Getting (More of) What You Want

In negotiations, there is tension between behaviors that create value (by enlarging the pool of available benefits/resources) and those that claim value (by allocating benefits/resources among the parties). Information sharing helps to create value, but revealing information to your counterpart can handicap your ability to claim value.

Recall the one-sided full-disclosure strategy we discussed in Chapter 4: Revealing all your information to your counterpart allows her to determine the largest feasible pie of resources. By revealing all your information, she might offer you the smallest increment over your reservation price that she believes you are likely to accept, leaving you with essentially your reservation price, and claiming all the remaining value for herself.

Developing strategies to determine the right kind and amount of information to share is a major challenge. The total pie might be smaller when you share less information (it certainly can’t be larger), but you may manage to claim more than you might be able to get from a larger pie.

The challenge really has three aspects. First and foremost, if getting more of what you want is your goal, then value creation is a means to that end, not the end in itself.

Second, by its very nature, value creation is cooperative. By contrast, value claiming is inherently adversarial. Thus, while value creation may facilitate the value available to be claimed, some value creation strategies may handicap your ability to claim value.

Finally, the distinction between actions that create value and actions that claim value is fluid. Because opportunities for value creation exist when negotiating parties value some issues differently from one another, the selective claiming of positions on issues with asymmetrical value can increase the size of the pie that you can ultimately claim. Indiscriminate information exchange can leave less for you, even if it were to increase the size of the pie.

Knowing what information to share, and how to share it, is an important strategic consideration in most negotiations. For most people, strategic thinking does not come naturally—but luckily, there is help. An entire area of study—game theory—focuses on strategic thinking in social interaction. In this chapter, we rely on tenets of game theory to help negotiators get more of what they want.

THE RATIONAL PERSPECTIVE

Game theory assumes that parties pursue their interests in a rational manner, fully understanding that their counterparts will do the same. Thus you must consider that as your counterparts pursue their objectives and you pursue yours, your ultimate objectives may be unaligned. For example, the buyer should understand that the seller’s actions are based on the seller’s information, motives, aspirations, and goals (which, of course, include what the seller knows about the buyer). Symmetrically, the seller must accept that the buyer’s actions are based on the buyer’s information, motives, aspirations, and goals (including what the buyer knows about the seller).

Game theory is not useful in situations in which parties can pursue their objectives while ignoring the action of their counterparts. While negotiators sometimes may act (or at least appear to act) as if achieving their objectives were not dependent on their counterparts, the only real-world circumstance in which you can choose to ignore the behavior of your counterpart is when you have complete command-and-control power over the situation.1 However, if your counterparts cannot walk away, then it is not really a negotiation, is it?

Game theory also assumes that negotiators pursue their objectives in a rational manner. While game theory necessarily makes an assumption about the cognitive ability of the actors and their interactions, this allows it to identify what might be attainable between two rational actors. This rationality assumption does not mean that the actors will not make mistakes—only that mistakes are random and unpredictable. Of course, considerable research has demonstrated that humans are fallible and often deviate or violate these assumptions of rationality in predictable ways. But when mistakes are predictable, knowledge of these systematic errors or biases can allow you to predict and exploit the behavior of your counterpart as well as avoid mistakes you are likely to make yourself.2

The hallmark of a strategic interaction is taking your counterpart’s likely actions into account. So just as in a game of chess where Player 1 has to take Player 2’s likely reaction to a specific move or set of moves into account, a skillful negotiator will look ahead and reason back, taking the likely actions of her counterpart into account.

A good example of the look-ahead-reason-back rule can be found in the way negotiators must analyze their strategic options in a Truel. This is a three-party version of a duel in which three players—in our example, White, Grey and Black—engage in a three-way, sequential gun battle. Let’s say that White is a bad shot, and hits about one third of his targets. Grey is somewhat better: he hits 50 percent of his targets. Finally, Black is 100 percent accurate; he is truly dangerous! Because the contest is patently unfair, White is allowed to fire first, followed by Grey (if he were still alive), then Black (if he were still alive) then White again (if he were still alive) and so forth until there is only one person standing.

Imagine that you are asked to advise White. What should he do to maximize his chance of survival? Using the look-ahead-and-reason-back rule, you can see that shooting at Grey would be a disastrous decision because, if White were successful (and, frankly, there is only a one-third chance that he would be), he would die next at the hands of the sharpshooting Black. So reasoning back makes it obvious that shooting at Grey would be a grave mistake.

Shooting at Black would clearly be better than shooting at Grey—but not for the reason you think. At first glance, this might seem to be the case because if White were to kill Black, Grey will shoot at White—and that would be better for White than facing a shot from Black. So if White kills Black, he ends up in a duel with Grey, with Grey firing first. But what if White were to miss Black? Then Grey would have to decide where to fire, and clearly he will fire at Black. If he misses, Black will fire back at Grey, since Grey is a more dangerous adversary than White. If Grey misses, moreover, Black’s perfect accuracy means that he will inevitably kill Grey, and then it will be White’s turn again.

So if White shoots at Black first, White has a one-third probability of hitting him, and living—but then he would have a 50-50 chance of being killed by Grey. If White misses Black, however, and Grey then manages to kill Black, then White and Grey will face each other again—but this time White will fire first. For this to occur, however, White has to miss Black in the first round.

So White’s best chance of winning the Truel is to shoot at Black and miss. While he is likely to do so by pure chance, he shouldn’t rely on his bad shooting! Your advice to White should be to miss Black intentionally, increasing his odds of missing Black from 67 to 100 percent.

Looking ahead and reasoning back allows you to identify White’s optimal strategy and choose a course of action that increases his chance of surviving the Truel. To do this, of course, you have to consider the likely behavior of his counterparts Grey and Black—and in this situation you were able to do this with complete accuracy, since all the information was known by all the parties.

In a negotiation, by contrast, parties have incomplete information and must seek out additional facts—but that is only the first step. Once that additional information is revealed, it is important to understand what to do with it.

Strategic considerations are a hallmark of all our social interactions. Taking advantage of information revealed in social situations is surprisingly difficult. Consider the following experience we had in a recent consulting assignment.

Our client, a large Real Estate Investment Trust (REIT), made an offer for the assets of a smaller Canadian REIT at $15.00 per share, as part of an auction in which the bidders agreed to submit a best-and-final-offer at a particular date and to abstain from further bidding after that date. The Canadian REIT’s board accepted our client’s offer, although it still needed the approval of its shareholders.

Following the offer, (but prior to the shareholder vote) the target’s stock price settled in a narrow band in the $14.90s per-share range. A few weeks before the shareholder vote, however, the competing company violated its prior agreement and submitted a new offer of $18.00 per share. As the shareholder vote was approaching, the target stock price traded above $17.00 per share.

Obviously, because the value of their stock had increased, the target shareholders were not going to approve the sale at $15.00 and, as such, our client had to assume that the bid would fail. The simplest way to see this is to consider the three options faced by target shareholders: (1) vote in favor of our client’s offer and receive $15.00 per share; (2) vote no and hold out for a higher offer, possibly higher than $15.00 per share (which may or may not occur, as our client sued the interloper for “tortious interference with contract”—meaning that the interloper illegally interfered with a valid contract that our client had); or (3) sell the stock in the marketplace.

While the payoffs to the holdout option are uncertain, it is clear that as long as the stock price was above $15.00 per share, alternative (3) is more attractive to the target shareholders than alternative (1). Thus, while it is not clear whether selling or holding out is a better strategy, as long as the stock price is trading above $15.00 our client’s original $15.00 offer will be rejected. Predicting this, our client threatened to lock up the deal in lengthy litigation, causing the stock price to drop to the mid-$16 range. Then, our client raised the offer to $16.50 and acquired the target for that price. (As it turned out, our client also recovered the additional $1.50 per share from the competitor from the tortious interference with contract lawsuit that followed the acquisition.)

In both of these cases—the Truel and the three-way interaction between our client, the competitor and the target shareholders—the actions taken were sequential. Whether you are negotiating through words or through actions, it is not enough to know what you want; that is, to know your aspirations, alternatives, and reservation price. Because of the strategic nature of negotiation, the importance of analyzing the likely behavior of your counterpart(s) is also critical for your success. Not knowing what you want or ignoring the systematic—and, thus, predictable—behavior of your counterpart dramatically reduces your ability to achieve a better deal.

Taking into consideration the likely behavior of your counterpart requires you to engage in the look-ahead-and-reason-back strategy. In this way, you are more likely to consider your explicit goals as well as understanding the motivations and aspirations of your counterparts. If you appreciate the critical role that such information gathering plays in your success, you are much more likely to undertake a serious (and systematic) planning process.

Of course, predicting human behavior is more complex than simply relying on the tenets of rationality. Many psychological factors shape the choices that individuals make—and one of these factors is the perception of what is fair.

FAIR VERSUS RATIONAL

Consider the following situation: Two anonymous parties are offered a chance to split $100. One party—the allocator—is tasked with dividing up the $100. The other party—the decider—will then decide whether to accept the allocation as presented.

The allocator can divide the $100 anywhere in the range of $99 for the allocator and $1 to the decider to $1 for the allocator and $99 to the decider. The allocation is then sent electronically to the decider, who must choose between one of two options: If the decider agrees to the allocation, the money will be allocated as indicated between the allocator and the decider; and the game is over and will never be played again. If the decider says no, no money is distributed and the game is over, never to be played again. In both outcomes, neither the decider nor the allocator will ever know the identity of the other.3

Suppose you were assigned to the allocator role. How much would you allocate to yourself, and how much to your counterpart? If you were trained in Thomas’s world of classical economics, the answer is clear: you’d allocate $1 to the decider and the rest to yourself. Following the “look ahead and reason back” rule, you must conclude that the decider faces a simple choice: get $1, or get nothing. Any reasonable decider would obviously choose the $1, right?

Wrong. Imagine yourself in the role of the decider. Across your computer screen comes the allocation: $99 for the allocator, $1 to you. Do you hit the YES button or the NO button?

When faced with this decision, most people seem to choose to forgo the $1 simply for the satisfaction of knowing that the greedy allocator who wanted the other $99 will get nothing. (In fact, most deciders don’t start agreeing to the allocation until a 70/30 split is offered; a substantial minority agree to a 60/40 split and most deciders will agree to a 50/50 split.)

What if the game were for a much larger pool of money? Would the size of the allocation to the decider change your mind? Most people, in thinking about this, agree that it would. But researchers have found evidence that most people do not actually change their behavior when the amount in the game is increased.4 In allocating the equivalent of 10 months of wages, deciders were highly unlikely to agree to a 90/10 split; they began to agree to a 70/30 split. A substantial minority agreed to a 60/40 split and almost all agreed to a 50/50 split.

Why does this happen? Researchers have yet to find a simple answer, but it seems likely that the deciders simply cannot bear to see themselves be used as the instrument of the allocator’s gain, even for the equivalent of ten months of wages. They simply say no.

When deciders have more information about the allocators in this game, however, that knowledge can influence their decision. For example, if deciders know the allocators have earned their position, rather than having been randomly assigned to it, then the deciders are often willing to take less. More controversially, when male and female deciders knew that their allocators were women, they demanded more to say yes; conversely, when male and female allocators knew their decider was female, they allocated significantly less to her.5

Consider the implications of this for negotiations: factors such as fairness, legitimacy, justifications, and even the identity of the counterpart can influence how willing parties are to agree to a particular deal. Wise negotiators are those who understand this notion of voluntary agreement and frame the proposals as solutions to their counterparts’ problems so as to make their offers more attractive. Of course, in some situations you may not know enough to craft your proposals in this manner—a challenge we confront in the next section.

STRATEGIC THINKING WITH ASYMMETRIC INFORMATION

One of the biggest challenges in negotiation is the presence of asymmetrical information: knowledge that your counterpart has but you do not. For example, in many purchase negotiations, sellers typically have an information advantage about the sale item, including what truly might have motivated their decision to sell. As a result, rationally, a buyer should ask “Why this item? Why now?” Consider what happened when Thomas wanted to purchase a used car.

In 1989, after he was awarded tenure at Kellogg, Thomas decided to reward himself by purchasing a red Corvette convertible. Chevrolet had just come out with a brand new six-speed manual transmission made by Zahnrad Fabrik Friedrichshafen AG in Germany (ZF for short), an obvious must-have for every newly tenured faculty member! Unfortunately, professor salaries—even for those who just received tenure—limited Thomas’s choices. He could only afford a used Corvette. Yet he knew he should only buy one that was a few month old, as the previous model had a clunky 4 + 3 transmission, which clearly was not acceptable.

As luck would have it, Thomas was able to locate a beautiful specimen, red with black leather interior and a black roof—his favorite color combination. He was in love. With his mechanic friend in tow, Thomas embarked on a careful inspection—under the hood, under the car, and any other place that the two could think of. They could not find anything wrong. The car looked absolutely perfect—almost brand new and over 30 percent off the new car price.

AKERLOFF’S MARKET FOR LEMONS

In the 1970 paper “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” George Akerlof describes a market with extreme information asymmetry: the market for used cars where sellers have more precise information about the quality of the cars than buyers. Therefore, if the seller is willing to accept the sale price, then the buyer should infer that the quality of the car is lower than implied by that price. As a result, buyers should follow the age-old principle of caveat emptor and rationally discount the prices of used cars, as people are more likely to keep their good cars and sell their bad cars! This in turn is more likely to drive out good cars than bad cars from the market, which in turn results in even lower prices, driving more good cars out until only lemons are left. Hence the title of the paper.

While this may seem like a relatively unimportant subject for an economic paper, it not only provides the economic foundation of Groucho Marx’ famous line: “Please accept my resignation. I don’t want to belong to any club that will accept people like me as a member,” but Akerlof’s work on information asymmetry took him further: In 2001 he, Michael Spence, and Joseph E. Stiglitz were awarded the Nobel Prize in Economics for “their analysis of markets with asymmetric information” which stimulated the development of an important new area—information economics.

As a last check, Thomas asked the owner why he was selling such a beautiful car, after only six months. The owner, looking very sad, pointed to a young woman who was sitting on the porch: “my daughter” he explained, “is turning sixteen next week and will start driving. This is way too much car for her, and I doubt I can keep her from driving the ‘Vette’ rather than the family station wagon (an Oldsmobile Custom Cruiser)!” Hearing this explanation, and to the surprise of his mechanic friend, Thomas decided to pass on the opportunity. Can you think why?

The answer is quite straightforward: Thomas simply did not find the seller’s explanation persuasive. When the seller purchased the car six months ago, he surely knew that his daughter would soon be turning six teen. While it is possible that he was rich enough to buy the car in full anticipation of selling it six months later, a 30 percent discount seems like a steep price to pay for such a short-run pleasure. Besides, if the seller were really that wealthy, then it is not clear why he would sell the car in the first place rather than buy another interesting, but safer car for his daughter’s birthday—like a Mustang with an anemic six cylinder engine. The danger that the sale was motivated by a serious problem with the “Vette,” one that Thomas and his mechanic friend were not able to identify, was simply too high. To put it differently, Thomas felt that he simply was not wealthy enough to take that risk.

Asymmetrical information is not limited to negotiating a used car purchase. In fact, it exists to a greater or lesser degree in all negotiations because negotiations in which there is complete information on both sides are very rare indeed. Yet just because negotiators constantly experience asymmetrical information does not mean they’ve developed good coping skills for this challenge. Consider what you would do if you were confronted with the following situation:

You represent Company A that wants to acquire 100 percent of Company T from its owner for cash. The value of T depends directly on the outcome of an oil exploration project it is currently undertaking. If the project fails, T will be worth nothing—$0/share. If the project succeeds, the value of T under current management could be as high as $100/share. All share values between $0 and $100 are equally likely.

T will be worth 50 percent more in the hands of A than under its current management. For example, if T were to be worth $50/share value under its current management, the company would be worth $75/share under A’s management. (Technically, the combination of A and T creates a synergy of 50 percent to T’s stand-alone value.)

Your task is to acquire Company A profitably. T’s owner will delay their decision on your bid until the results of the project are known to him (but not to you)—and accept or reject your bid before the drilling results become public. From A’s perspective, you are deliberating over offers in the range of $0/share (i.e., no offer) to $150/share.

What price per share would you offer?6

If you answered $60/share, then you are like a large number of our students who seem to base their offer on the following reasoning: The unconditional expected value of the firm to its owner is $50/share, and hence the expected value to A is $75/share. Thus, A can make a reasonable profit by offering less than $75 and reasonably expect their offer to be accepted by offering something greater than $50/share. On average, our students suggest an offer of $60/share.

At first, this may seem a reasonable offer as it in the middle of the average of T’s value to its owner and of A’s synergistic value (i.e., between $50 and $75 per share).7 However, this offer will, on average, lose money for A. To understand why, consider what A will learn about T’s private information if it were to accept A’s offer. Because T’s owners have an accurate assessment of the value of their shares (they know how much oil is present), they rationally will only accept a deal that is profitable to them. So T accepting your $60 offer means that the range of possible values is not $0−$100 but rather it is $0−$60; because they will not accept an offer that is worth less than the oil that they have. Since all values are equally likely, the average value of any offer accepted by T then is $30. Because T is worth 50 percent more to A, A’s expected value of T when A’s offer is accepted is $45. Thus, if A’s offer were accepted, A’s $60/share offer results in a loss of $15 ($60 − $45)! In fact, by offering $60/share, acquirers will lose money 67 percent of the time (since A breaks even only if T has more than $40 worth of oil there is a two-thirds probability that T’s oil is valued between $0 and $40 and a one-third probability that T’s oil is valued between $40 and $60).

The previous example highlights two important facts about information in negotiation. The first is quite obvious: not all participants have equal (or all the) information. In the previous example, A knows the distribution of the amount of oil held by T, while T knows the exact amount of oil it has.8 Such information asymmetry has an important impact on the negotiation success of the parties.

But there is a second, more subtle truth embedded in the previous example: The actions of the parties reflect the information they have. So, for example, when T’s owners accept A’s offer of $60 per share, A realizes that the amount of oil owned by T must be equal to or less than $60. Thus, applying our principle of looking ahead and reasoning back, before making an offer of $60, A has to ask: “If I were to make an offer of $60, what do I learn if it is accepted?” The answer is that T has no more than and probably less than $60 worth of oil. But if the offer were accepted, T on average has $30 worth of oil and “I will lose money; hence I should not make that offer in the first place.”9

By now it should be abundantly clear that your success depends on taking advantage of information that you gathered during the planning phase and supplemented during the negotiation. But some types of information have more impact on your ability to claim value than others, and thus are more strategically important. So let’s consider different types of information and the effect that having (or not having) that information has on your ability to get more of what you want.

RESERVATION PRICES. Arguably, a party’s reservation price is the most strategic piece of information it possesses, because it helps negotiators distinguish between good and bad deals—and it allows their counterparts to claim more value than might otherwise have been theirs. For example, if your counterparts were to learn your reservation price, they might simply package their offers to give you the smallest increment over your reservation price they assess you would accept, make that offer, and hold out until you agree and then they claim the rest.10

So we strongly advise you not to reveal your reservation price. But what if you face an impasse? Are there any situations in which you should reveal your reservation price?

Consider the following scene: Your counterpart, after negotiating for a while, says, “Look, this is my best and final offer. I simply cannot afford to pay a dime more.” She supports this statement by disclosing what she claims to be her reservation price. Do you believe her? If you are like most, you would not. Here is why: If she told you her true reservation price and you reach a deal, then she gets no more than her reservation price. But then, she is no better off than taking the impasse and simply walking away. Knowing that, she is likely to misstate her reservation price. Thus, if she tells you that this is her best and final offer, you can rationally assume that she may have a few more concessions available. Thus, rather than giving you her reservation price, you believe your counterpart has given you her faux reservation price. And this, in turn, implies that there is still more potential value that you may be able to extract from the negotiation.

When you are tempted to share your true bottom line with your counterpart, you should reconsider—because as the previous example demonstrates, you can’t be certain that your partner will believe you, or will respond in kind. Of course, it would save time if you could simply tell your counterpart your reservation price, have her reciprocate, and then split the surplus equally. But there are a few problems with this strategy. First, while sharing equally may have some romantic appeal, it may not necessarily reflect an equitable allocation from an economic perspective given the different contributions and alternatives of the parties. More importantly, revealing your reservation price carries considerable risks over and above simply identifying your tipping point between a yes and a no. This is because neither you nor your counterpart can reliably distinguish when each of you is telling the truth and when you are misrepresenting your reservation price.

There is another dangerous effect of oversharing, as well. For instance, suppose the ticket scalper that we first met in Chapter 2 makes an opening offer of $60 for a theater ticket, and you respond that you will pay no more than $30.11 The scalper suspects that you are actually willing to pay more than $30, but she does not know how much, so she concedes and lowers the ticket price to $50. You hold the line at $30, and she tries one more time, offering to accept as little as $45 for the ticket. You repeat that $30 is the most that you can pay.

How will this negotiation end? Our research suggests that the outcome is counterintuitive: Sharing your true reservation price actually increases the likelihood that the negotiation will reach an impasse, and it is the party that receives rather than the party that reveals its reservation price that is more likely to walk away, claiming that the party revealing its reservation price is not bargaining in good faith.12 Thus, truthfully revealing your reservation price—something your counterpart did not expect and cannot reasonably verify—results in more impasses, because the recipient of this truthful revelation—the scalper in this case—will likely suspect you are giving a faux reservation price, and will walk away when you stick to it. Hence, what seems like a more direct strategy for efficient value claiming is more likely to result in an impasse.

In summary, revealing your reservation price, or revealing information that would allow your counterpart to triangulate it accurately, is a grave mistake in a negotiation. Of course, the same applies for your counterparts—revealing their reservation price to you will either allow you to claim most if not all of the surplus created in the negotiation or hasten your walking away because you cannot verify that this is their true reservation price.

CONGRUENT ISSUES. Next, consider whether you should reveal issues in which there is no disagreement—where both parties want the same thing. For example, assume that the tire dealer in our earlier tire-purchase examples has multiple locations and that both the dealer and Thomas would prefer to have the tires delivered in location A, which is closest to Thomas’s office. But, prior to the negotiation, neither party knows the preference of the other party; that is, the dealer does not know where Thomas’s office is located and Thomas does not know that the dealer has a surplus of tires at that location. Because both the dealer and Thomas favor the same location (say A), the location is a congruent issue.

Assume now that the dealer discovers that Thomas prefers to pick up the tires at location A, but Thomas is unaware that the dealer also favors location A. Thus, knowing that location is a congruent issue gives the dealer a strategic advantage. She can appear generous and offer location A to Thomas while demanding nothing in return. This is called a “direct strategy,” and it’s most useful to the dealer if she wants to establish a rapport with Thomas or establish better long-term relations. Alternatively, she can offer location A in return for a concession, such as a higher price. This is called a “trading strategy,” and it is most useful when the dealer’s goal is to exact as much value as she can from the exchange.

Thus, while revealing congruent issues does not put you in as much strategic disadvantage as revealing your reservation price, doing so is potentially costly and therefore requires some thoughtful analysis. For example you can simply give that information away to create goodwill or you can capitalize your informational advantage by trading it for another concession from your counterpart. Your choice between direct and trading strategies will depend on what you value in the negotiation. But either way you are obtaining something in return for your knowledge.

INTEGRATIVE ISSUES. The last item on the list of strategic information that should be shared with caution is information relating to the integrative issues in the negotiation. To see why this is the case, consider the earlier tire example, in which Thomas was willing to increase his purchase price by $10 for each day that delivery could be accelerated, while the dealer was willing to accelerate delivery for $2 per day. Accelerating delivery thus created $8 in net benefits for each day ($10 per day of incremental benefits for Thomas minus $2 of incremental costs for the dealer). This created value can be claimed by the parties in the negotiation.

But who will be able to claim that additional value? Research shows that if both the parties are aware of the value creation potential, then they are more likely to split it equally. In our example, Thomas and the dealer then would each get $4 for each day that they agree to accelerate delivery.13

But assume that Thomas realizes that the dealer is willing to accelerate delivery, but is uncertain of the costs to the dealer. Not knowing those costs, Thomas might offer to increase the purchase price by $3 for each day delivery is accelerated.

For simplicity assume that the dealer accepts Thomas’s $3 offer. Now Thomas captures $7 of addition value while the dealer captures $1 for each day that delivery is accelerated. Thus, if Thomas knows that the delivery date is an integrative issue, and even better if he knew the value of each additional day for both parties (i.e., $10 for Thomas and $2 for the dealer), he could be much more effective at creating value and claiming most of that value.

But here lies the dilemma: To create value, you need to identify the integrative issues and triangulate the value that is created by the differing preferences of you and your counterpart—but you have to do so without sharing too much information. The first step, of course, is in the planning and preparation phase, when you should try to obtain as much information as possible prior to the negotiation.

In your preparation, you have identified the relative importance of the issues under consideration for both you and your counterpart. You should consider issues where there is a considerable difference between the way in which you value the issue and the way in which, in your assessment, your counterpart values it, because these issues are likely to be integrative. For example, in the tire purchase case, Thomas has identified that he is willing to pay up to $10 for each additional day that the delivery is accelerated from his reservation delivery date. Next, analyze the situation from your counterpart’s perspective—what are the dealer’s costs of accelerating delivery? For example, can the dealer get the tires from her supplier on short notice? What are the additional expedited transportation costs? Is there a queue for mounting the tires? Thomas may be able to answer some (but probably not all) of these question prior to the negotiation.

Once Thomas concludes that the dealer cares more about price than about delivery date, the next step is to figure out what her costs of accelerating delivery are. Let’s say that Thomas estimates that her costs to expedite delivery are somewhere around $3 per day. Thus, Thomas could propose a price increase of $3 per day of expedited delivery. Notice that once Thomas has made that offer, the dealer can infer that expediting the delivery is worth at least $3 per day to Thomas. So if the dealer were thoughtful and strategic, she probably would not accept Thomas’s offer of $3 per day but instead counter with an offer of $5 per day. Countering is actually optimal as it provides an opportunity to increase her profit but reveals only minimal information to Thomas: While it confirms that delivery date may still be integrative, it does not allow Thomas to triangulate her true cost as the counteroffer only places an upper limit of $5 on her costs to expedite delivery.

At this point, the parties might go back and forth for a while, but suppose they eventually agree to say $4 per day. This agreement still creates $8 per day of additional value (remember, while Thomas thought that the dealer’s reservation price was $3 per day, in reality, her reservation price was $2 per day), allocating $6 ($10 − $4) per day of that value to Thomas and $2 ($4 − $2) per day to the dealer.

Notice again how important planning and preparation is. Because Thomas suspected that delivery date might be more valuable to him than the costs the dealer would incur, he offered what he thought was her reservation price of $3 per day. Without that preparation, he might have thought that delivery was distributive and offered closer to his value of $10. If he were to offer $10 per expedited day, the dealer might have accepted and captured all the value. If he had offered $9 and the dealer were to accept that offer, he would have learned that delivery is integrative—but this would have been an expensive way of learning, as the dealer would have gotten most of the value created in the process.

In this example, the initial identification of the integrative issue was based on planning and preparation. In fact, however, much of the information that is necessary for identifying integrative issues requires this information to be exchanged between the parties during the negotiation. Information can be exchanged in a number of ways, whether through reciprocity or explicit proposal exchange. Relying on reciprocity encourages your counterpart to match your exchange of information while mitigating the adverse effect to you of one-sided information exchange.

Encourage Reciprocal Information Sharing

Sometimes you may hesitate to share information because you are concerned that your counterpart will take advantage of you. Although this concern is justified, it is less acute when you already have an established relation with your counterpart and you both expect future interactions.

But the fact remains that to create value negotiators need to get the information exchange process started. Taking the first step and sharing some information can initiate the process of reciprocal information exchange. The challenge is what and how to share.

The information that you choose to initiate the sharing process should open up the conversation without risking significant harm to your strategic position should your counterpart not reciprocate. For example, you might open the negotiation by discussing the characteristics of a good deal—what is important to you to achieve in this interaction (and of course, learning what is important to your counterpart). In the tire purchase example, for instance, Thomas might reveal that early delivery is important to him. In response, the dealer might indicate that she could accommodate Thomas’s desire, but that she would need a higher price to defray the additional costs. Although Thomas does not know the exact magnitude of those costs, he can obtain a reasonable estimate by asking her what price increase would be acceptable. Comparing her proposal to his reservation price of $10 per day may confirm to him that the delivery date is likely to be an integrative issue.

The information that you gather can help you choose between a direct strategy (your counterpart asks, you agree) or a trading strategy (your counterpart asks, you propose to give your counterpart what he wants in exchange for a concession on another issue). Suppose you chose the trading strategy. You should propose this by asking your counterpart her preference about the congruent issue and then you agree to accommodate her preference in exchange for a concession on another issue. In this way, your counterpart is unable to infer whether that issue is congruent, distributive, or integrative.

Package Your Proposals

One strategy to claim value is to package your proposals, rather than negotiating issue by issue. For example, Thomas might make the dealer an offer that specifies price, location, and delivery date. There are several advantages to such an approach. First, by offering a packaged offer, you open up the opportunity for trading among multiple issues. Second, packages are very effective means to solicit counteroffers—and thus move toward value-creating trade—without revealing too much information.

In contrast, consider a diametrically opposed strategy often used in collective bargaining negotiations: “solve the easy issues first!” One reason that some may find this strategy attractive is because it creates momentum towards agreement: Once you have agreed to the first issue, finding a way to agree on the second issue seems like less of a hurdle. In addition, as you and your counterpart reach agreements on successive issues, walking away from what you have achieved becomes increasingly difficult: with every agreement, the negotiators may perceive that they have more to lose, and thus each becomes more committed to reaching an agreement.

However, there are some significant disadvantages to the solve-the-easy-issues-first strategy. First, because it necessarily requires an issue-by-issue approach, it hinders your ability to take advantage of the integrative potential within the negotiation, which requires multiple issues that are packaged. Remember that creating value within a negotiation requires at least two issues that are valued differently by the parties.

Second, if you were to solve the easy issues first, what ultimately remains is the most difficult issue—and you now have nothing to trade. Your remaining option to resolve this last, difficult issue is through the contentious strategy of domination—who will win as neither you or your counterpart have any other issues that you could trade in exchange for concessions on this last issue. Even if you get a deal, you and your counterpart have now ended the negotiation in the most contentious way possible—as a winner or as a loser! Obviously this doesn’t bode well for future negotiations, if you have a continuing relationship with your counterpart.

The third, and less obvious, drawback of the solve-the-easy-issues-first strategy is that it assumes that your easy issues are also your counterpart’s easy issues. What if an issue that was relatively unimportant to you was your counterpart’s most important issue? Resolving this issue early would put you at a decided disadvantage in the negotiation going forward. You would lose an opportunity to trade a relatively minor concession for a concession on an issue that was important to you.

The value of solving the easy issues first is based on the common assumption that issues are equally important to both you and your counterpart. If this is the case, then the strategy may be useful to garner commitment and momentum in fashioning an agreement. If this is not the case, then you run the risk of reducing the quality of the value created and, in like measure, the value that you claim.

Packaging issues is more likely to lead to negotiation success. But should you combine all the issues into one package and negotiate it? Or would it be better to offer your counterpart multiple packages, each differing in settlement options but similar in the value of the package to you? As we’ll show in the following section, the latter approach can provide some important tactical advantages.

Propose Multiple Packages

You may find yourself in a situation in which it becomes clear that your counterpart has done little in the way of preparation for the negotiation or acts as if every issue and potential concession is a life-and-death struggle. One strategy that may help both of you figure out what is more and less important among the issues to your counterpart is for you to design and propose multiple offers and present these offers simultaneously to your counterpart. Unlike a fast food menu, this option does not allow your counterpart to cherry pick a single aspect from each of the different packages (for instance, combining option A in Issue 1 in Package 1 with option C in Issue 2 in Package 3). Rather, you offer your counterpart a choice among the packages you offered. Even if your counterpart were not prepared to choose a package, it is useful to have her rank-order the packages or, at the very least, to tell you which is most preferred and which is least preferred among the packages.

This strategy has a couple of real benefits. First, asking your counterpart to rank packages provides you both with information about each issue’s relative importance to both of you, without revealing too much information. Second, providing your counterpart with a choice among multiple packages may increase her sense of control over the outcome of the negotiation. This increased sense of control can increase her commitment to what she chooses, so that implementing the actual deal is more palatable. In addition, since this strategy has much less of the take-it-or-leave-it flavor, it appears less adversarial and more of a problem-solving approach.

However, these benefits can come at a cost. When you propose multiple packages that are similar in value from your perspective, you also provide information that allows your counterparts to triangulate the values that you place on individual issues. Thus, while this strategy can enhance the value-creating aspect of your negotiation, it may well limit the amount of value that you can ultimately claim in the interaction.

Of course, these costs are offset by the benefits of the information about your counterpart’s preferences that you can infer from her. While this is an important point to keep in mind, however, you must understand that no strategy has only an upside potential—that is, no strategy can help you create value without creating collateral problems in value claiming. The converse is also true; there are few strategies for value claiming that do not affect opportunities for value creating. The task of the strategic negotiator is to create a productive balance between those strategies, creating value as long as that value creation is likely to increase the ultimate value that can be claimed.

SUMMARY

This chapter has explored the ways in which negotiators’ interests intersect with the interdependencies of the negotiation process. Thinking strategically in negotiation requires that you not only focus on your preferences, interests, motives, and goals but also focus on your counterpart’s preferences, interests, motives and goals.

• Acquiring and using information requires that you identify the outcome you wish to achieve and then figure out how to get there from here; that is, you look ahead and reason back (remember the Truel).

• Look out for other systematic aspects of human behavior such as fairness which is likely to influence the behaviors of you and your counterparts. But even if getting more of what you want does not depend on fairness, you still must consider this factor, as it is likely to affect your counterpart’s behaviors.

• Information asymmetry is a constant challenge for negotiators. Sellers typically know much more about what they are selling than the buyer does, and that information often becomes evident only after you have completed the deal. Thus, an important question that should be answered prior to making an offer is “what do I learn if my offer is accepted?”

• Remember that if all information is known by all parties, then the negotiation becomes purely distributive and adversarial. In this situation, value claiming will likely be more of a function of who is more powerful—particularly in terms of who has the better alternative and the discipline to demand more while being willing to walk away.

At this point, you are finally ready to negotiate. You have determined your reservation price; you have established your aspirations and have investigated your alternatives. You have scoped out the issues that will be discussed in the negotiation, and you’ve figured out what your preferences are—and you have a good idea of the preferences and interests of your counterparts. You know which of these issues are distributive, which are integrative, and which are congruent.

What’s next? In the next chapter we address the first strategic question facing negotiators: Should you make the first offer?