9/03/2017 1 Claiming Value Week 5 Workshop MBA506 Thinking Styles, Negotiation and Conflict Management • What does English poet Samuel Butler mean when he says: Small Group Discussion Look before you leap for as you sow, ye are like to reap. Albert Einstein has a problem. He has been offered a resident scholarship by the Institute for Advanced Study at Princeton in the United States. The founder and director of the Institute, Abraham Flexner, wants to know how much he expects to be paid. Although Albert has travelled extensively and given many lectures at several American universities before, he has little understanding of what it might cost to comfortably live in Princeton or what the average earnings of a resident scholar might be and he is unsure of how to respond to Flexner’s request. Small Group Challenge Berlin, Germany 1933 In groups, propose a salary offer that Albert could make to the Institute for Advanced Study. 9/03/2017 2 First Offer • Whether you should make the first offer or not depends upon how much information you have. • If you suspect that you may not have enough information about the ZOPA you should defer making the first offer until you have enough information, or allow the other side to make the first offer. Anchoring • But if you believe you have sufficient information about the other person’s reservation value, you can anchor the negotiation in your favour by making the first offer. • The primary benefit of making a first offer is that it establishes an anchor, a number that focuses the other person’s attention and expectations. Outside the ZOPA • Make a first offer that falls outside the ZOPA – an offer you know the other side will not accept. • If your first offer is already inside the ZOPA, you have lost the opportunity to claim the value that lies between your offer and the other person’s reservation value. 9/03/2017 3 Justification • Do not place your first offer too far outside the ZOPA or you risk losing credibility and potentially offending the other person. • Ask yourself: “What is the most aggressive first offer I can justify?” • Refer to comparable data such as recent sales figures in support. • What does Austrian psychiatrist Viktor Frankl mean when he says: Small Group Discussion Between stimulus and response there is a space. In that space is our power to choose our response. In groups, advise Lil Wayne how he should react to Jay Z’s offer. Dwayne Michael Carter Jr., known professionally as hip hop artist Lil Wayne, has a problem. He has been invited by producer Jay Z to Jay Z’s sports bar - 40/40 Club - to discuss a potential recording deal with Roc-A-Fella Records. Jay Z is entertaining baseball star Derek Jeter and actor Denzel Washington and asks Lil Wayne to sit down beside him. In between jokes with his famous guests, Jay Z offers Lil Wayne a recording contract for $175,000 on the basis Lil Wayne is not yet a celebrity. Lil Wayne is outraged by Jay Z’s embarrassingly low offer but is unsure how to react. Small Group Challenge New York, US 2005 9/03/2017 4 Outright Rejection • A first offer made by the other person may be so aggressive that it indicates there is no ZOPA – no value between either party’s reservation values. • In this case the most appropriate response may be to reject the offer but without animosity so as not to jeopardise potential future negotiations. Response • When the other person makes the first offer you become vulnerable to the effects of anchoring. • Do not dwell on the first offer by asking the other person to justify it. • Respond in a way diverts attention away from the first offer. Response • Take a minute to draft a response that diverts attention away from an aggressive first offer. Based on your first offer I think we may be seeing this deal from different perspectives. Let’s find some common ground by discussing… 9/03/2017 5 Counter-Anchor • Alternatively you can negate the anchoring effects of the first offer by making an equally aggressive counteroffer. • There is a possibility that your aggressive counter-offer may end the negotiation so avoid this risk by also proposing moderation. Counter-Anchor • Take a minute to draft an aggressive counter-offer and moderation proposal. Based on your first offer I think we have some work ahead of us. We believe a fair price would be $X. I’m happy to explain how we are valuing this deal but it seems we will both have to work together if we are going to reach agreement. • What does Roman philosopher Marcus Tullus Cicero mean when he says: Small Group Discussion Silence is one of the great arts of conversation. 9/03/2017 6 In groups, advise Steli how he should respond to the account executive’s offer. Steli Efti, CEO of sales software company Close.io, has a problem. His start-up owes $250,000 in licence fees to a technology company for an accounting program his company did not even end up using. An account executive from the technology company phones Steli and says, “I really want to help you. You guys are a struggling startup and I have a huge soft spot for entrepreneurs. I put up a huge fight with the finance department and got you an amazing deal. I think you’ll love it. You’ll be super thrilled to hear that instead of $250,000 you just need to pay us $100,000.” Steli is super thrilled. He feels like doing a happy dance. Small Group Challenge Silicon Valley, US 2013 Silence • Many people are uncomfortable with silence and speak up when they should not. • This discomfort can drive them to inadvertently volunteer important information or make unnecessary concessions to the other person. Silence in Negotiation • A particularly dangerous time to speak is after you have made your offer and the other side is considering it. • If the other person seems to be taking too long to respond, negotiators often grow nervous and begin bargaining against themselves. 9/03/2017 7 Remain Silent • Do not allow yourself to retract your offer or make further concessions before the other person has even voiced a concern or grievance. • Be patient and wait for their response. • Resist the temptation to speak. • Become comfortable with silence. Use Silence to Your Advantage • Rather than rejecting or responding negatively to an offer, simply remain silent. • Very often, the other person will begin to qualify it, moderate it, or simply indicate a greater willingness to concede. • What does American investment banker Bill Hambrecht mean when he says: Small Group Discussion You don't want any buyer to feel like he's been foolish or cheated. 9/03/2017 8 Abraham Flexner, founder and director of the Institute for Advanced Study, has a problem. He has offered a resident scholarship to Albert Einstein and asked the renowned physicist how much he expects to be paid. The Institute is independently funded and Abraham is nervous Albert will demand more than the standard yearly salary for resident scholars of $15,000. Abraham is surprised by Albert’s reply: “$3,000 annually, unless you think I can get by with less.” Small Group Challenge Princeton, US 1933 In groups, prepare a response that Abraham could make to Albert’s offer to work for $3,000 per year. Satisfaction • Satisfaction has less to do with how well someone actually negotiated and much more to do with how well they think they negotiated. • You are negotiating a deal and a relationship so it is important to effectively manage not only outcomes but also the other person’s satisfaction. The Other Person The person you negotiate with will be satisfied with the negotiation outcome to the degree that they feel they: • got a good deal. • were treated respectfully. • achieved a fair outcome. 9/03/2017 9 Attractive First Offers • Imagine the other person makes a first offer you find surprisingly attractive. • If you accept too quickly or too enthusiastically you will probably upset the other person because they will realise they could have made a more aggressive offer. Attractive First Offers • Alternatively you could make a counteroffer. The other person may have to make some nominal concessions but they will be happier than if you had accepted their first offer. • Yet another approach is to give something back as a gesture of goodwill to strengthen the relationship. Beware the False ZOPA • Satisfaction management strategies in response to attractive first offers should only be used if you have accurately estimated the ZOPA. • Ensure the attractive first offer does not mean your estimation of the ZOPA is inaccurate and in need of revision. • If you are surprised by an offer, don’t celebrate – think.