BATNA lecture notes

• We know, through a negotiation, the parties in valued try to reach an agreement and to satisfy their concerns and interests.

• In any negotiation, There exist realities that are hard to change.

• The other side may have a stronger bargaining position or more powerful weapons or may be better connected.

• In this situation, whatever negotiation method we use, we must try to meet the following objectives in response to the power of opposite side:

A. To protect ourselves against making an agreement that we should reject.

B. To make the most use of our assets so that any agreement we reach will better satisfy our interests.

A. Protecting Ourselves

* At the time of negotiation, less powerful parties may worry about failing to reach an agreement.

* Under these conditions, he tries to quickly go along with the other side.

* As a result, he may end up with a deal that he should reject.

* To avoid these, the parties can use the following techniques:

1. Using a bottom Line.

2. Knowing their BATNA.

3. To formulate a Trip Wire.

1. Using a Bottom Line

* Negotiators commonly try to protect themselves against any undesirable agreement by establishing a Bottom Line.

What is a Bottom Line?• Bottom line means establishing in advance the worst

acceptable outcome.• A Bottom Line is a position that is rigid and is not to be

changed.

Example: 1

– A man demands Tk. 20,00,000.00 for his house. But he has agreed himself that he would not accept any offer bellow Tk. 16,00,000.00.

– Here the Bottom Line is Tk. 16,00,000.00.

Example: 2

For a buyer: Bottom Line: The highest price he decides to pa y

For a Seller: Bottom Line: The lowest amount he would accept.

Merits of Bottom Line Adopting as Bottom Line protects the negotiators in the

following ways:

Having a bottom line makes it easier to resist pressure and temptation of moment.

Example

Say, I want to sell my house.– My Bottom Line: Tk. 16,00,000.00– Offer from the buyers: Tk. 14,40,000.00

In this situation, my predetermined bottom line may save me from making a decision that I would later regret.– My action:

As a result, I might wait further instead of selling the house at Tk. 14,40,000.00. Because I might get an acceptable offer (higher then 16,00,000.00) in later periods.

If there is more than one person in side, jointly adoption a bottom line helps to ensure that no one will indicate to the other side that the first party might settle for loss.

A bottom line limits the authority of a lawyer, broker or agent.

Example

• My Bottom Line is Tk. 16,00,000.00.

• I can say to my agent “ Get the best price you can, but you are not authorized to sell for loss than Tk. 16,00,000.00.”

Costs of Using a Bottom line:• The protection afforded by adopting a bottom line

involves high costs. Such as:

It limits our ability to benefit from what we learn during negotiation.

As we establish our Bottom line in advance, we shut our ears. As a result, nothing the other party says could cause us to raise or lower than bottom line.

It inhibits imagination. It reduces the incentives to invent a tailor-made

solution, which would better reconcile both parties’ interests.

Example

• Rather than simply selling my house for Tk. 16,00,000.00(Bottom Line), I can make a selling agreement at

Tk. 13,50,000.00

+

A delayed closing

+

The right to use the barn for storage for two years.

If we insist on a Bottom Line, we are not likely to explore an imaginative solution like this.

A Bottom Line is likely to be set too high or too low.

Example

• A man decides to sell his house.

His Bottom Line: Tk.20,00,000.00 (He establishes if unwisely, overvaluation)

Buyers Offer: Not more than Tk.15,00,000.00 ( Because the house does not worth more than tk.15,00,000.00).

• This Bottom Line may prevent the person from selling the house when he should sell it.

2. Knowing our BATNA

* Because of the cost of Bottom Line, we can apply BATNA.

* It is an alternative to Bottom Line.

What is BATNA?• BATNA means Best Alternative To A Negotiated

Agreement.

• It means what we will do if we fail to reach an agreement.

• BATNA refers to the best alternative courses of actions that one party can take if the negotiation fail.

• That means, if one party fails to reach an agreement through negotiation, he can do many things.

Out of these options, one option will be best. And this best option will be his BATNA.

Example

• A family decides to sell their house. If they fail to sell it on the designed price, they might have the following alternatives:

– To rent the house

– To tear it down

– Turn the land into a parking lot.

Among these alternatives, one will be alternative and best considering all things. And this alternative will be that family’s BATNA.

• Merits of BATNA If we know our BATNA, we can enjoy the following benefits: BATNA is the standard against which any proposed

agreement should measured. It is the only standard which can protect us both from:

Accepting terms that are too unfavorable. Rejecting terms that are favorable.

It is flexible enough to permit the exploration of imaginative solutions.

We can compare a proposal with our BATNA to see whether it better satisfies our interests.

The Insecurity of an unknown BATNA

• This section indicates the consequences of not having a clear idea about what we will do if we fail to reach an agreement.

• If we go to a negotiation table without having a clear idea about our BATNA, we might face the following problems:

We might become too optimistic and assume that we have many other choices but in reality we do not have.

We might fail to consider the full agony of the reached agreement.

We might see our alternatives in the agreement.

Example

• A person is trying to reach an agreement with a company on the salary for his job. He might think, if he fails, he has the following alternatives:

– Go back to school

– May seek job in another company

– May go to another city for jobs.

The sum total of all these alternatives may seem more attractive to that person than reaching the agreement. but the difficulty is that, the person cannot have the sum total of all those alternatives. If he fails to reach agreement, we will have to choose just one.

We might become too committed to reaching agreement.Not having developed any alternative to a negotiated solution, we are unduly pessimistic about what would happen if negotiation broke off.

We may avoid facing the question of what we will do if no agreement is reached.

We may think, “If things don’t work out, then I’ll figure out what to do”

But if we want to conduct our negotiations wisely, we must have at least a tentative answer to the question.

3. Formulate a Tripwire

* Besides BATNA, a tripwire can help us to judge any proposed agreement.

* Tripwire means identifying one far from perfect agreement that is better than one’s BATNA.

* A tripwire gives us an early warning about whether the content of a possible agreement is beginning to run the risk of being too unattractive.

* Before accepting any agreement worse than the tripwire package, we should take a break and reexamine the situation.

* Like a bottom line, a tripwire can limit the authority of an agent.

* A tripwire provides us with some margin in reserve.

B. Making the Most of Our Assets

* While negotiating with powerful parties, we must try to make the most of our assets in order to produce a good agreement. It can be done with the help of our BATNA.

* We can do this by the following techniques:

1. To understand that the better our BATNA, the greater our power.

2. To develop our BATNA.3. To consider the other side’s BATNA.

1. The Better Our BATNA the Greater Our Power:

* People often think that negotiation power is determined by resources like wealth, political connections, physical strength, friends and military power,

* In fact, the relative negotiating power of two parties depends primarily on their BATNA, which means how attractive to each is the option of not reaching an agreement.

Example

Conflicting Issue: – A small town is in a conflicting situation with a

company with a factory just outside the town limits.

Positions: – Town Authority: Demands a “Goodwill Payment” from

the company to be raised from $ 3,00,000 a year to $ 23,00,000 a year.

– The Company: It refuses to raise the payment.

BATNA: – The Town Authority: It would expand the town limits to

include the factory and then tax the factory at the full residential rate of $ 25,00,000 a year.

– The Company: They are committed themselves in keeping the factory. It had developed no BATNA.

Agreement:

The company agreed to pay $ 23,00,000 as demanded by the town authority.

The Company: The company was a powerful party in the negotiation and its contribution to the town was huge. Yet, all of these assets proved to be little because they were not converted into a good BATNA.

The Town Authority: It was the less powerful party. Having a powerful BATNA, the small town had more ability to affect the negotiation and they were able to win over one of the world’s largest corporation.

2. To develop our BATNA

* Parties can develop their BATNA by exploring the alternatives available to them.

* Generating possible BATNAs requires three distinct operations:

a. Inventing a list of actions those one might conceivably take if no agreement is reached.

b. Improving some of the more promising ideas and converting them into practical alternatives.

c. Selecting, tentatively, the one alternative that seems best.

Example

Issue & parties:– A labor union is negotiating with the mgt. over

salary and promotion.

Development of the labor union’s BATNA: Step 1

For labor union, alternatives to a negotiated agreement would presumably include:

• Calling a strike• Working without a contract• Giving a sixty-day notice of a strike• Asking for a mediator

Step 2

If the most promising alternatives are:

• Calling a strike

• Calling in a mediator

Then, the union should convert these ideas into drafts of specific operations decisions ready for execution.

For instance, the union might take a vote of its membership to authorize a strike if necessary.

Step 3

In this step, the union should select the best among the realistic alternatives which the labor union will pursue if the negotiation fails.

• In this way, we can develop BATNA.

• The better our BATNA, the greater our ability to improve the terms of any negotiated agreement.

• Knowing what we are going to do if the negotiation fails will give us additional confidence in the negotiating process.

♣ Should we disclose our BATNA to the other side?

• The desirability of disclosing our BATNA to the other side depends upon our assessment of the other side’s thinking.

• We can consider three options in this regard:

– If our BATNA is extremely attractive, it is in our interest to let the other sides know.

– If they think that we lack a good BATNA when infact we have one, then we should almost certainly let them know.

– If our BATNA is worse for us than they think, we should not disclose it to the other side. Because it will weaker our hand.

3. To consider the other side’s BATNA

* We should think and consider the alternatives to a negotiated agreement available to the other side.

* The more we can learn of their alternatives, the better prepared we are for negotiation.

* Knowing their alternatives, we can realistically estimate what we can expect from the negotiation.

* If the other side appears to overestimate their BATNA, we should want to lower their expectations.

* If the other side’s BATNA is so good and they don’t see any need to negotiate on the merits, we should consider what we can do to change it.

* If both sides shave attractive BATNAs, the best outcome of the negotiation for both parties may be “Not to reach an agreement”. They should not try to reach an agreement.

♣ When the other side is powerful

• If the other side appears to be physically or economically powerful, we can make more benefit by negotiating on the merits.

• If they have muscle and we have principle, we should establish a larger role for principle.

• A good BATNA can help us to negotiate on merits.• We should apply knowledge, time, money, people,

connections and wits into devising the best solution for us independent of the other side’s assets.

• The more easily and happily we can walk away from a negotiation, the greater our capacity to affect its outcome.

• Developing our BATNA is the most effective course of action we can take in dealing with a seemingly more powerful negotiator.

End of Batna

chapter