MSTM Blog

Entering content area for MSTM Blog

blog posts

  • Learning the Science of Negotiation

     

    Wait, but isn't negotiating typically referred to as an art? Yes, but that is not what MS-TM students are here to learn. There is a science to negotiating, and it is comprehensible.

    This past Friday, we took part in a Negotiations Workshop, as a part of our ongoing, two-semester Frontiers in Technology course. For me, as I am sure for many others, perhaps the most enduring lesson was not simply the framework we were taught; but rather, that we were given a venue in which to use that new knowledge and make mistakes with in implementing it.

    The workshop was led by Professor Gregory Northcraft, an internationally renowned expert on negotiations. He began with a brief expose on the fundamentals of negotiation, which requires first defining what exactly that word means. A negotiation is simply a decision made between two (or more) parties about what resources they will give and take in an exchange. The fundamental goal, for any single party in a negotiation, is to satisfy his or her own preferences. Everything we would talk about, the professor explained, would be geared towards that basic premise.

    With that definition, and that basic premise, though, comes conflict. However this is natural and is not to be thought of as “hostility.” Instead, we should think of conflict in terms of differences. Another way of framing this is to say that we shouldn’t think of negotiations as a tug-of-war. Instead, think of them as a jigsaw puzzle.

    With that said, the ~70 MS-TM students present were randomly divided into groups of 4. In those groups, on one side of the negotiating table, two students would represent the interests of the Magnetic Advances (MA) division of a decentralized, product-centered organization called El-Tek. The other two would represent the interests El Tek’s Audio Components (AC) division.

    A few years prior to the scenario, my division’s engineers at that time passed on developing the new magnet for various cost and implementation reasons.  And so it went to the Audio Components division, who could definitely use it in their products, and make money themselves selling it to other internal divisions. AC then spent 5 years and 1.2 million dollars developing this new magnet, called the Z-25. At the PR event announcing the Z-25, my division approached theirs to discuss a deal.

    AC had proven our initial assessment wrong, and done well. But, my division was the only division with the license to sell the new magnetic to external markets. So, some transfer of the basic technology needed to be negotiated between divisions in order for the technology to realize its full commercial potential. AC wanted a piece of the impending commercial revenue we would generate, and wanted remuneration for their development costs, plus some multiple to give them a decent return on capital. The MA division was simply looking to strike a good transfer price, and negotiate a transfer with as few exclusions as possible (i.e. MA can have the technology and sell it to the external market, but cannot sell directly to and AC competitor, for say, 6 or 12 or 18 months).

    In the end, my particular group could not come to a deal. In a real life situation, we would have had to kick it up to CEO to resolve the dispute, and that’s rarely a good thing. Conflict is hardly ever best resolved when a teacher, parents, CEO, or whomever has to arbitrate the resolution.

    But, for the purposes of the exercise, my partner and I agreed to the last deal on the table. In either case, the negotiations failed, and I’d put the failure down to my side of the table much moreso than the other, because of the mistakes we’d made.

    The first mistake both sides of my group made was that we did not meet the first goal of any negotiation, which is to create value. Before figuring out what percentage of the pie to divide up, parties first must choose the set of options that maximally enlarges the pie in the first place. There are many more calories in 40% of a large from Pizza Hut, then 50% of a small from the exact same pizza place.

    Beyond that, my side specifically made two crucial mistakes. We allowed the other side to make the first offer, without receiving anything of value in a return. The first offer is like the high ground, and it’s much easier to win a battle when you occupy the high ground. However, if you accede that ground whilst gaining information that provides a tunnel into the barracks, then you stand a better chance of fulfilling your own objectives or winning the battle.

    That mistake was not insurmountable, though, because it was somewhat natural. They had developed the product when we had already passed, and it seemed courtesy to give the other side the right to the first proposal. Our major mistake, however, was in the exchanging of numbers.

    The first step to the negotiations is making the biggest pie, and the second is claiming that pie. By giving our numbers first, without much information in return, we were on low ground, without much ammo. The opposition could afford to be extreme in their demands because we were in no position to get them to make terms more favorable to us, because information is the central piece to claiming value. By giving up important information freely (our projected profit numbers), the other side could dig in their heels.

    At that point, our massive mistake meant the only way to achieve a good deal for the division would have been to ask the CEO to intervene. That’s not optimal, but by that point, it was near certain the CEO would give us a better deal than anything that AC had even come close to offering in their negotiations. There would be backlash beyond the numbers, but we were prepared to deal with that to achieve a win for the division. Our getting called to the principal’s office would not have been AC’s fault though. They were just leveraging the position we created for them with our mistakes.

    There was a great deal more to the session, but this was kind of the end of the simulation. Understanding the dynamics of negotiating properly will be of immeasurable importance going forward. Like, when I go to negotiate my salary in the near future….

∞ Back to top © 2011 University of Illinois, College of Business