Negotiating from a Position of Weakness

NASSCOM 2007

Prof. Deepak MalhotraHarvard Business School

Negotiating to winfrom a Position of Weakness

NASSCOM 2007

Prof. Deepak MalhotraHarvard Business School

Why are we starting with Chapter 12?

1. Introduction2. Capturing Value in Negotiation3. Creating Value in Negotiation4. Information: How to Find Out What They Know5. Mistakes People Make I: Cognitive Bias in Negotiation6. Mistakes People Make II: Motivational Bias in Negotiation7. Overcoming Bias8. Strategies of Influence: How to get them to say “Yes”9. Increasing your Strategic Awareness in Negotiation10. Ethics in Negotiation11. Strategies for Confronting Lies and Deception12. Negotiating from a Position of Weakness13. When Things Get Ugly: Dealing w/ Irrationality, Anger, Threats, Ultimatums, & Egos

14. When Not to Negotiate15. Putting it into Practice

Story 1

“In our business, potential customers constantly tell us that we have to lower our price, and that if we don’t lower it, they will go to our competitors. They do not seem to want to talk about anything other than price. And the fact of the matter is, they can go to our competitors and get a better price. How can we possibly negotiate a good deal in such situations?”

Story 2

“I am involved in a dispute and the other side is threatening to sue. Their lawsuit is entirely frivolous, but if we go to court, they can continue to litigate until I go bankrupt. They have a lot of money and can easily afford a long court battle. What can I do?”

Story 3

“My country is a small player on the world stage. When it comes to negotiating economic or political international agreements, we are constantly being pushed around. More powerful countries overlook our interests, and we practically have to plead for what we most desperately need. Is there some way to improve our position?

Negotiate Effectively… Even When You are Weak

The Roosevelt Campaign

• 1912 – U.S. Presidential election

• 3 million copies photograph have been printed

• Permission has not been granted.

• Copyright law: owner can demand $1 per copy

• No time to reprint brochure

• Brochure is critical for the campaign

The Roosevelt Campaign

Campaign manager sends telegram to copyright owner:

"Planning to print three million copies of campaign speech with photographs. Excellent publicity opportunity for photographers. How much are you willing to pay to use your photographs?"

Photographer’s reply:

"Appreciate opportunity, but can only afford to pay $250”.

The Roosevelt Campaign

Campaign manager sends telegram to copyright owner:

"Planning to print three million copies of campaign speech with photographs. Excellent publicity opportunity for photographers. How much are you willing to pay to use your photographs?"

Photographer’s reply:

"Appreciate opportunity, but can only afford to pay $250”.

The Roosevelt Campaign

Campaign manager sends telegram to copyright owner:

"Planning to print three million copies of campaign speech with photographs. Excellent publicity opportunity for photographers. How much are you willing to pay to use your photographs?"

Photographer’s reply:

"Appreciate opportunity, but can only afford to pay $250”.

A Client: “QAR”

• QAR revenues: $300 million

• 85% of revenues based on relationship with Remus

• Remus revenues: $3.25 billion

• QAR is one of many regional distributors

If Remus and QAR end their relationship:

QAR Loss of Revenue Remus Loss of Revenue~80% ~3%

The Case of “QAR”

• Define the “zone of possible agreement”.

Current momentum

Current Deal- Preferred Revenue Sharing- No constraints on strategy- No forced affiliation

Feared Outcome- Lose preferential revenue deal- Lose all flexibility- Forced affiliationLose $240 Million

But let’s do some analysis:If there is NO DEAL…

QAR:

• Loses 80% Revenue = $240M

• Gains:+ Future business opportunities

+ Sovereignty

= ~ $50 million

Net Loss if No Deal$190 Million

The Case of “QAR”

• Define the “zone of possible agreement”.

Current momentum

Current Deal- Preferred Revenue Sharing- No constraints on strategy- No forced affiliation

Worst Case- You lose some revenue- You lose flexibility- Some affiliationLose $190 Million

Feared

Some analysis:If there is NO DEAL…

REMUS:

• Loses 3% Revenue = $100M

• Also Lose:+ Political connections

+ Reputation

= ~ $20 million

Net Loss if No Deal$120 Million

QAR:

• Loses 80% Revenue = $240M

• Gains:+ Future business opportunities

+ Sovereignty

= ~ $50 million

Net Loss if No Deal$190 Million

The Case of “QAR”

• Define the “zone of possible agreement”.

Current momentum

Current Deal- Preferred Revenue Sharing- No constraints on strategy- No forced affiliation

Best Case- Even more revenue- More freedomGain $120 Million

Worst Case- You lose some revenue- You lose flexibility- Some affiliationLose $190 Million

The Case of “QAR”

• Define the “zone of possible agreement”.

Current Deal- Preferred Revenue Sharing- No constraints on strategy- No forced affiliation

Best Case- Even more revenue- More freedomGain $120 Million

Worst Case- You lose some revenue- You lose flexibility- Some affiliationLose $190 Million

The Case of “QAR”

• Define the “zone of possible agreement”.

Change momentum?

Current Deal- Preferred Revenue Sharing- No constraints on strategy- No forced affiliation

Best Case- Even more revenue- More freedomGain $120 Million

Worst Case- You lose some revenue- You lose flexibility- Some affiliationLose $190 Million

Lessons from Roosevelt & QAR

• Don’t reveal the weakness of your alternatives

• Having weak alternatives is not so bad if the other side’s alternative is also weak

• Being weak is bad. Feeling weak can be fatal.

• The person who defines the negotiation, wins the negotiation

• Change the focus of the negotiation to be about:

– The weakness of their alternatives

– The value you bring to the table

– Pricing example: Cost Plus OR Value Driven?

• This works if you identify and leverage your Distinct Value Proposition

Make Your Distinct Value Proposition a Factor in the Negotiation

Beating the Price-Only Auction

• Should I submit a low-cost/low-value bid, or a high-cost/high value bid?– Submit multiple bids simultaneously

• Negoti-auctions– Lower your bid just enough to make it to the 2nd round

• Purchasing agent cares only about low price– Go around the agent with a CC to principal– Do a Post-Settlement Settlement with the principal

• Communicate with your customers…– When there is no money on the table– Possibly preempt the auction

• Not everyone is your customer. Have the difficult conversation.– “Is it the case that you will pick the lowest price option regardless of the

entire package someone offers? Do you have any interests other than price?”

• A thought experiment…

If You Can’t Leverage Your Strength, Leverage Your Weakness!

Romania

• Paris 1919• Allied Forces in charge• Redrawing geographic boundaries• Age old principle: to the victor belong the spoils• The case of Romania seems to be an exception

The Dispute

• South American distributor’s perspective: – Old models are being dumped in S. America– Manufacturer then illegally terminated the agreement– CLAIM: Want $8 million (lost profits, reputation damage, $s

invested)

• US manufacturer’s perspective:– Distributor did not order the minimum amount required in Year 1– Distributor did not have distribution channel set up as initially claimed– Distributor still owes us $125,000 for products already delivered– CLAIM: We want to end the agreement and collect our $125,000

The Dispute

• Who has more power?– U.S. manufacturer is 1000 times bigger than the distributor– Legal experts agree: US manufacturer’s case is stronger– If litigate, the case will be heard in a U.S. court

• What was the final Agreement?

• Agreement:– U.S. manufacturer will pay $1 million to the distributor– Manufacturer will give the distributor exclusive right to sell new

product (and future products) in a few key regions of South America

Lessons from Romania & Prosando

• Weakness can be a strength

• They might need for you to survive and be successful

• Key Insight:

– Your Power is not simply based on the strength of your alternatives… more fundamentally, your Power is determined by you ability to create value for others

• Consider the case of a small firm in the pharmaceutical industry…

– A small player negotiating with a large pharmaceutical firm

– After deal is done, he decides to squeeze them for more money!

Student Profile

“I had agreed…to sell the rights to 8 different drugs I have in development… I had negotiated for five straight days on this deal and it closed…before the Harvard course. After your classes I call up the pharmaceutical company that is buying the rights and said that I needed more money up front - The company was taken aback by my call.

However… I used this opportunity to explain exactly "why" I wanted different terms. Once they heard my rationale, that I wanted the money to start more projects, that I wanted the money to help me with cash flow and that I wanted the money to be able to go to some angel investors to raise even more money, they understood. All they wanted in return was a right of first refusal on any future projects I develop with the additional cash flow in the next two years. 

Now instead of using a line of credit to support all these development programs, I have 3-4 more projects which I will start  this summer vs. end of 05'. And both sides have a better value under these terms…”

Student Profile

“I had agreed…to sell the rights to 8 different drugs I have in development… I had negotiated for five straight days on this deal and it closed…before the Harvard course. After your classes I call up the pharmaceutical company that is buying the rights and said that I needed more money up front - The company was taken aback by my call.

However… I used this opportunity to explain exactly "why" I wanted different terms. Once they heard my rationale, that I wanted the money to start more projects, that I wanted the money to help me with cash flow and that I wanted the money to be able to go to some angel investors to raise even more money, they understood. All they wanted in return was a right of first refusal on any future projects I develop with the additional cash flow in the next two years. 

Now instead of using a line of credit to support all these development programs, I have 3-4 more projects which I will start  this summer vs. end of 05'. And both sides have a better value under these terms…”

Sick of Playing by Their Rules?Change the Game

Changing the Game

• Attack the source of their power– Planned Parenthood

• Don’t try to block their punch– A Last Minute Demand

• If you have no power, don’t play the power game– Einstein at the bargaining table

A Final Example…

• Subway Sandwich Shop• Man walks in and orders a sandwich• Then he takes out a gun and points it at the cashier• “Give me all the money that is in the cash register”• Cashier Responds:

– “How about $10 and the sandwich?”

• The eventually agree on $20 and the sandwich

Power Corrupts

Absolute Power Corrupts Absolutely

Effective Negotiators Don’t Have to Worry

Power Corrupts

Absolute Power Corrupts Absolutely

Effective Negotiators Don’t Have to Worry

Power Corrupts

Absolute Power Corrupts Absolutely

Trained Negotiators (and stupid cashiers) Don’t Have to Worry