Friday, November 16, 2012

Negotiation: Your Starting Points

Any successful negotiation must have a fundamental framework based on knowing the following:
·         The alternative to negotiation
·         The minimum threshold for negotiated deal
·         How flexible a party is willing to be, and what trade-offs it is willing to make

Three concepts for establishing negotiation framework: BATNA (Best Alternative To Negotiated Agreement), Reservation Price and ZOPA (Zone Of Possible Agreement). And expanded to the fourth concept: value creation through trade.
BATNA
Developed by Roger Fisher and William Ury, it is one’s preferred course of action in the absence of a deal. Knowing your BATNA means knowing what you will do or what will happen if you fail to reach agreement. Always know your BATNA before entering into a negotiation. Otherwise you won’t whether a deal makes sense or when to walk away.

Example:  a consultant is negotiating with potential client about a month long assignment. It’s not clear what fee clear fee arrangement she’ll be able to negotiation, or even if she’ll reach an agreement. So, before she meets with this potential client, she considers her best alternative to an acceptable agreement. In this case, her BATNA is spending that month developing marketing studies for the other clients and she calculates can be billed out at $15,000
If your best alternative to a negotiated agreement determines the point at which you can say no to an unfavorable proposal.

If that BATNA is Strong, you can negotiate for more favorable terms, knowing that you have something better to fall back on if a deal cannot be arranged. If BATNA is weak, puts you in a weak bargaining position. Whenever a negotiator has a weak BATNA (or hasn’t taken the time to determine what that BATNA is), it is difficult to walk away from proposal. And if the other side knows that its opponent has a weak BATNA, the weak party has very little power to negotiate.
A weak BATNA can be improved, here three potential approaches to strengthening it:
1.       Improve your BATNA
2.       Identify the other side’s BATNA
3.       Weaken the other party’s BATNA

No negotiator is in a weaker position than one with no alternative to a deal. In that case, the other side can dictate the terms. The BATNA less party is a deal taker or not a deal maker. If you find yourself in this situation, you must have an alternative.
Most business negotiation involves many variables, some of which cannot be quantified or compared. In transaction that involves price and other features, you can make the BATNA less fuzzy by assigning a monetary value to various features and adjusting the BATNA value by that amount. But, not all situations are amenable to price adjustments, for simple reason that price is not always the fulcrum of negotiated deals. In that case, the negotiator must be able to make a trade-offs in both sizing up the deal and developing his/her BATNA.

Reservation Price
The reservation price (also referred to as the walk-away) is the least favorable point at which one will accept a deal. It could be derived from BATNA, but it is not usually the same thing.
Example: You are currently paying $20 per square foot for suburban office space. While preparing to negotiate with a commercial landlord for a lease in down-town high-rise, you decided that you won’t pay more than $30 per square foot. That’s your reservation price. Or, you can stay where you are at $20 (your BATNA). In the end of negotiation, the landlord declares that he will not accept less than $35. You terminate the negotiation and walk away from the deal.

In above case, the new location has different characteristic. Thus, there’s a subtle difference between your BATNA and your reservation price. The fact that $35 per square foot is the landlord’s reservation price.

ZOPA (Zone Of Possible Agreement)
ZOPA is the area range in which a deal that satisfies both parties can take place. Put another way, it is the set of agreement that potentially satisfy both parties. Each party’s reservation price determines one end of the ZOPA. Each party had a reservation price, and they bargained within the ZOPA. In doing so, each got a better price than his/her walk-away.
In some cases, both reservation prices were reversed, no overlap in the ranges in which two parties could not reach agreement – No ZOPA. No agreement would be possible, no matter how skilled the negotiators, unless there were other elements of value to be considered or if one or both side’s reservation price changed.

Value Creation through Trades
This fourth concept tells us that negotiating parties can improve their positions by trading the values at their disposal.

Example: Book barter between collectors of rare books. One party is building A book series and has B series –not his/her interested building.  While other party is building B book series and has A series –not his/her interested building. Both are extremely happy with the deal.

Value Creation through Trades is possible when a party has something he or she values less than does the other party –and vice versa. By trading these values, the parties lose little but gain greatly

Ref:
Negotiation, 1992, Harvard Business Essentials

1 comment:

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