Negotiation is a dialogue between two or more people with the aim of reaching a consensus over an issue or issues where conflict exists. Good negotiation tactics are important for negotiating parties to know in order for their side to win or to create a win-win situation for both parties. The outcome of the negotiation may benefit one of the parties involved or provide benefits to all parties in the negotiation.
Usually, a negotiation takes place as follows:
1 – One of the parties to the negotiation puts forward a position
2 – The parties discuss – negotiate – until an agreement is reached
For a negotiation to be successful, the parties must cooperate to achieve the intended purpose of the negotiation. They must also be able to trust each other to implement the negotiated solutions.
Negotiations occur daily, within organizations, between governments or businesses, or between individuals. In high-stakes negotiations such as hostage rescues and sale of companies, professional negotiators are frequently employed to increase the chances of success. For example, investment firms engage the services of leveraged buyout negotiators to ensure they get the best deal possible. Negotiators must be capable of utilizing excellent negotiation tactics to, ideally, create win-win outcomes.
Forms of Negotiation
In mediation, a neutral party listens to both parties’ arguments and helps create an agreement. Negotiating parties tend to work more toward securing a winning ground for their side.
Negotiations can be categorized by type, as follows:
Distributive negotiation is also referred to as hard-bargaining negotiation. Any gains made by one party are at the expense of the other party. If one party wins, the other party must lose. Therefore, such negotiations typically start with one party taking an extreme position and then ceding as little as possible before reaching an agreement.
Distributive negotiations are often between parties who have no past relationship. An example of a distributive negotiation is a negotiation for the price of a car at a car dealership.
An integrative negotiation is a merit-based negotiation that attempts to improve the quality of negotiated agreements by appreciating the fact that each party values various outcomes differently. It often aims to create a win-win situation. Integrative negotiation requires a high degree of trust and the need to achieve mutual gains. One of the means of achieving mutual gains is by trading one favor for another. This negotiating technique is referred to as “logrolling”. The negotiating parties approach the negotiation as a shared problem, as opposed to a battle. Negotiators attempt to focus on the underlying interests of both parties.
Integrated negotiation was first identified and labeled by Peter Johnson, an international negotiator and author of the book, “Negotiating with Giants”. It maximizes value in a negotiation by linking it to other negotiations and decisions related to the parties’ operating activities. This involves mapping out all related connections, conflicts, and operating decisions to bring out helpful connections and minimize any harmful connections. Integrated negotiations are more about establishing or developing relationships, as opposed to merely addressing a specific issue or situation.
“Bad faith” in negotiations refers to a situation where parties pretend to negotiate but ultimately have no intention of compromising on their demands. Bad faith negotiations often happen in politics where a political party pretends to negotiate but has no intention to compromise or reach an agreement.
Common Negotiation Tactics
Here are some of the most commonly used negotiation tactics:
Make the first offer
Many people are reluctant to go first in a negotiation, for fear that their bid may be too low or too high. However, making the first offer may actually give you the upper hand since you quote a price that is close to your target price. The first number sets the stage around which the subsequent negotiations revolve.
Mirror words selectively
A quick way to create a rapport with the other party in a negotiation is to repeat the last three words they said to you. This negotiation tactic engenders trust and may encourage the other party to negotiate in good faith. It also buys you time to consider the other party’s latest offer and prepare a well-thought-out response.
Know your target price and walk-away price
The target price is the price you are hoping for. The walk-away price is a price that is utterly unacceptable. If the other party refuses to budge from a point beyond that price level, then you would prefer to walk away without reaching an agreement.
It pays to have both a target price and walk-away price in mind prior to starting negotiations. In contrast, If you go into a negotiation without clear notions of what you want, and let the other party start the bidding, you are immediately in a disadvantaged position.
Create the illusion of control
Creating an illusion of control can give you an advantage in negotiations. By asking “how” or “what” questions, you force the other side to engage their mental energy to find the right answer. It also takes their focus off of their desired outcome, as they have to respond to your query first.
Negotiation tactics and skills are critical to being a successful financial analyst. To continue learning and advancing your career in corporate finance, these additional CFI resources will be helpful: