Negotiating to Win from a Position of Weakness

Slide 1: Negotiating from a Position of Weakness NASSCOM 2007 Prof. Deepak Malhotra Harvard Business School

Slide 2: Negotiating to win from a Position of Weakness NASSCOM 2007 Prof. Deepak Malhotra Harvard Business School

Slide 3: Why are we starting with Chapter 12? 1. Introduction 2. Capturing Value in Negotiation 3. Creating Value in Negotiation 4. Information: How to Find Out What They Know 5. Mistakes People Make I: Cognitive Bias in Negotiation 6. Mistakes People Make II: Motivational Bias in Negotiation 7. Overcoming Bias 8. Strategies of Influence: How to get them to say “Yes” 9. Increasing your Strategic Awareness in Negotiation 10. Ethics in Negotiation 11. Strategies for Confronting Lies and Deception 12. Negotiating from a Position of Weakness 13. When Things Get Ugly: Dealing w/ Irrationality, Anger, Threats, Ultimatums, & Egos 14. When Not to Negotiate 15. Putting it into Practice

Slide 4: 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?”

Slide 5: 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?”

Slide 6: 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?

Slide 7: Negotiate Effectively… Even When You are Weak

Slide 8: 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

Slide 9: 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”.

Slide 12: A Client: “QAR” • QAR revenues: $300 million • Remus revenues: $3.25 billion • 85% of revenues based on • QAR is one of many regional relationship with Remus distributors If Remus and QAR end their relationship: QAR Loss of Revenue Remus Loss of Revenue ~80% ~3%

Slide 13: The Case of “QAR” • Define the “zone of possible agreement”. Current momentum Feared Outcome Current Deal - Lose preferential revenue deal - Preferred Revenue Sharing - Lose all flexibility - No constraints on strategy - Forced affiliation - No forced affiliation Lose $240 Million

Slide 14: 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

Slide 15: The Case of “QAR” • Define the “zone of possible agreement”. Current momentum Feared Worst Case Current Deal - You lose some revenue - Preferred Revenue Sharing - You lose flexibility - No constraints on strategy - Some affiliation - No forced affiliation Lose $190 Million

Slide 16: Some analysis: If there is NO DEAL… QAR: REMUS: • Loses 80% Revenue = $240M • Loses 3% Revenue = $100M • Gains: • Also Lose: + Future business opportunities + Political connections + Sovereignty + Reputation = ~ $50 million = ~ $20 million Net Loss if No Deal Net Loss if No Deal $190 Million $120 Million

Slide 17: The Case of “QAR” • Define the “zone of possible agreement”. Current momentum Worst Case Best Case Current Deal - You lose some revenue - Even more revenue - Preferred Revenue Sharing - You lose flexibility - More freedom - No constraints on strategy - Some affiliation Gain $120 Million - No forced affiliation Lose $190 Million

Slide 18: The Case of “QAR” • Define the “zone of possible agreement”. Worst Case Best Case Current Deal - You lose some revenue - Even more revenue - Preferred Revenue Sharing - You lose flexibility - More freedom - No constraints on strategy - Some affiliation Gain $120 Million - No forced affiliation Lose $190 Million

Slide 19: The Case of “QAR” • Define the “zone of possible agreement”. Change momentum? Worst Case Best Case Current Deal - You lose some revenue - Even more revenue - Preferred Revenue Sharing - You lose flexibility - More freedom - No constraints on strategy - Some affiliation Gain $120 Million - No forced affiliation Lose $190 Million

Slide 20: The Case of “QAR” • Define the “zone of possible agreement”. Change momentum Worst case Best Case Current Deal - You lose some revenue - Even more revenue - Preferred Revenue Sharing - You lose flexibility - More freedom - No constraints on strategy - Some affiliation - No forced affiliation - Full flexibility and No affiliation is the default Reset expectations - Stop apologizing, Stop saying “yes sir”, keep acting! Reset the “anchor” - This is a negotiation – demand compensation for concessions

Slide 21: 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

Slide 22: Make Your Distinct Value Proposition a Factor in the Negotiation

Slide 23: 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…

Slide 24: If You Can’t Leverage Your Strength, Leverage Your Weakness!

Slide 25: 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

Slide 26: 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

Slide 27: 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

Slide 28: 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!

Slide 29: 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…”

Slide 30: 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…”

Slide 31: Sick of Playing by Their Rules? Change the Game

Slide 32: Changing the Game • Attack the source of their power – Planned Parenthood

Slide 33: Planned Parenthood • A recurring problem – anti-abortion protestors • How might the clinics deal with this problem? • The “Pledge-a-Picket” program. – Clinic asks supporters to pledge donations on a per protestor basis. – The more protestors that show up, the more money the clinic raises! – One clinic has even posted a sign that reads: “Even Our Protesters Support Planned Parenthood”.

Slide 34: Changing the Game • Attack the source of their power – Planned Parenthood

Slide 35: Changing the Game • Attack the source of their power – Planned Parenthood • Don’t try to block their punch

Slide 36: Changing the Game • Attack the source of their power – Planned Parenthood • Don’t try to block their punch – A Last Minute Demand

Slide 37: Student Profile • The CEO of a construction company negotiating with a buyer • Negotiations had been going on for weeks • Just before the contract was signed—alast minute demand: – If the project is not completed by the deadline, the construction company must pay a very hefty penalty for each month of delay • The CEO was surprised—and angry. • To make matters worse, the CEO was desperate to do the deal. • How would you, as CEO, handle this situation?

Slide 38: Changing the Game • Attack the source of their power – Planned Parenthood • Don’t try to block their punch – A Last Minute Demand

Slide 39: 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

Slide 40: 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

Slide 41: Would you take a Group of Juvenile Delinquents to the Zoo? 100 90 80 70 60 50 40 30 20 10 17% 0 100 90 80 70 60 50 50% 40 30 20 17% 10 0 No other demand After Rejection

Slide 42: 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

Slide 43: Power Corrupts Absolute Power Corrupts Absolutely Effective Negotiators Don’t Have to Worry

Slide 44: Power Corrupts Absolute Power Corrupts Absolutely Effective Negotiators Don’t Have to Worry

Slide 45: Power Corrupts Absolute Power Corrupts Absolutely Trained Negotiators (and stupid cashiers) Don’t Have to Worry

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