Essay on Terms and Concepts of Effective Negotiation

A negotiation is known as any attempt to persuade or influence another party to do something. Commonly it is a discussion between two parties or more, with the intention of reaching an agreement upon courses of action, resolving issues or disputes through compromise, or gaining advantages from a certain situation for each participating parties. Thus in ensuring effective negotiations, various aspects need to be taken into account such as strategy, effective communication, long-term effect on relationship, and also aligning the objective and expectations of the negotiation.

In effective negotiation, managing emotions, prioritizing conflicting ideas and interests, finding solutions, and tempering expectations need to be well balanced before each participating party is able to agree upon a solution. Thus effective negotiation requires skills that can either be taught or developed, and most importantly through experience and practice. Figure 1 shows a representation of a negotiation situation between a Buyer and a Seller. There are many theories and terms on effective negotiation that shall be explained further in this essay.

Figure 1: Buyer-Seller negotiation

Mythical Fixed Pie mindset

The mythical fixed pie mindset is referring to a limited understanding in a negotiation where it is assumed that one party of the discussion must lose in order for the other party to win. I believe the term came from the physical characteristic of a pie where if it is to be divided, it can only either be equal, or biased to one side. In this perspective, there is no way both parties can have the bigger portion of the pie. The mythical fixed pie mindset will lead negotiators to interpret most competitive situations as purely win-lose. It tends to limit the vision of possible opportunities where both parties can actually benefit from the discussion through mutually beneficial trade-offs, and a win-win situation. Therefore in ensuring effective negotiation, it is important to remember that a negotiation may benefit not only just one party, but both, by taking into account each party’s needs and priorities. These needs and priorities can be aligned to compromise or to complement in order to negotiate effectively by constructing a win-win situation.

Distributive Negotiation

Distributive negotiation is actually where the Fixed-Pie mindset most commonly occur. It is a situation where the expected outcome or benefit of the negotiation will be distributed with a certain limitation and a varying portion. This type of negotiation is most likely to face difficulties in deciding on a settlement as the negotiating parties will compete for the most self-satisfying portion of the outcome. Therefore, this ‘tug of war’ type of usually involves people who has no interactive relationship with the other party before, and no intention of forming one in the future. They have no concern on the other party’s perception of them as there was no importance in protecting their reputation with that party.

Integrative Negotiation

Integrative negotiation is somewhat like the opposite of Distributive Negotiation. Instead of aiming to reach only self-serving goals, this negotiation aim to help the other party reach their goals as well. The main objective is to create a win-win situation where both parties can benefit from the outcome of the negotiation. The term ‘integrative’ indicates a combination or cooperation in the negotiation by working as a team in achieving their goals. The outcome of the negotiation may not be the most advantageous for each party, but a smaller advantage is more agreeable if it means that the other party will be able to have their fair share of advantage as well. This type of negotiation is where each party’s needs and priorities are assessed in constructing a compromising or complementing outcome as mentioned in earlier paragraphs.

This type of negotiation is very important for long-term relationship in both business and personal standpoint. It uses the problem-solving approach in deciding on an agreement that benefits both parties. Therefore, it is a lot more dynamic in a sense where each party need to assess their objective, priorities, limitations, and also capabilities. This is where they will be able to see if any integrative decision making can be made through strategic alliances, or long-term collaboration. Integrative Negotiation is a common practice in big organizations where the relationship with customers and suppliers are highly valued in ensuring sustainable business growth.

The Impact of Framing

Framing is one of the many terms used in negotiation skills where it is the tactic of limiting a person’s thought, particularly the opposing party. Another term used for this tactic is called Anchoring, which refers to ‘anchoring’ people’s thoughts. This tactic can be implemented by providing initial information to the other party, or manipulating information that they already know. This is because during decision making, our minds have the tendency to give biased weight to the first information we received. Therefore, in negotiation, our first impressions, assumptions, or information strongly frames subsequent thoughts and judgements, and this information can be implanted through a mere comment made by a person from the other negotiating team or a statistic quoted out of context from a publication.

Referring to the situation represented in Figure 1, the asking price of both seller and buyer is the framing attempt where both parties try to set their expected value of the item. From these framing attempts that the seller will tend to think that the actual value could not be far off than the buyer’s asking price, while similarly the buyer will tend to think that the actual value could not be far off than the seller’s asking price. This is when they will negotiate the price until they reach the ZOPA. As we tend to focus too strongly on our initial assumptions, we may not be able to pay enough attention on other available information during a negotiation thus leading us to limit our mental flexibility to create the alternatives necessary to move from conflict to compromise.

BATNA

BATNA is the short form used for the Best Alternative to a Negotiated Agreement which is known as the final offer that shall be used by a party when a negotiation failed to result in an agreement. Before deciding on a BATNA, many aspects need to taken into account such as time value of money, relationship value, and the possibility that the other party will live up to their side of the bargain. This is to make sure that the deals are accurately valued. Additionally, many external influences may also determine the BATNA such as new information, change of situation, or having competition (other buyer or other seller). Unlike the reservation point, any settlement that is lower than the BATNA must not be accepted. BATNA comes from thorough planning and preparation which includes realistically estimating the other party’s alternatives. Thus should the BATNA is not agreed, the only option is to walk away.

In a negotiation, it is also not all about having a BATNA. The timing of revealing the BATNA is also very important. It is very risky if the BATNA is revealed too early in the negotiation as the opposing party might have their own BATNA that might not give you much option, thus putting you on the losing ground. Therefore, it is very important to have a strong BATNA as not only that it will provide assurance and confidence, it will also allow a party to hold a better ground.

ZOPA

ZOPA is the short form used for the Zone of Possible Agreement, and it only exists if there is a potential settlement that is agreeable to both parties in a negotiation. Referring to the situation represented in Figure 1, the ZOPA exists between the seller’s and buyer’s reserve price. This means that should the buyer agrees to make purchase with the price within the ZOPA, the price will be below the maximum price that he/she would pay and above the minimum price that the seller will sell it for. Therefore, with such agreement, no party will lose. However, should the maximum price that the buyer will agree to pay is lower than the seller’s minimum price, ZOPA will not exist and the negotiation will not end in a agreement unless they have a BATNA as explained earlier. The ZOPA is critical to the successful outcome of negotiation, but it may take some time to determine whether a ZOPA exists. It may only become known once the parties explore their various interests and options.

Bargaining Range

A bargaining range is the set of possible decision values that the negotiators may agree upon. It is within this range that both parties will negotiate before they come to an agreement. In reference to Figure 1, it shows that the bargaining range is between the buyer’s asking price, and the seller’s asking price. In such type of purchasing situation, it is after the seller and the buyer state their asking prices that the negotiation can begin.

Prisoner’s Dilemma

In effective negotiation, the Prisoner’s Dilemma is the term used when a negotiation can only result in a win-lose situation, unless both parties agree to accept a settlement that only a little beneficial and less favourable. It will also risk a lose-lose outcome if both parties fail to cooperate, and should one party betray the other party, the betraying party will win and the other will lose very badly. The classic example for the prisoner’s dilemma is where two prisoners must decide whether to confess to a crime. Neither prisoner knows what the other will do. The best outcome for prisoner A occurs if he/she confesses, while prisoner B keeps quiet. In this case, the prisoner who confesses and implicates the other is rewarded by being set free, and the other (who stayed quiet) receives the maximum sentence, as s/he didn’t cooperate with the police, yet they have enough evidence to convict, and vice versa. But if both prisoners tried to take advantage of their partner, they each serve the maximum sentence, whereas if neither confesses, they both serve a reduced sentence which is a win-win outcome, although the win is not as big as the one they would have received in the win-lose scenario thus, the main key in the prisoner’s dilemma is trust. In a negotiation, it might be difficult to obtain such trust if the negotiation parties do not have any relationship and are not intending to form any relationship in the future. On the other hand, it is useful to have a back-up plan such as a BATNA or any other alternatives options in order to hold a better ground or to ensure cooperation.

Social Dilemma

Social dilemma occurs when short-term self-interest and long-term collective interest contradicts each other. It is much more general than the prisoner’s dilemma described above. It is also the outcome from the situation in which a group shares a common output and in which each individual must decide to contribute or not. For example, as members of the community, all of us benefits from public services such as hospitals, schools, and recreational facilities. However, there is always reluctance hen is comes to fees or some contributions to maintain such facilities. In this case, if everyone acted according to their narrow self-interest then these resources would not be provided and everyone would be worse off by not being able to benefit from these facilities. Therefore, in a negotiation, it is important to assess each objective and goals, and align priorities for both of self, and of the opposing party in order to be able to negotiate effectively. This is after taking into account the other party’s interests and at the same time avoiding our own conflict of interest that may deter our decisions.

Winner’s Curse

Winner’s Curse is the term commonly known in auctions or bidding activities. In an auction, the bidder who offers the highest bid is known as the winner. Most commonly, the initial value of the auctioned items is equal to all bidders, and the bidders do not know the actual market value of the items. Thus, the players can only estimate the value of the items that they want to bid for, which can either be too low, or too high. Since it is a bid, the winner is most likely to have overestimated and offered a value that is higher than the actual value, unless no one else is interested in the item. Therefore, the situation where the winner offered to pay a value that is higher than the actual market value of the item is known as the Winner’s Curse. Basically, the winner submitted an overestimated value for the auctioned item whereas it is actually worth less than what he/she has to pay for. On the other hand, there is an exception for such cases where the Winner’s Curse does not exist, which is when the auctioned item has a personal value and is considered priceless to the winner.

In negotiation standpoint, Winner’s Curse holds a different meaning altogether. In negotiation, Winner’s Curse happens when a negotiator sets a target or objectives too low at the beginning of the negotiation that allowed the other party to agree on a quick settlement. For the example of a negotiation between a Buyer and a Seller as represented in Figure 1, both party must have their own Reserve Price which is unknown to each opposing party. In a Winner’s Curse situation, most commonly the initial offer made by the Buyer is deemed as a very good deal to the Seller that led to the immediate acceptance. The Buyer could have offered a price at the upper side of the ZOPA, which is biased towards the Seller’s goal. Therefore, although it is considered a ‘win’ for the Buyer as well, the Winner’s Curse has fallen on him/her as he/she failed to negotiate for a price that is lower in the ZOPA and closer to the his/her own reserve price.

Trade Off

A trade off is very closely related with the give and take concept where it involves losing one aspect of something in return for gaining another aspects. I believe it is derived from the word trade which means to exchange, thus it means giving something up in order to get something. In a negotiation, it can either be an item, or an agreement. For example, a seller may agree to sell his car with a 10 percent discount if the buyer agrees to pay him with cash. Additionally, a trade off is also sometimes referred to as a ‘Concession’ where one or more parties to a negotiation engage in conceding, yielding, or compromising on issues under negotiation and do so either willingly or unwillingly.

Win-win Situation

“Win-win, win-lose, and lose-lose are game theory terms that refer to the possible outcomes of a dispute involving two sides, and more importantly, how each side perceives their outcome relative to their standing before the game. In a negotiation, if the outcome is better than expected it is classified as a ‘win’ whereas if the outcome is worse than expected then it is classified as a ‘lose’. In reference to Figure 1, if the seller and the buyer agree on a price within the ZOPA, then it will be a win-win situation. However, if either the buyer or the seller gave in and agree on a price that is still within the bargaining range but outside of the ZOPA, then it is a win-lose situation where whoever gave in is the losing party.”

http://www.beyondintractability.org/essay/win-lose/