KING CHING OF CHOU (1100 в.с.) > I believe in always having goals, and always setting > them high. > - SAM WALTON, FOUNDER O...

# BARGAINING FOR ADVANTAGE: NEGOTIATION STRATEGIES FOR REASONABLE PEOPLE ## 2 The Second Foundation: Your Goals and Expectations > High achievement comes from high aims. > -KING CHING OF CHOU (1100 в.с.) > I believe in always having goals, and always setting > them high. > - SAM WALTON, FOUNDER OF WALMART In 1955, a small Japanese company called Sony Corporation had a new product: a $29.95 miniature transistor radio. The radio was selling well in Japan, but Sony's energetic leader, Akio Morita, was not satisfied. He wanted to introduce Sony's radio to the world's biggest consumer market: the United States. Morita went to New York City to see if he could interest American retailers in selling Sony's new radio. He quickly ran into a problem: the tiny radio was unlike anything Americans had ever seen. As Morita would later write, many US companies said, "Why are you making such a tiny radio? Everybody in America wants big radios." Morita was persistent, however, and he soon attracted the interest of Bulova, one of the era's most respected names in electronics. Bulova offered to buy one hundred thousand of the radios for distribution through its strong US retail network. Morita was stunned by the size of the order. At the price that Bulova was willing to pay, the order was worth several times Sony's total working capital. This was the deal of a lifetime. There was just one condition to the offer: Sony would have to act as an "original equipment manufacturer” in the deal; that is, Sony would make the radios but Bulova would sell them under its own brand name. This condition conflicted directly with an important long-range goal Morita had set for his firm: to establish Sony as an independent, global brand name based on its innovative, quality products. Morita cabled his executive board at Sony headquarters in Japan for instructions. The board enthusiastically cabled back its response: forget about the problem with the brand name and take the order. Morita thought it over carefully for a week, then returned to Bulova to continue the negotiations. He told Bulova he would like to make a deal, but he could not accept the condition. Now it was the Bulova purchasing officer's turn to be stunned. Bulova's condition was standard in this sort of transaction. "Our company name is a famous brand that has taken over fifty years to establish,” the purchasing officer argued. "Nobody has ever heard of your brand name. Why not take advantage of ours?" "Fifty years ago," Morita calmly replied, "your brand name must have been just as unknown as our name is today. I am here with a new product, and I am now taking the first step for the next fifty years of my company. Fifty years from now I promise you that our name will be just as famous as your company name is today." Morita walked away from the biggest deal in his company's history. Indeed, his board was shocked when he reported his decision and told Morita that he was being foolish. Shortly thereafter, Morita received a more modest order from another American distributor, but this one let Morita keep the Sony name on the radio. He quickly agreed, and the miniature radio caught the American public's eye-along with the name Sony. Of his negotiations with Bulova, Morita later wrote, “I said then and I have said it often since: It was the best decision I ever made." Morita's decision to reject Bulova's lucrative offer was risky. But his bargaining stance reflected the strength of his vision for Sony. Morita had a goal: to make the name Sony a household word for quality electronics throughout the world within fifty years. He achieved that goal with time to spare-and made himself a business legend in the process. The Second Foundation of Effective Negotiation focuses on your goals and expectations. You cannot know when to say yes and when to say no without first knowing what you are trying to achieve. And research on setting goals discloses a simple but powerful fact: the more specific your vision of what you want and the more committed you are to that vision, the more likely you are to obtain it. Moreover, research confirms that skilled negotiators can achieve these higher goals without putting their relationships or reputations at risk. ## Double the Power of Your Goals: Turn Them into Expectations In Lewis Carroll's Alice's Adventures in Wonderland, Alice finds herself at a crossroads where a Cheshire Cat materializes. Alice asks the Cat, “Would you tell me, please, which way I ought to go from here?" The Cat replies, “That depends a good deal on where you want to get to.” “I don't much care where," says Alice. “Then it doesn't matter which way you go," the Cat replies. To become an effective negotiator, you must find out where you want to go-and why. That means committing yourself to specific, justifiable goals. It also means taking the time to transform your goals from simple targets into genuine-and appropriately high-expectations. What is the difference between a simple goal and something that has matured into a genuine expectation? Basically one thing: your attitude. Goals are things we strive toward that are usually beyond the range of our past achievements. Such things as investment goals, weight loss goals, and athletic goals are typical. We set goals to give ourselves direction but we are not greatly surprised or disappointed if we fall short. An expectation, by contrast, is a belief about what we ought reasonably to accomplish. If we fall short of our expectations, we feel sincere disappointment. It will hurt. We may set a goal of having our children attend an Ivy League college, but many parents have an expectation that their children will attend college somewhere. Those expectations affect the way they communicate about college with their children. It is not “if” the child will go to college but "when and where" they will go. That assumption shows up in kids' behavior. Who in fact goes to college? Kids of parents who went to college. The same pattern holds all the way up to the children who expect to obtain doctoral degrees. So it is with negotiation. Your goals give you direction, but your expectations are what give conviction to your statements at the bargaining table. You are most animated when striving to achieve something you believe you justly deserve. The more time you spend preparing for a particular negotiation, researching what others have achieved in similar circumstances, and gathering information that reinforces your belief that your goal is legitimate and achievable, the firmer your expectations grow. Morita had two important goals for Sony when he headed for America in 1955: to sell a lot of radios and sell them using Sony's name. Partly as a result of his experience with Bulova, he learned that the "using Sony's name" goal was more important than the "sell a lot of radios" part. As his goal matured into a solid expectation, he was able to communicate this vision more clearly to his own board of directors and to potential customers. What you aim for in negotiations often determines what you get. Why? The first reason is obvious: your goals set the upper limit of what you will ask for. You mentally concede everything beyond your goal, so you seldom do better than that benchmark. Second, research on goals reveals that they trigger powerful "striving" mechanisms. Sports psychologists, salespeople, and educators alike confirm that setting goals motivates people, focusing their attention and psychological powers. Third, you are more persuasive when you are committed to achieving a specific purpose you believe in, in contrast to the occasions when you ask for things halfheartedly or merely react to initiatives proposed by others. As US president Lyndon Johnson once said, "What convinces is conviction." Your commitment is infectious. People around you feel drawn toward your goals. I have personally observed this "expectation effect" in watching some of the best negotiators in the business both at the bargaining table and in executive training sessions. Negotiators striving to achieve concrete goals they believe in are more animated, committed, prepared, and persistent. Nor is this effect limited to experienced dealmakers. I have seen the same power at work in parents negotiating with school systems to obtain better educational support for their children and in community leaders negotiating with zoning boards to protect the integrity of neighborhoods. Everyone gains a significant psychological edge when they are convinced that what they are asking for is fair, feasible, legitimate, and achievable. ## Goals versus “Bottom Lines" Most negotiation experts emphasize the importance of having a "bottom line,” “walkaway,” or “reservation price" for negotiation. Indeed, the bottom line is a fundamental bargaining concept on which much of modern negotiation theory is built. It is the minimum acceptable level you require to say yes in a negotiation. By definition, if you cannot achieve your bottom line, you should seek another solution to your problem. When two parties have bottom lines that permit an agreement at some point between them, theorists speak of there being a positive "zone of possible agreement" (ZOPA). When the two bottom lines do not overlap, they speak of a negative ZOPA-e.g., when a buyer does not have enough money to meet a seller's minimum acceptable price or one side's short deadline does not give the other side long enough to respond with an offer. A well-framed goal is quite different from a bottom line. As I use the word, a "goal” is your highest legitimate expectation of what you should achieve. For example, in the case of the used electronic device illustrated on page 33 (fig. 2.1), the seller has a bottom line of getting at least $100, but the seller might set a goal of $130 based on the prices for similar devices online. Bottom lines are vitally important to negotiation theory, but setting and negotiating toward a legitimate goal is the key factor in most bargaining success stories. Let me explain why. Researchers have discovered that humans have a limited capacity for maintaining focus in complex, stressful situations such as negotiations. Consequently, once a negotiation is under way, we gravitate toward the single focal point that has the most psychological significance for us. Once most people set a firm bottom line in a negotiation, that becomes their dominant reference point. They measure success or failure with reference to their bottom line. Having a goal as your reference point, by contrast, prompts you to think you are facing a potential "loss" for any offer you receive below your goal. And we know that avoiding losses is a powerful motivating force. Thus, if you are selling your used electronic device and have focused on getting at least $100 in order to buy some other item that costs about that much, you will tend to relax once the buyer makes an offer above $100. You can now end your search for a buyer and begin mentally possessing the other item you want. If the buyer is alert (and most are when it comes to money), they will sense your relaxation and stop the bidding. If, instead of focusing on your bottom line, you orient toward your goal of getting $130 based on comparable online prices, you don't stop striving quite so soon. And if the buyer is focused on their bottom line of $150, chances are you will end up with a higher price than you otherwise would receive. To avoid falling into the trap of letting your bottom line become your reference point, be aware of your absolute limits, but do not dwell on them. Instead, prepare your bottom line, then set it aside while you work energetically on formulating your goals. With experience, you should be able to keep both your goal and your bottom line in view at the same time without losing your goal focus. Research suggests that the best negotiators have this ability. If setting goals is so vital to effective preparation, how should you do it? Use the following simple steps: 1. Think carefully about what you really want—and remember that money is often a means, not an end. 2. Set an optimistic-but justifiable-target. 3. Be specific. 4. Get committed. Transform your goal into an expectation. Write down your goal and, if possible, discuss the goal with someone else. 5. Carry your goal with you into the negotiation. ## What Do You Really Want? Begin your preparation for negotiation by considering your own underlying needs and interests. In business or consumer negotiations, a good price is usually an important goal because it is precise and quantifiable; it helps you "keep score" and measure success. But it is easy to forget that price is often a means to an end, not an end in itself. The goal is to achieve more value or profit, not a victory on the price term. This is not as paradoxical as it sounds. If you are on the buy side, you want to make sure that you get a specified level of quality for the money you spend, not just a low price. And sellers need to be careful that their sales create the conditions for future business. Canceled orders and one-time sales do not make for a profitable enterprise, even if the price achieved on any given sale looks good. The founder of CBS, William Paley, was having a hard time making money in the radio broadcast marketplace in its early days. He was negotiating with local stations over prices for CBS shows, and the stations had all the power. They did not have to buy and often did not. Paley revolutionized radio and created the modern network by realizing that the price for his shows was a means, not an end in it-self. In the late 1920s, he started giving away CBS's radio programming in exchange for the right to run advertisements on local stations during prime-time slots. The strategy earned him millions. Later, in the 1940s, Paley took the US recording industry by storm with a similar move: cutting the prevailing price of records in half. Experienced negotiators often report that price can be a relatively easy term to resolve compared with less obvious but more explosive issues such as control, turf, ego, and reputation. In the legendary fight over RJR Nabisco chronicled in Barbarians at the Gate, a multibillion-dollar bid for RJR collapsed when two major investment banking firms—Drexel Burnham Lambert and Salomon Brothers could not agree on which firm's name would appear on the left-hand side of the Wall Street Journal ad announcing the financing of the transaction. The position of the firm's name in the ad would signal to the financial community which of the two banks was the "lead bank" in the deal and neither would accept second-place status. So when you formulate your goals, consider carefully what really matters to you. Sure, money is important. But identify your underlying interests and needs clearly. Once negotiations start, it is all too easy to become preoccupied with competitive issues such as price and forget what you are trying to accomplish. ## Set an Optimistic, Justifiable Target When you set goals, think boldly about what you would like to see happen. Research has repeatedly shown that people who have higher aspirations in negotiations do better than people who have modest or “I'll do my best" goals. In one classic study, psychologists Sydney Siegel and Lawrence Fouraker set up a simple buy-sell negotiation experiment. They allowed the negotiators to keep all the profits they achieved but told the subjects they could qualify for a second, “double-their-money” round if they met or exceeded certain specified bargaining goals. In other words, Siegel and Fouraker gave their subjects both concrete incentives for hitting a specified level of performance and, perhaps unintentionally, a hint that the assigned target levels were realistically attainable (why else would subjects be told about the bonus round?). One set of negotiators was told they would have to hit a modest $2.10 target to qualify for the bonus round. Another set of negotiators was told they would have to hit a much more ambitious target of $6.10. Both sides had the same bottom line: they could not accept any deal that involved a loss. The negotiators with the more ambitious $6.10 goal achieved a mean profit of $6.25, far outperforming the median profit of $3.35 achieved by those with the modest $2.10 goal. My own research has confirmed Siegel's and Fouraker's findings. In our experiment, unlike the one Siegel and Fouraker conducted, negotiation subjects set their own bargaining goals. And instead of letting everyone keep whatever profits they earned, we gave separate hundred-dollar prizes to the buyer and the seller with the best individual outcomes. The result was the same, however. Negotiators who reported higher prenegotiation expectations achieved more than those who entered the negotiation with more modest goals. Why are we tempted to set modest bargaining goals when we can achieve more by raising our sights? First, many people set modest goals to protect their self-esteem. They are less likely to fail if they set their goals low, so they tell themselves that they are doing fine as long as they beat their bottom lines. Modest goals thus help avoid unpleasant feelings of failure and regret. Research suggests that the self-esteem factor plays a more important role in low goal setting than many of us would care to admit. We once had a negotiation speaker who said that the problem with many reasonable people is that they confuse "win-win” with what he called a “wimp-win” attitude. The "wimp-win" negotiator focuses only on his or her bottom line; the “win-win” negotiator has more ambitious goals. Second, we may not have enough information about the negotiation to see the full potential for gain; that is, we may fail to appreciate the true worth of what we are selling, fail to do research on applicable standards, or overlook how eager the buyer is for what we have to offer. This usually means we have not prepared well enough. Third, we may lack desire. If the other person wants money, control, or power more urgently than we do, we are unlikely to set a high goal for ourselves. Why look for trouble over things we care little about? As students and executives in my negotiation workshops start setting more ambitious goals and strive to improve, they often report feeling more dissatisfied regarding their performance—even as their objective results get better and better. For this reason, I suggest raising one's goals incrementally, adding difficulty in small steps over a series of negotiations. That way you can maintain your enthusiasm for negotiation as you learn. Research shows that people who succeed in achieving new goals are more likely to raise their goals the next time. Those who fail, however, tend to become discouraged and lower their targets. Once you have thought about what an optimistic, challenging goal would look like, spend a few minutes permitting realism to dampen your expectations. Remember: optimistic goals are effective only if you believe in them and they can be justified according to some standard or norm. As I will discuss more fully in chapter 3, credible negotiation positions are supported by legitimate standards. No amount of mental goal setting will make your five-year-old car worth more than a brand-new version of the same model. You should also adjust your goals to reflect appropriate relationship and leverage concerns, subjects I address in chapters 4 and 6. With the preliminary work done, you are ready to enter the negotiation process and encounter the values and priorities the other side is bringing to the deal. Until you know for sure what the other side has for goals and what the other side thinks is realistic, you should keep your eyes firmly on your own defendable target. The other party will tell you if your optimistic deal isn't possible, and you will not offend him or her by asking for your goal so long as you have some justification to support it, you advance your ideas with courtesy, and you show a concern for his or her perspective. ## Be Specific The literature on goal setting counsels us to be as specific as possible. Clarity drives out fuzziness in negotiations as in many other endeavors. With a definite target, you will begin working on a host of psychological levels to get the job done. For example, when you land your new job, don't just set a goal to "negotiate a fair salary.” Push yourself to take aim at a specific target—go for a 10 percent raise over what you made at your last job. Your specific goal will start you thinking about other, comparable jobs that pay your target salary, and you will begin to notice a variety of market standards that support a salary of that amount. ## Commit to Your Goal: Write It Down and Talk about It Your goal is only as effective as your commitment to it. There are several simple things you can do that will increase your level of psychological attachment to your goal. First, as I suggested above, make sure it is justified by solid arguments. When you believe in your goal, you communicate commitment. Second, spend a few moments vividly imagining how it would feel to achieve your goal. Visualization engages your mind more fully in the achievement process and also raises your level of self-confidence. One of my better MBA students, a young man from India who came to the United States via a career in Hong Kong, once confided to me that before he applied to the Wharton School, he came to Philadelphia and had his picture taken inside the school's main building. He then kept that picture over his desk for several years as he directed all his professional energies toward gaining admission. After being turned down once, he was finally admitted. When he arrived on campus, he had another picture taken of himself in the same building, and he now proudly displays the two pictures together on his desk at his Silicon Valley tech firm. He credits the visual image of his goal with keeping him on track toward its achievement. The same visualization techniques work for negotiation goals. Third, psychologists report that the act of writing a goal down engages our sense of commitment much more effectively than merely thinking about it. The act of writing makes a thought more objective, obligating us to follow up on it—at least in our own eyes. According to psychologist Robert Cialdini, successful sales companies often ask their sales representatives to write down their sales goals, declaring in their training manuals that "there is something magical about writing things down" that improves salespeople's performance. You can begin your practice of writing down negotiation goals by referring to the Information-Based Bargaining Plan in appendix C. Note the space provided for recording your "specific, optimistic goal." I discuss the use of this plan in more detail in chapter 7. To commit yourself even further to your goal, tell other people about it and show them your written goal. If others know about the goal, you begin to feel subtly accountable to them. Research indicates that negotiators bargain harder when they might have to explain to someone why they failed to achieve a goal. Labor, sports, and political negotiators go to extreme lengths to mobilize this power: they sometimes announce their bargaining goals to the press, thereby putting everyone (including their constituents and the other side) on notice as to what they want to achieve. This sort of public commitment is a powerful way of binding yourself to your goals. Of course, as in all other aspects of negotiation, one should use judgment in committing to goals. If both parties engage in dramatic forms of public commitment, with press conferences and do-or-die statements to their respective audiences, they can paint themselves into a corner from which it is impossible to escape. Labor strikes, political gridlock, and wars are examples of failed negotiations, not successes. Finally, any type of material investment you can make in the goal that would be lost if you fail to achieve it will add greatly to your commitment. A major airline once announced that it had signed a deal to acquire four hundred new planes to expand and upgrade its fleet. It went on to state that the airline would be forced to cancel that order if it failed to reach a favorable wage agreement with its pilots before the deadline for closing the purchase. With that one move, the airline secured three negotiation advantages: a public commitment to its stated wage target, a credible deadline for concluding negotiations with its pilots, and, most important, a vision of what it (and the pilots) would lose if the airline failed to achieve its wage goals. The negotiations successfully concluded by the deadline and within the wage constraints the airline had set. ## Carry Your Goals with You into the Negotiation It is all too easy to get knocked off your target by the other party during a negotiation. It therefore pays to carry your goals with you and, if you feel yourself getting swept away, to take a break and review them before going forward. I find it sometimes helps to literally carry a short summary of my goals in my pocket or wallet. Barry Diller, the successful television executive and entrepreneur, learned this lesson the hard way when he got caught up in bidding for the rights to the first television showing of the movie The Poseidon Adventure back in the early 1970s. Representing ABC, Diller ended up bidding $3.3 million-by far the highest amount ever paid for such a property at the time—and losing money for his network. The reason Diller paid so much? He agreed to participate in the first (and, for him, the last) open-bid auction for TV rights to a movie. In the frantic bidding that followed, he forgot about his primary goal-making a profit and got caught up in what one CBS executive who bid against him called the "fever” of winning a competition. Negotiation scholars have observed this phenomenon so often we have a name for it: "escalation of commitment." People lose sight of their real goals in competitive situations and pay far too much money, spend too much time, or sacrifice too many other interests for the privilege of saying they have won. It usually does not take long for regret to set in after such a victory, teaching the winners that it is not enough to prepare goals-you must remember them during the negotiation. In auction situations, the final bidder overpays so often that economists call the accompanying feeling of regret the "winner's curse." ## Summary The first important step in preparation is committing to ambitious, specific, justifiable goals. Clarity of purpose and optimism are key attitudes to bring to the goal-setting process. A concrete, challenging goal will motivate you. You will tend to see proposals below your goal as a “loss.” In addition, the intuitive part of your mind-the part that works and learns below the surface while you are getting ordinary things done during the day-will become a powerful ally and problem solver. You will become more focused, persistent, and achievement oriented, and you will be more likely to come up with good arguments and new ideas about how to get what you want. You will also avoid the common trap of becoming focused on your bottom line too early. Your clarity will also communicate resolve to the other party. You will convey the message that you have high expectations for both yourself and the deal. And perhaps no other personal variable makes such a difference in negotiation as the quiet feeling of confidence that emanates from people who know what they want and why they ought to get it. With your goals in hand, it is time to investigate the Third Foundation of Effective Negotiation: the standards and norms that will help you convince the other side that what you are proposing is fair. > **SETTING EFFECTIVE GOALS: A CHECKLIST** > > ✓ Think carefully about what you really want. > ✓ Set an optimistic-but justifiable-target. > ✓ Be specific. > ✓ Write down your goal and commit to it. > ✓ Carry your goal with you into the negotiation.