Six Steps for Making Your Threat Credible
It damages your reputation, your company, and the deal if you make empty threats in negotiation. In this article from Negotiation, HBS professor Deepak Malhotra explains six steps for powerful follow-through.
In the classic game of Chicken, two drivers on a crash course speed toward each other. The rules are simple: Whoever swerves first and avoids collision loses, and whoever is brave enough to stay the course wins. Of course, when both drivers stay the course, they collide and die.
Clearly, this is not a game for the faint-hearted. But bravado alone doesn't guarantee a win. Your opponent has to believe that you're gutsy enough to stay the course, or he may do the same until the very end.
How do you win at Chicken? One approach would be to talk tough beforehand. You might behave irrationally to suggest that you wouldn't swerve even to save your life. Once the game begins, however, your threat simply may not be credible.
Now consider this strategy: Once the cars are headed directly toward each other, you unscrew your steering wheel and throw it out the window, making sure that your opponent sees you do it. Foolish? So it would seem, but your threat is now entirely credible. You can't change course even if you wanted to. It's up to your opponent to decide whether to lose the game or die. The odds are in your favor.
While the stakes are usually lower, negotiation often resembles a game of Chicken. Both sides make threats in an effort to change their counterpart's behavior or beliefs. You might threaten to take your business elsewhere unless the other side sweetens her offer or pursue litigation if she refuses to address your grievances. Your success depends on whether your threat is credible. Does your counterpart truly believe you're ready to walk away from the deal?
There are two components to signaling that you won't back down from a threat.
This is the dilemma confronting negotiators who make threats: Your threat will be credible only if the other side believes it's in your best interest to follow through—yet you probably made the threat at a point when the other side doubted your resolve. After all, if it were obvious that you were ready to walk away, you wouldn't have had to threaten at all!
As this paradox highlights, the credibility of threats is always in question. What follows are six ways to make your threats more credible in negotiation.
1. Increase your costs of not following through on your threat
Imagine that you're thinking about bidding to acquire another company that would be of great value to your firm. Your only reservation is that your bid might invite your biggest competitor to follow suit, instigating a costly bidding war. If you lost the war, your company would almost certainly take a hit in the stock market. Even if you won, the bidding war may have driven the price so high that the deal is no longer worthwhile. To summarize, you would love to bid but only if your competitor stays out of the game.
Rumors suggest that your competitor is willing to counter your bid, but you believe these are strategic leaks designed to scare you off. You know that your competitor probably doesn't have the resources for such an acquisition and that it would lose a great deal if its bid failed. Because its threat to counter your bid is not credible, you decide you will place a bid.
The day before you are to announce your bid, your competitor's CEO says at an open meeting that he has no specific acquisition plans, but that he will definitely make competitive bids as necessary to protect his company's strategic position. Without a doubt, this announcement is a veiled threat directed squarely at you.
Unfortunately, the CEO's announcement has changed the game. While it still may be costly for his company to bid, it's now even more costly for it to back away from the public commitment he made. If the company now fails to respond with a competitive bid, it is likely to take a greater hit in the stock market than if he had simply kept quiet and let you bid. By increasing the cost of not following through on the threat, the company has made its threat credible. This may be more than enough of an incentive for you to decide not to bid after all.
As the CEO's strategy illustrates, increasing the costs you will incur by not following through on your threats can persuade others that you mean business. This tactic goes beyond rhetoric; increasing your costs fundamentally changes the game being played. If your threat is not credible because the costs of following through are visibly high, you may need to lower those costs and make sure your counterpart knows they have dropped.
2. Visibly restrict your options
A public commitment makes it difficult for a negotiator to back down from a threat. Other tactics—such as throwing away the steering wheel in a game of Chicken—make it impossible for you not to follow through. There is no better way to make your threat credible than to ensure that you can't go back on your word.
Centuries ago, when European explorers arrived on the shores of a new land, they faced indigenous populations that did not welcome the explorers' conquering intentions. Subduing the natives would require an arsenal of weapons and tremendous resolve. To increase their soldiers' commitment to the cause and to intimidate the local population, some captains took to sinking their ships as soon as they landed. Now there was no choice but to stay and fight. Scuttling the ships made the threat—"We will fight to the death!"—credible to the natives.
As this story dramatically illustrates, these are two components to signaling that you won't back down from a threat. First, you must irreversibly restrict your options. Second, you must do so in a way that's visible to the other side. If the other driver doesn't see you throw away your steering wheel, you're in serious trouble. Not only does your threat lack credibility, but you also have no way of changing course if the situation becomes dire.
3. Visibly incur sunk costs
Suppose you are negotiating with a consulting firm to renew its contract to provide information technology (IT) services to your company. In pursuit of a lower price, you threaten to cancel the $700,000 yearly contract and create your own in-house IT department. Unfortunately, both you and the contractor know that it would be much cheaper for you to retain her firm's services than to start up a new department.
One way to make [a] threat more credible is to find someone else to take your place.
To signal your commitment to the threat, you might take the first steps toward creating an in-house IT department, perhaps by purchasing basic hardware and software. Incurring unrecoverable costs can have several beneficial effects. First, it signals to the contractor that you're serious about following through on your threat. Second, it forces the contractor to reconsider how much value her firm is truly adding to the relationship. Third, your sunk costs reduce the cost of eventually following through on the threat. Your threat may have been easy to dismiss if a new IT department would cost you $1 million. But after you've sunk $150,000 into the new department, the question becomes whether you're prepared to ante up an additional $850,000—an amount closer to the value of your consultant's contract. Suddenly your threat may seem credible to the contractor.
This strategy requires careful calculation. Your sunk costs must be large and visible enough to make an impact but small enough that you are not significantly harmed by losses you may incur in the hope of influencing your counterpart. Don't spend enough to outfit an entire IT department if your goal is to outsource at the right price.
4. Delegate authority to someone who will follow through on the threat
The time, energy, and resources that you devote to reaching agreement can suggest that you're desperate for a deal—any deal. The greater your investment in the negotiation, the less credible your threat of walking away becomes.
In such instances, one way to make this threat more credible is to find someone else to take your place. You might delegate authority to finalize the deal to someone who has less riding on the outcome. Threats become most credible when the authority to carry through on them is delegated to whoever is most willing to do so.
If you feel you're too invested in the negotiation, you might announce, after making a threat, that your boss is filling in for you. "I'd hate to see the deal fall apart," you could explain, "but he makes the final decision and has less at stake than I do." You might also suggest that your substitute is a harder bargainer than you are: " I don't want to walk away from this deal, but he's in charge and is not happy with the offer on the table." In both cases, you've assigned the decision of whether to follow through on the threat to someone with greater power.
This dynamic often plays out in corporate hiring decisions. In many companies, new recruits must negotiate their compensation with the human resources (HR) department rather than with the hiring department. When a hiring manager is anxious to bring someone onboard, he will have a harder time refusing the recruit's demands. Because the HR department has less to lose if the recruit walks away, its own threats (such as "This is the most we can offer") are more credible.
5. Create and leverage a reputation for making credible threats
Your threats will be more credible if you have a reputation for carrying through on them. If you are known for sometimes being rash or obstinate, even your more extreme threats are likely to be taken seriously. Your threats also may be effective if you have a reputation for staying true to your word or for being willing to sacrifice dollars for principle.
Some negotiators intentionally bargain hard every time to create reputational capital, which entails an investment (in this example, in how you are perceived) that helps to earn a return when your reputation is on the line. Thus, investment in reputational capital often entails sacrificing short-term gains in return for long-term profit. For example, some negotiators are habitually straightforward, guarding their integrity with great care despite the potential for short-term financial loss. The return on this investment comes in the form of influence stemming from the increased credibility of future promises, commitments, and threats.
6. Leverage the shadow of the future
Even if you can't leverage your past reputation, you might be able to leverage your future. Imagine that an author is selling the rights to market her book in a particular region. If there is only one potential publisher with significant access in that region, the publisher is likely to make a low offer, knowing the author has no choice but to sign the deal. The author's threat to walk away if the publisher doesn't tender a better offer may not be credible.
Your threats will be more credible if you have a reputation for carrying through on them.
In such instances, threats can be made credible by leveraging the shadow of the future. The author might suggest that while accepting the publisher's offer might be smart in this region, it will set a bad precedent for the author's dealings with publishers in other regions. It now makes sense for the author to reject the publisher's low offer even though she has no other offers. This argument is likely to make the publisher rethink the strength of its position and the reasonableness of its demands. Indeed, such threats are commonplace, as the sidebar "No Haggling at the Ticket Counter" shows.
As many of the strategies suggest, sometimes the best way to make your threat credible is to act in a way that would normally be considered irrational. Restricting your options, sinking money into a potentially useless enterprise, and surrendering authority are the types of behaviors that smart negotiators usually try to avoid. It is critical to understand, however, that these tactics don't work because they make you seem irrational or unpredictable but because they fundamentally alter your strategic options and those of your counterpart.
Reprinted with permission from "Making Threats Credible," Negotiation, Vol. 8, No. 3, March 2005.
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