CHAPTER 2

• Preparation:
• What to do before negotiation

Open Rubric
 BECOMING AN EFFECTIVE NEGOTIATOR
Exhibit 1-1 Evaluating the Success of Negotiation

Prior to Negotiation Negotiation Post-Negotiation

Initiate negotiation Strategy Post-deal implementation

• Opening Durability
Preparation • First offer(s) Reputation
Willingness to negotiate again
• Planning worksheet • Counter-offers Trust
• Assess BATNA • Substantiation and persuasion
• Develop reservation price • Concessions
• Develop target price (aspiration) Agreements
• Efficiency
• Economic value
• Individual gain
• Joint gain
Relational value
• Satisfaction
• Fairness
PART ONE NEGOTIATIONS ESSENTIALS
THE FIXED-PIE PERCEPTION (1 OF 2)

Most negotiators believe whatever is good for one

party must be bad for the counterparty.
People with this fixed-pie perception take one of three
mindsets when preparing for a negotiation:
• Resign themselves to capitulation to the counterparty
• Prepare for hard bargaining with the counterparty
• Compromise in an attempt to reach a midpoint between
opposing demands
THE FIXED-PIE PERCEPTION (2 OF 2)

It is commonly assumed that concessions are necessary by

one or both parties to reach an agreement.
The fixed-pie perception is almost always wrong and often
leads to an ineffective approach to negotiations.
 MIXED-MOTIVE DECISION-MAKING:
A MORE EFFECTIVE AND ACCURATE
MODEL
A more accurate model of negotiation is to approach it as a
mixed-motive decision-making enterprise involving both
cooperation and competition.
Effective preparation for a negotiation encompasses
three general abilities:
• Self-assessment
• Perspective-taking
• Situational awareness
 SELF-ASSESSMENT: WHAT DO I WANT?
TARGET

Identifying your ideal outcome may sound

straightforward, but three major problems often arise:
• Under aspiring negotiator (the Winner’s Curse)
• Over aspiring or positional negotiator
• The grass-is-greener negotiator
 SELF-ASSESSMENT: WHAT IS MY BATN
A?

What is my Best Alternative To a Negotiated Agreement in

this situation (your BATNA)?

• BATNAs are not wishful, they are factual.

• Your BATNA is time sensitive.
• Do not let the other party manipulate your BATNA.
• Negotiators should be willing to accept any set of terms
superior to their BATNA.
 SELF-ASSESSMENT: WHAT IS MY
RESERVATION POINT?

You can determine your reservation point, or the

quantification of your BATNA, with respect to other
alternatives by the following steps:
• Brainstorm your alternatives.
• Evaluate and order each alternative’s value.
• Attempt to improve your BATNA.
• Determine your reservation price based on facts.
• See Exhibit 2-1.
 C ASE STUDY

Frieda wants to sell her house. It is no forced sale, because she just
considered moving to a townhouse complex. She still owes R1 225.000 on
her bond that she has to settle when she sells the house. The townhouse
in which she is interested costs R1 450 000. She has already organised
finance for the townhouse subject to the sale of her house. The bank can
only finance R1 400 000 of the purchase price, which means that she has to
put down a deposit of R50 000. Frieda has no additional savings or
reserves.

John is interested in Frieda’s house. The house is currently in the market

for R1 315 000. He has R125 000 that he can put down as a deposit. The
maximum amount that his bank will finance is R1 275 000. He has made
Frieda an offer of R1 250 000 for her house.

10
 Calculate:

1. Frieda’s reservation price

2. Frieda’s target price
3. John’s reservation price
4. John’s target price

Frieda eventually agrees to sell her house to

John for R1 285 000.

11
 ANSWER

Calculate:
1. Frieda’s reservation price : R1 275 000
2. Frieda’s target price R1 315 000
3. John’s reservation price: R1 400 000
4. John’s target price : R1 250 000
5. The bargaining zone: R1 275 000 between R1 400 000
 FIGURES EXPLAINED

• Target- What you open with

• Reservation (Reserve Maximum) minimum she can afford to sell for
Freda )- (Incl what was financed) and his Johns Reserve Max is the Max
he can afford
• BATNA (the alternative)- BATNA is different for each person
• (Freda- moving to a complex, John- not buying or buying alternative)
• Bargaining Zone (difference between two reservations)
 SELF-ASSESSMENT: SETTING UP THE
NEGOTIATION
When determining your reservation point, be aware and
knowledgeable of the following:
• Be aware of focal points.(no. appear to be valid but have no
basis)
• Beware of sunk costs. (Money already invested that is
irrecoverable- Purchase price of house)
• Do not confuse your target point with your reservation point.
• Identify the issues in the negotiation.
• Identify the alternatives for each issue.
• Identify multi-issue proposals of equivalent value.
Packages should all be of equivalent value or attractiveness
 SELF-ASSESSMENT: RISK &
UNCERTAINTY

• Most people are risk-seeking when it comes to losses,

and risk-averse when it comes to gains.
• Reference points define what people consider to be a
gain or a loss.
 SELF-ASSESSMENT: ASSESS YOUR RISK
PROPENSITY

In any negotiation, negotiators should consider the differential

impact of three sources of risk:
• Strategic risk: refers to the riskiness of the tactics that negotiators
use at the bargaining table. (Agreeing to co-author)
• BATNA risk: given BATNAs of equal expected value, the more risk-
averse negotiator will be in a weaker bargaining position. (potential
offers with no real offers)
• Contractual risk: refers to the risk associated with the willingness
of the other party to honor its terms. (signing non disclosure
agreement)
 SELF-ASSESSMENT: ENDOWMENT
EFFECTS
Differences in negotiators’ reference points may lead
buyers and sellers to have different valuations for the
same object.
• Someone who possesses an object has a reference point
that reflects his or her current endowment, or private
valuation, of the object.
• The difference between what sellers demand and what
buyers are willing to pay is a manifestation of loss-
aversion.
 SELF-ASSESSMENT: BUYER’S
REMORSE & SELLER’S REGRET

An important component in determining whether a

person experiences regret is counterfactual thinking, or
“what might have been.”
• In negotiation, immediate acceptance of a first offer by the
counterparty often means a better outcome for the
proposing negotiator, but the outcome is less satisfying.
• Thinking about what might have been, but did not occur,
may be a reference point for the psychological evaluation
of actual outcomes.
 SELF-ASSESSMENT: NEGOTIATOR
CONFIDENCE
Often, negotiators’ probability judgments for certain
types of events occurring are more optimistic than is
warranted.
• The overconfidence effect refers to a negotiator’s
unwarranted level of confidence in the judgment of their
abilities and the likelihood of positive events.
• This effect also causes people to underestimate the
likelihood of negative events.
• When we find ourselves highly confident of a particular
outcome, it is important to examine why we feel this way.
 PERSPECTIVE TAKING

Once a negotiator has thought about their own BATNA,

reservation point, target point, and interests, it is time to
identify information about the other negotiating parties:
• Who are the counterparties?
• Are the parties monolithic? (of one voice)
• Identify counterparties’ interests and positions.
• Research the counterparties’ BATNAs.
 SITUATIONAL AWARENESS (1 OF 2)
Research related to the details of a negotiation situation
is also critical to a successful negotiation outcome.
• Is the negotiation one shot, long term, or repetitive?
• Is the negotiation a transaction or a dispute situation?
Contract worker who expects the same treatment as a
permanent employee
• Are linkage effects present? (usually in multinationals-
one neg affects another)
• Are negotiations false or sincere?
• Is it legal to negotiate?
• Is ratification required? (required to have the contract
approved by another party (HR in a hiring situation)
 SITUATIONAL AWARENESS (2 OF 2)

Additional questions for situation-assessment include:

• Are there time constraints or time-related costs?
• Are contracts official or unofficial?
• Where will the negotiations take place?
• Are the negotiations public or private?
• Is third-party intervention a possibility?
 SITUATION-ASSESSMENT: TIME
CONSTRAINTS
All negotiations have time-related costs:
• Two negotiators may face radically different time-related
costs, but a deadline for one is a deadline for the other.
• The rate of concessions made by negotiators increases as
negotiators approach final deadlines.
• Setting a final deadline on the negotiations can be helpful,
especially if the passage of time is particularly costly for
the negotiator.
• If a deal is not reached by a point they must exercise their
BATNA
 SITUATIONAL AWARENESS:
ADDITIONAL CONSIDERATIONS

Additional questions for situation-assessment include:

• Is the negotiation agreement formal or based on an informal
handshake agreement?
• Will the negotiation meeting occur onsite or offsite?
• Will the negotiation take place in the public eye or behind
closed doors?
• What norms and conventions will dictate how the negotiation
process unfolds?
• Will there be a single-option offered or multiple offers to the
counterparty?
 SUMMARY

• Effective preparation is a strategic

advantage at the bargaining table.
• Three general areas of preparation are
self-assessment, perspective-taking, and
situational awareness.
• A negotiator who has adequately
researched the counterparty’s BATNA and
interests is less likely to be manipulated or
confused by the other party.
• Review the summary preparation form
(see Exhibit 2-2).