Chapter 5

Initiating Global Business Negotiations

Making the First Move

The way a person opens business negotiations influences the entire process, from the initial offer to the final agreement. For first-time negotiations, especially between different cultures, these opening moments are even more critical.

Setting the first offer is crucial as the final price usually ends up around the midpoint between the first offer and the counteroffer.

Doing business in the global arena is a long-term prospect, where personal relationships are essential. Skilled negotiators create a favorable atmosphere that has a positive impact on the tone, style, and progress of negotiations, as well as on the final agreement.

Once made, first impressions are difficult to change, particularly if they are negative. People tend to have quicker, stronger, and longer-lasting reactions to bad impressions than to positive ones. Thus, extra care is needed when formulating opening statements. For fruitful negotiations, the opening offer should (a) stress mutual benefits, (b) be clear and positive, (c) imply flexibility, (d) create interest, (e) demonstrate confidence, and (f) promote goodwill.

Making the First Offer

If a negotiator wishes to take the initiative and set the tone of the discussions, he or she should make the first offer. The negotiator gains a tactical advantage by submitting his or her position first by establishing a reference or anchor point.

A person’s anchor point can influence the other party’s response. When the other party knows the negotiator’s position, he or she either rejects the offer or requests a counteroffer. The other party may also revise its acceptance limits in light of the opening offer.

At this point, the negotiator should not make unnecessary concessions; he or she should seek clarification instead. This approach assumes that the initial offer was based on recent market information, was credible, and was presented with conviction. In other words, when a negotiator is highly confident of the other party’s reservation point, making the first offer is to the negotiator’s advantage. The ideal first offer should barely exceed the other party’s reservation point. The other party will consider such an offer to be serious and respectable because it is within the bargaining zone. If the other party accepts the offer, the negotiator can keep a big share of the bargaining surplus.

In most international business deals, sellers are expected to make the first offer since buyers consider themselves in a position of power. In some markets, buyers dictate and control the discussions from the beginning of the negotiations to the final agreement. If a negotiator is not familiar with the market in which he or she is trying to do business, making an offer without adequate information or a clear understanding of what the other side wants places him or her in a risky position. For example, having the first offer immediately accepted means the negotiator underestimated the market; he or she experienced the winner’s curse. If the negotiator must make the first offer, he or she can avoid the winner’s curse by making the offer so low or so high (depending on his or her role as buyer or a seller) that it is virtually impossible for the other party to accept. But the danger is that a ridiculous offer can create an unfavorable impression and may jeopardize the relationship. Thus, as a rule, a negotiator should not make the first offer if the other party has more information.

Opening High/Low

As the negotiations begin, a negotiator faces a dilemma about whether the opening offer should be high or low. If the negotiator makes a high offer, he or she may lose the business. Alternatively, a low offer might mean giving up profits, since an offer seen as modest by the other party probably could have been higher. If a negotiator has accurate knowledge about the reservation point of the other party, the offer could be within the bargaining zone, suggesting a cooperative stance. Unfortunately, in most cases, negotiators possess limited information about the perspectives of their counterparts; thus, the perplexing question of high or low remains unresolved.

Empirical work on the subject shows that negotiators who make extreme opening offers achieve higher settlements than those who make low or modest opening offers.¹ An initial high price is suggested for three reasons. First, it allows the negotiator to gather and exchange information without making early concessions. Second, it communicates to the other party that the negotiation process is going to be time consuming—and that the other party must be prepared to grant more concessions than it initially intended. Third, it allows the negotiator to continue discussions, despite the rejection of a high initial offer.

An extreme opening presents two problems. First, it might be summarily rejected by the other party. Second, it shows an attitude of toughness, which is not conducive to a long-term relationship.

Any objections to a high offer should be dealt with through questions and answers, not through concessions. The negotiator should determine which parts of the proposal are acceptable and which areas are problematic. Based on this knowledge, the negotiator can justify his or her initial offer or eventually make a counterproposal. Proposals and counteroffers should be handled step by step, with repeated questioning, as shown in Figure 5.1. This allows the negotiator to gather and exchange information without making early concessions.

Starting high is common in markets where business executives rate their superior negotiating skills by how many concessions they obtain. For example, a high initial offer is expected in many countries in Latin America, Africa, and the Middle East. In highly competitive markets, frequently found in Southeast Asia, North America, and Northern Europe, opening offers are slightly above the bottom line.

The main mistake to avoid with the high-offer strategy is to present an offer considered so high by the other party that it results in a deadlock. Another common pitfall is to start with a high offer and not be prepared to justify it. To overcome the lack of justification, negotiators wrongly begin to make concessions immediately, without asking for reciprocity.

Skilled negotiators sometimes make a low initial offer near the bottom line, not so much to get the business but to be invited to the negotiation. They intend to improve their offer on the basis of new information gathered during the discussions. In some industries and markets, a product is sold at a going price and at predetermined conditions, leaving the negotiator with little choice in setting an opening offer.

In such a situation, your offer must be more or less in line with the competition’s. An advantage of having an opening offer close to the competition’s is that it allows the negotiator to remain in contention for the business. To increase his or her chances of being retained, the negotiator’s proposal must address the specific needs of the other party and demonstrate how the offer best meets the party’s requirements.

When a negotiator enters a new market or wants to get a foot in the door with a new customer, he or she should open with a proposal that is close to, or at times below, the bottom line. In such cases, the negotiator must explain that the offer is valid for a limited time only. For example, an exporter may be faced with extra production capacity during the last quarter of the year. In this situation, the exporter could propose a limited business deal at a onetime price preferential to use the extra capacity and thus recover the fixed costs and part of the variable costs.

At times, a negotiator may wish to make a low offer to secure business with well-known global firms. This strategy is common among small- and medium-sized firms seeking business deals from world-class companies. Advantages of being associated with large international firms often override the need for immediate profits. However, such a negotiation strategy places the negotiator in a weak position from the beginning and often results in unprofitable agreements. To avoid being caught in this situation, the negotiator should shift the discussions away from the initial offer to the needs of the other party. The negotiator should take charge of the discussion through questions and make sure he or she has a clear understanding of the real needs of the other party. Once the negotiator knows exactly what the other party’s requirements are, he or she can propose additional features such as better quality, faster delivery, individual versus bulk packaging, short and flexible production runs, and other intangibles to improve profit margins. By managing successfully even with a low-offer strategy, he or she can obtain a profitable agreement. Professional buyers are known to seek the best-quality products or services from the most reputable firms at the lowest possible price. In the end, these same buyers often end up paying a premium price to avoid the risk of getting inconsistent quality or receiving late deliveries.

There are times when entrepreneurs from small- or midsized firms propose very low offers in the hope of receiving large orders at higher prices in the future. Too often, promises for future business opportunities remain just that—promises. Negotiating deals at low prices in the hope of recovering lost profits from future orders is a dangerous strategy. Wise negotiators avoid such a strategy because of the high risks involved. The moment they raise the price (with or without justification), the buyer is likely to shift business away to a competitor.

Overcoming Objections

The question of overcoming objections arises after the first offer has been made and rejected. Figure 5.2 provides a summary of the most common objections in the opening phase of the face-to-face discussions and appropriate responses. A negotiator should not resort to concessions right away. Experienced negotiators expect objections. They turn objections into opportunities, without taking a defensive attitude and getting into concessions.

Objections are generally meant to put the negotiator on the defensive. By handling the objections strategically, the negotiator can successfully overcome the objections and be in a favorable position to steer the negotiation toward his or her goals. Chapter 6 explores trading concessions in depth.

Influencing Negotiation

Influence refers to tactics negotiators use to exert their power with the intention of seeking a favorable outcome of negotiations for themselves. Robert. B. Cialdini has identified six different categories of influence: reciprocity, consistency, social proof, liking, authority, and scarcity.²

Either party to the negotiation can use influence to its advantage. A negotiator should attempt to influence the outcome of negotiation in a way that is favorable to him or her. At the same time, the negotiator should be sensitive to the use of influence by the other party.

Reciprocity

The principle of reciprocity means that if someone does a person a favor, that person must return the favor, since he or she feels obligated to do so. In negotiation, reciprocity is often used by one party to seek concessions from the other. A negotiator feels indebted to the other party to make concessions because the party did something for the negotiator in the past. The other party will tactfully remind the negotiator that he or she owes the party the concessions.

Basically, there is nothing irrational or illogical about reciprocity in negotiation. However, a negotiator should be careful not to yield too much ground in the name of reciprocity. In other words, the negotiator does not want to be victimized or exploited by the other party. The negotiator must weigh what the other party did for him or her and what he or she might do for the party to repay the favor. Nothing should be conceded beyond that. A situation to avoid is to give away concessions now with the promise of receiving concessions in future deals. Unfortunately, concessions received in the past are easily forgotten, and the future deal never materializes.

Consistency

Psychologically, people like to be consistent in their behavior since inconsistency is a sign of irrationality.³

Following on the consistency principle, a negotiator should not agree to terms he or she cannot or does not want to follow through. For example, an exporter is negotiating with an overseas distributor about commission on sales. The distributor accepts the exporter’s terms on the condition that the exporter make adaptations to the product to be shipped. The exporter agrees to such product adaptation, probably without thinking about what it might entail, and the negotiations are successfully completed. Now, to be consistent, the exporter must comply with the product adaptation even if it costs him more than he had anticipated. The principle of consistency influences him to make the agreed-upon adaptation.

Social Proof

People often justify their behavior based on what others have done or might do under similar circumstances. In business negotiation, the other party may ask for concessions using the principle of social proof. For example, the overseas distributor may influence the exporter to pay for the transportation costs of defective products that are returned, citing the example of other foreign companies the distributor represents. The distributor convinces the exporter using the behavior of other companies as proof that it is the exporter’s responsibility to absorb the transportation costs of returns. If the exporter’s information shows that statement to be untrue, the only way he can counter the social proof advanced by the other party is to demand evidence of the proof. If the exporter’s knowledge of the industry practice shows that the transportation costs of returns are absorbed by the distributor, the exporter should obtain some proof to support it. He can then submit his own social proof and discount the distributor’s argument.

Liking

Generally speaking, people are more agreeable with those they like. A negotiator is more likely to make concessions to those of the other party he or she likes. Thus, the other party in negotiations can take steps to make the negotiator like him or her, which leads the negotiator to making the concessions the party desires.

A negotiator can use the liking principle to his or her advantage in negotiation by making the other party like him or her. This can be achieved in various tangible and intangible ways. For example, the negotiator can present the other side with a gift or talk positively about the other party’s country; for example, “You have a wonderful country with a long history and a rich culture.” Once the negotiator has created an atmosphere in which the other party likes him or her, the negotiator will find it easier to seek concessions in negotiation. Savvy negotiators go a long way in making themselves likable, humorous, knowledgeable, and friendly so the other party likes them.⁴ By the time negotiation begins, the other party believes he or she is dealing with an accomplished friend. This influences the other party’s behavior favorably.

Authority

Behaviorally speaking, people accept the opinions, views, and directions of those they consider an authority on the subject. When people are sick, they accept the advice of a doctor because they consider the doctor an authority on health matters. Similarly, in negotiation, the other party will accept a negotiator’s offer without much questioning whether the negotiator is considered an authority.

It is important, therefore, that people assigned to negotiate on one’s behalf are capable, are fully knowledgeable about the details of the situation, and can present themselves as authoritative. A weak person lacking the necessary authority might give in too soon, providing more concessions to the other party than necessary.

Authority has another connotation in negotiations. It has to do with the authority of the negotiators to finalize the agreement on behalf of his or her organization. If the negotiator does not have the authority to make a deal, he or she will be considered by the other party as a go-between, and the other party will be less willing to strike a deal. For example, if the other party is seeking concessions and the negotiator has no authority to make concessions, the other party might as well end the negotiations. In the other party’s eyes, the negotiator has no credibility. Whoever is responsible for handling negotiations must be equipped with adequate authority.

Scarcity

It is human nature to want things that are rare, are hard to get, or are in great demand. This tendency applies to negotiations as well. In accordance with the principle of scarcity, a negotiator should make different attributes of an offer seen rare and scarce, which would result in the other party wanting them. A negotiator may be willing to include those attributes in his or her first offer but should hold them back, emphasizing that such attributes cannot be provided.

Since the negotiator makes the attributes seem scarce, the other party wants them at all costs. The negotiator then makes them available, grudgingly, as negotiations advance. Such concessions will be valued highly by the other party, and the negotiator might obtain additional concessions in return.

Common Concerns

Frequently, negotiators face many questions to which there are no easy answers. While the negotiators must address these questions on their own based on the environment in which they are placed, the basic guidelines are examined here.⁵

Sharing Information About Reservation Price

The previous chapter discussed the term zone of potential agreement, which is the final price agreed upon between the reservation points of the two parties. Each party seeks as much portion of the zone of potential agreement as it can. And the parties negotiate for that. If one party reveals its reservation point, that strengthens the bargaining position of the other party. Thus, it is not a good idea to share information about one’s reservation point with the counterpart.

Some negotiators believe the task becomes easier when both the parties trust each other and reveal their reservation points. Thus, they can negotiate to share the surplus in a rational fashion. However, the problem in negotiations is not a matter of trust, but strategy. The strategy calls for maximizing the surplus. Therefore, trusting the other party will only cause conflict.

Lying About Reservation Point

Lying about one’s reservation point is dysfunctional for several reasons. First, it shortens the zone of potential agreement, which renders the making of concessions difficult. The negotiations may end in impasse. Further, lying can negatively affect the negotiator’s reputation in the marketplace. People often talk about their negotiation endeavors, and a lying negotiator would be mentioned as an undependable party. Remember, good news travels fast, but bad news travels faster.

Catching the Liar

A negotiator should make sure the other party is not lying. Three strategies can be used to catch a lie in negotiation. First, test the consistency in the other party’s statements. Negotiations involve asking each other a variety of questions. One should watch for any inconsistencies in the answers the other party supplies. Of course, questions should be adequately designed so that inconsistencies show up if an opponent is lying. Second, enrich the mode of communication by adopting a multichannel strategy. For example, if a person suspects the other party is lying and the person has been negotiating by phone, by written correspondence, or by e-mail, he or she should ask the other party for a face-to-face meeting. It becomes difficult for liars to monitor themselves when communicating through different channels. Signs of lying are often revealed through nonverbal communication, such as gestures and eye contact. Third, ask the other party to support what he or she said by providing tangible proof or evidence.

Determining the Reservation Point of the Other Party

As a negotiator should not reveal his or her reservation point for the reasons examined previously, it would be counterproductive for the negotiator to ask the other party for his or her reservation point. The other party might lose respect and withdraw from the negotiation. Frankly, it is unethical for a negotiator to probe into the other party’s reservation point while not wanting to reveal his or her own.

Choosing Between Tough and Soft Negotiation Stance

A tough negotiator is inflexible, demands much, yields few concessions, and holds out. Tough negotiators are stubborn and do not hesitate to walk away from negotiations that might be highly rewarding. A soft negotiator, on the other hand, reveals his or her reservation point, makes too many generous concessions, and attempts to make the other party feel good.

Neither of the two approaches mentioned—tough or soft—works well from the perspective of global negotiation. The best approach for successful negotiations is strategic creativity. This approach suggests the use of strategies to seek the larger proportion of the zone of potential agreement through sharing information, trading select concessions, and creating a lasting relationship.

Playing a Fair Game

Conceptually, it is appealing if both parties play a fair game. The negotiations are finalized quickly, and both parties end up as winners. Unfortunately, in practice, this ideal approach may not work. First, what is fair and what is not fair is difficult to define. The concept of fairness is vague, and different people define it differently. Thus, even though, in their estimation, both parties are playing a fair game, they may be far apart from each other. Further, while parties desire a fair outcome, their ideas about how to achieve fairness can vary. Thus, negotiations cannot be conducted on the basis of fairness alone.

Making the Final Offer

A negotiator should not rush into making a final offer, an irrevocable commitment, until he or she is ready. Once the negotiator reaches the point at which he or she is comfortable walking away from the negotiations, only then should he or she take the stance of final offer. This happens when his or her BATNA (or best alternative to a negotiated agreement) represents a more attractive option.

Buyer’s and Seller’s Points of View

Figure 5.3 provides insights into key points that buyer or seller should consider in negotiating an agreement.

Summary

For every negotiation, a negotiator’s initial offer should stand on its own merit within the prevailing context surrounding the discussions. Entering the negotiation under false pretenses or unfounded premises can prove costly or result in a deadlock. A negotiator must make the first offer competitive in the eyes of the other party and be ready to defend it with valid arguments.

The worst-case scenario is to make concessions immediately following objections to an initial offer. Unskilled or unprepared negotiators frequently face this dilemma in their business dealings. Asking questions, listening actively, and being patient go a long way in conquering this tendency. A negotiator should anticipate the typical objections he or she is likely to face, prepare appropriate replies in advance, and formulate information-seeking questions before meeting the other party.

One’s knowledge of the market, a clear assessment of the competition, and an understanding of the other party’s real needs should help in this crucial initial phase. As the opening offer shapes the outcome of the negotiation, a negotiator’s ability to make a good impression from the outset is critical. He or she may not get a second chance to make a good first impression.

Although it is better to place an initial offer slightly higher to reach a better outcome, a negotiator may lower it if he or she is doing business in highly competitive markets. In more traditional and less competitive markets, offers should be on the higher side with plenty of built-in concessions available to the other party.

An initial offer should be presented with confidence and conviction, yet imply flexibility. The issue is not to have an offer accepted or rejected or to be the first to make an offer, but to be in a position to start strong and maintain control of the discussions. Only through a series of high-yield questions can a negotiator learn what the other party really requires, enabling the negotiator to reformulate the offer to meet the party’s specific needs.

The initial phase of the negotiation should be regarded as an opportunity to create an atmosphere of trust, leading to an exchange of strategic information. It is not the time to begin trading concessions. Some executives from certain corporations consider this initial phase a waste of time and begin trading away concessions immediately. Successful negotiators know better. They invest their time by finding out the real needs of the other party and by determining how they can best satisfy those needs in an acceptable package. In other words, a negotiator’s first offer should reflect the best-case scenario, supported by first-class justification.