Bargaining for Advantage Read online

Barry called me because he was talking with a large Swiss firm about a possible joint venture and needed some negotiation advice. The Swiss company wanted to exploit a special chemical formula developed by Barry’s firm to create an entirely new product line with enormous global sales potential. If consummated, the deal could dwarf Barry’s current operation and quickly lead to more than $100 million in profits.

  Barry was anxious for this deal to work, but he was having trouble moving the negotiations along. He was especially keen to decide whether he should be the first one to name a price for his firm’s chemical formula or wait for the Swiss company to open with its own valuation.

  Barry sent me copies of his correspondence with the Swiss firm and his notes from various face-to-face meetings. We then had several long discussions about the situation. The deal had many interesting business terms, price issues, and possible structures, but as I studied the situation I concluded that the most important strategic variables centered on relationships.

  First, Barry and his counterpart—a Swiss executive who was slightly older than he was—had been strangers to each other prior to the Swiss firm’s inquiry regarding Barry’s technology. As I reviewed the correspondence, I was struck by the collegial tone and “we can work it out” spirit that underlay virtually everything the Swiss executive—I’ll call him Karl—said or wrote. Barry’s responses, by contrast, had a very competitive, defensive air, focusing on matters such as possible disputes in the future and the risk that the Swiss company might steal Barry’s technology. From the workshop, I knew that Barry was a competitive type—and he was running true to form.

  In addition, Barry’s notes reflected his frustration at not being able to get Karl to talk specifics about the deal at various meetings. Barry suspected that Swiss companies were secretive and that this one might have a hidden agenda.

  I did not discount the possibility that something suspicious was going on in Zurich, but competitive people like Barry have trouble taking others at face value. Although it pays to be prudent, people are sometimes exactly what they seem. I questioned Barry closely about Karl’s behavior in the casual conversations and social situations they had shared. I then made an informed guess about Karl—that he was a genuine problem solver who could be both fair and creative if Barry would only give him a chance.

  I advised Barry to relax and begin approaching Karl as a possible confederate rather than as a potential pickpocket.

  I suspected that what Barry was experiencing as delay might well be an unstated need by Karl to form a better personal relationship with him as a foundation for a long-term business opportunity. By focusing exclusively on the current transaction, Barry was missing a lot of signals his would-be Swiss friend was sending him.

  This was an important insight, but the most important relational issue in the deal still lay ahead. Something Barry mentioned in one of our talks prompted me to ask him about his relationship with the CEO and majority owner of Barry’s own firm: Barry’s father. And that opened a floodgate of frustration and anxiety. It turned out that Barry’s father, the firm’s founder, was getting on in years but was not relinquishing his control over strategic business issues. This deal was a classic example.

  Barry’s father was avoiding the subject whenever it came up, expressing exaggerated and unrealistic expectations for the formula in question so that funds derived from it would “take care of your mother when I’m gone,” and indicating in subtle ways that he did not quite trust Barry to negotiate the best possible terms.

  This, of course, raised some complex and important issues about Barry’s relationships within his family. It was clear that, even if the Swiss firm made an attractive offer, the deal might fall through because Barry’s father would fear losing control of the company. When Barry and I focused on this issue, we agreed that his chances for success with the Swiss firm were low without clarity on the home front.

  Interestingly, while Barry’s father was avoiding a realistic discussion of the deal, Barry himself had been avoiding a confrontation with his father over the simmering issue of control. Family relationships that involve business can be both the most dependable and the most explosive imaginable. Barry’s family had developed a sophisticated avoidance mechanism to keep the risk of an explosion by its strong-willed patriarch as low as possible.

  Over the next month or so, the deal began to move forward. Barry made a trip to Europe and spent several days with Karl—this time putting the deal in the background while he let the beginnings of a personal relationship develop. Barry was genuinely surprised when Karl casually dropped a possible price range for Barry’s formula into a dinner conversation near the end of this trip. After some discussion, the pair began closing in on a price that was much higher than Barry had thought possible.

  Meanwhile, on the home front, Barry had a talk with other family members and a trusted financial adviser about his father’s refusal to confront the implications of this deal for the firm. Barry realized that he had been as responsible as his father for deferring the control issue, but he was determined to move the issue forward. Barry gained an important ally when his mother privately agreed that something needed to be done.

  In short, Barry’s negotiation problems turned out to have important relationship issues both across the table and away from it. Barry began to make real progress only when he started paying as much attention to the “people” issues as he did to the financial terms. The same is true of many important negotiations.

  Personal Relationships Versus Working Relationships

  After the incident during the Panic of 1873, the relationship between J. P. Morgan and Andrew Carnegie was based on a degree of mutual trust. But was this relationship a personal friendship or a working relationship? How about the one between Barry and Karl? There is a subtle distinction between working relationships and personal friendships that can make a major difference in the way negotiations work.

  I once interviewed the head of an investment banking firm as part of a negotiation research project. This man had been an entrepreneur before he joined the firm and had done literally thousands of deals in his career. I asked him what aspect of negotiation caused him the most anxiety.

  He hesitated for a moment and then replied, “Walking into a negotiation and seeing a friend sitting on the other side of the table.”

  I was surprised by his answer. “Why would that be a problem?” I asked. “Wouldn’t that help you understand each other?”

  “In my business,” the banker said, “the job is to make as much money for the client as possible. Seeing a friend sitting there makes you worry about something else—the friendship. It’s hard to do your job when you’re worried about losing a friend.”

  Research has confirmed this banker’s intuition about bargaining with friends. In fact, the closer the personal relationship between two negotiators, the more likely it is that they will seek to minimize conflict and close the deal based on some simple, roughly equal compromise.

  Some years ago, three professors conducted a bargaining study to see how dating couples handled bargaining. They gave the same bargaining problem—the purchase for resale of three different appliances—to seventy-four dating couples and thirty-two pairs of men and women who were strangers.

  The dating couples were much “softer” in their bargaining styles than the strangers were. They started the negotiation with more modest goals; they made bigger concessions; they argued with each other less; and they told each other the truth about their bargaining positions more often. In short, they were nicer to each other than the strangers were, and reached agreements by straight, simple compromises.

  Their “soft” style carried a cost, however. They were much less successful than were the strangers at uncovering hidden, mutually rewarding trade-offs in the scenario they negotiated. Why? Because they focused on simple, equal compromises on all the issues and engaged in less problem solving and probing of priorities than did the more competitively minded strangers. As we shall see
in Chapter 9, effective negotiators care about being “fair,” but they are also assertive about their goals. They push the other party to help them find the best solutions, not just the simplest compromises.

  A second study confirmed that friends are also “soft” on each other when it comes to bargaining. The subjects in this experiment were asked to state the price they would demand or pay for certain items such as used TV sets or concert tickets. In each case, the item being sold had a stated range of fair values (for example, subjects were told that the concert tickets they had or wanted might sell for between $10 and $26). The subjects also told the experimenters how intensely they expected to bargain in an encounter to buy or sell these items. In some cases they were told to set the price for a friend; in others the price was for a stranger.

  The results confirmed our intuitions. The relationship factor made a big difference. The opening prices to sell things to friends were toward the lower end of the “fair value” range ($15.50 to sell the concert tickets worth between $10 and $24) and near the midpoint when subjects were offering to buy things from friends ($17.50 to buy the tickets). The subjects also anticipated a relaxed, no-haggle bargaining encounter. The prices for strangers were either very high ($24 to sell the tickets) or low ($14 to buy the tickets). Obviously, the subjects anticipated a lot of bargaining.

  So our relationships with others matter when it comes to the allocation norms we apply in bargaining encounters. Close relationships trigger the use of “equality” or “equal sharing” norms. Encounters with strangers cause us to expect and exhibit more competitive, selfish behavior.

  But isn’t there a middle ground for relationships—something between friends and strangers? There is. Between these two extremes are so-called working relationships. These are the exchange relationships of everyday business life. They are based both on a degree of trust and reciprocity and on the prudent assumption that both parties are looking after their own best interests. Working relationships are somewhat more formal than friendships; they can be sustained through more explicit conflict over relatively higher stakes; and they depend for their existence less on emotional support and feelings of “liking” than on explicit reciprocity in a series of exchanges. My guess is that J. P. Morgan and Andrew Carnegie had a highly reliable working relationship.

  Psychological Strategies for Building Working Relationships

  How does one go about building the trust needed to form working relationships? There are several strategies that can help, but you should remember that sincerity in your conduct is a key to any of these working effectively. People do not respond well when they think others are trying to manipulate them.

  THE SIMILARITY PRINCIPLE

  At the most superficial level, a simple psychological fact is that we tend to trust people who appear more rather than less familiar to us—people who act like us, share our general interests and experiences, and identify with the same groups.

  Remember the story in Chapter 3 about Mahatma Gandhi’s controversial first-class train ride in South Africa? The stationmaster gave Gandhi a first-class ticket. “I wish you a safe journey,” he said. “I can see you are a gentleman.”

  Gandhi had no personal relationship with the stationmaster to smooth the way toward getting his ticket, but he did use the basic principle of similarity to help him. The similarity principle applies to aspects of negotiation such as communication style as well as to things like appearance and group membership. When I was coaching Barry in how to relate better to Karl, my main effort was to get him to match Karl’s collaborative approach to communication—to emphasize the positive aspects of the deal and make an effort to discuss shared interests. As soon as Barry began suppressing his more overt competitiveness in favor of cooperative communication, the deal began to move ahead. Chapter 8, on the rapport building that goes on during the information exchange stage of negotiations, explores the similarity principle in more detail.

  THE ROLE OF GIFTS AND FAVORS

  Another time-tested way to encourage the delicate process of establishing trust in working relationships is to give the other side something as a symbol of good faith. Think back to the two examples that led off the book. The first involved the sale of Harcourt Brace Jovanovich to General Cinema. As you will recall, the negotiation started off with a surprise: HBJ’s CEO, Peter Jovanovich, presented General Cinema’s Dick Smith with a symbolic gift, an engraved HBJ watch. Even more important, he gave Smith some information—an admission that Jovanovich thought General Cinema was the “right” buyer for his company. This latter move involved some risk, which made it all the more meaningful.

  In the second case—the settlement of the land dispute between the two Arusha neighbors in Tanzania—the negotiation began with the parties making extreme demands and accusations. In the language of the Arusha people, the neighbors were “talking to the mountain.” But the negotiation ended with an exchange of gifts: a small goat and some homemade beer.

  In both of these negotiations the gifts served an important communication purpose that helped build trust. They were symbols of an underlying relationship between the parties. The HBJ watch helped initiate a relationship between businessmen who were strangers to each other; the goat and the beer helped reestablish order in a long-standing relationship between two neighbors.

  The favor J. P. Morgan performed for Andrew Carnegie by saving Carnegie from his $10,000 mistake also served as a kind of gift. And like a gift, Morgan’s favor set the norm of reciprocity in motion.

  Behavioral economists have argued that gifts—especially gifts between unrelated strangers—often serve as signals regarding intentions to invest in a future relationship. They cite as examples everything from certain animal courtship behavior to gift giving in business mergers such as the HBJ example. Gifts, kindnesses, and a thoughtful regard for other people’s feelings are all ways of helping to establish and maintain close personal relationships—and the same acts carry symbolic weight at the bargaining table even though the relationships there may be more professional than personal in character.

  TRUST AND RELATIONSHIP NETWORKS

  A third way to establish a measure of trust at the bargaining table is through the operation of relationship networks. Such networks often help us gain access to and credibility with those we are seeking to influence. The mere fact that we share a mutual acquaintance with our counterpart may help us appear more familiar and establish a minimal condition for trust. If our counterparts know someone who can specifically vouch for our trustworthiness, this helps them gain even more confidence that we will treat them fairly.

  Many cultures around the world have highly refined and explicit ideas about the operation of relationship networks, much more so than we do in the West. The Japanese have a ceremonial ritual of exchanging business cards (called meishi) when first meeting a potential business contact. Both parties bow and hold the card a certain way, treating it with great seriousness. This helps the relationship process get started based on reciprocal signs of respect.

  While doing research in Japan on negotiation practices, I learned that Japanese firms often send their young executives out for days at a time to collect as many meishi as possible. Why? Because once meishi are exchanged, both sides are free to make a future call without embarrassment. Asian networking is also accompanied by obligatory giving and receiving of small gifts, underscoring the reciprocal nature of these relationships. There are even gift-giving consultants in Japan to help people decide just what sort of gift is appropriate in each business situation. Once gift giving is established, negotiations become merely an episode in an ongoing association in which the parties no longer have to worry quite so much about the issue of trust.

  In China, the ceremonial aspects of networking are somewhat less formal but networks are just as important. The Chinese even have a special name for networks: guanxi (pronounced “gwang-chi”). As one prominent Asian business publication put it, “Connections are a fact of life in Asian business. With the righ
t guanxi, doors open and deals get done. Without it, the simplest deals can disintegrate.”

  Guanxi has its strongest connotations with respect to family affiliations. But it expands outward from that core to encompass any and all relationships that have at their source a commitment to reciprocal benefits and obligations.

  Just how does guanxi work? A U.S. newspaper recently reported a typical story. A young third-generation Chinese-American woman quit her well-paying job in Boston and traveled to Gwangzhou, China, looking for opportunity. After teaching conversational English to “Chuppies” (short for “Chinese young urban professionals”) for a few months, she decided to open a café and bar where fellow Americans in Gwangzhou could find a friendly and familiar atmosphere while consuming pepperoni pizza, beer, and homemade cheesecake.

  She had the money she needed, but, like many foreigners doing business in China, she had trouble negotiating with local officials to obtain her business permit. As she later described it, “The rules [in China] depend on whoever is behind the counter that day.”

  Then she called on her guanxi—some former “Chuppie” students who worked for the local government in Gwangzhou. She did not have to pay the “Chuppies” bribes or make under-the-table payments. She just approached them and asked for help. They liked their American friend and saw an opportunity to become part of her “network.” They spoke to a few officials who were part of their own guanxi and bureaucratic wheels began to turn. Her café soon opened as planned.

  Guanxi is so important to Asian business that a magazine called International Business Asia publishes an annual directory it calls its “Guanxi List.” This list features the people in Asia with the most influential networks of personal connections. “While [everyone on the list] possesses business acumen in their own right,” the magazine notes, “a constant in their success has been access to the best business and political circles.”