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… Read this article: http://www.businessinsider.com/rjr-nabisco-lbo-private-equity-deal-2012-1?op=1 http://www.businessinsider.com/the-biggest-private-equity-deals-in-history-2011-4?op=1 Emphasize that the management just wanted the price to be as high as possible (focus on a single issue) so it became a bidding war. The largest private equity deal of all time…

Why did this become a bidding war? Read this article: http://www.businessinsider.com/rjr-nabisco-lbo-private-equity-deal-2012-1?op=1 http://www.businessinsider.com/the-biggest-private-equity-deals-in-history-2011-4?op=1 Emphasize that the management just wanted the price to be as high as possible (focus on a single issue) so it became a bidding war. 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 Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party

What are examples of distributive negotiation? Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party

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 Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party

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 Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party 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 Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party Bargaining Zone

What was the Zone Of Possible Agreement in BioPharm-Seltek? Pulled from 4th edition, pg 27 On instrumental concerns, note that they don’t care about the relationship with the other party

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 $11 M $25 M $17 M $11 M $15 M $29.8 M $13 M $16 M Watch this video clip if time at the end about Pawn stars and haggling. $23 M $12 M

Sale Price MEAN: 19.8 SD: 5.5

Sale Price SALE PRICE FIRST OFFER Above average = 62% were sellers Below average = 67% were buyers Correlation 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 See galinsky’s article.

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 See galinsky’s article.

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 See pg. 31-34 in genius

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 See pg. 31-34 in genius

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