The Art of Haggling
When teaching negotiation skills, many educators now focus almost exclusively on an interest-based approach in which both parties openly collaborate to find a mutually satisfying solution. However, argues HBS Professor Mike Wheeler, it's important for students to know that there's still a time and place for old-school haggling. Key concepts include:
- In academic circles, "integrative bargaining" refers to a mutual-interest-based approach to negotiation. "Distributive bargaining" refers to an approach in which one party's gain usually results in the other party's loss.
- While Wheeler applauds the benefits of integrative bargaining, he warns that it works only when both sides have mutual interests in mind. Students must be prepared to negotiate with hardcore hagglers, too.
- A truly effective negotiator must be skilled at both integrative and distributive bargaining—and realize when each approach makes the most sense.
Let's say a successful businessman is in the process of buying a lakeside cottage from the original owner. The prospective buyer makes a lowball offer. The owner counters with a high demand. Both parties chest their cards, each hoping the other will misplay his hand. After lots of back-and-forth posturing, they settle on a price each can live with, although both know that the deal is likely better for one side than the other.
"At some point, it still comes down to determining who gets which slice of the pie."
Now imagine the same property but a different process, one in which the parties openly reveal their own interests from the get-go. The seller learns that the buyer plans to use the cottage only in the summer, and in the course of negotiation agrees to look after the property in the off-season. Here both sides win: the seller gets a little extra cash and the opportunity to spend additional time in the cottage, and the buyer takes care of winter maintenance concerns. Win-win solutions like that could leave both parties better off than a straight cash deal.
In academic circles, the former approach is called distributive bargaining, while the latter approach is known as integrative bargaining. The debate over which type of negotiation strategy is better has been raging since the early 1980s, when two books came out focusing on opposite sides of the issue. In You Can Negotiate Anything, Herb Cohen made an old-school argument for a "more for me, less for you" style of bargaining, while in Getting to YES, Harvard Law School Professor Roger Fisher and Harvard Negotiation Project Senior Fellow William Ury advocated for an approach that can benefit both parties. Fisher and Ury's message took hold, given people's understandable frustration with unreasonable behavior and protracted disputes.
Integrative bargaining is the process that is emphasized in most professional schools. Rightly so, says Harvard Business School Professor of Management Practice Michael A. Wheeler, who notes that many situations that initially look like win-lose propositions may actually present opportunity for mutual gain. But while Wheeler supports the interest-based approach, he cautions that the approach has its limits. "It's unrealistic to imagine that pies can be infinitely expanded," he says. "At some point, it still comes down to determining who gets which slice of the pie."
The art of negotiation lies in simultaneously creating and claiming value, says Wheeler, who likens it to "riding two different horses at the same time." On the one hand, if we don't explore mutual interests, we may not create mutual value. But on the other hand, if we show our cards and the other side doesn't reciprocate, then we run the risk of losing the whole pot.
Some negotiation professors sidestep this dilemma, however, and only address the value-creation side of the question. Such teachers may want to see themselves as peacemakers rather than pit bull trainers, Wheeler says, explaining why the hard-boiled notion of "more for me, less for you" doesn't get any play in some classrooms.
"Likewise, I'm not interested in training a bunch of used-car salesmen," adds Wheeler, who teaches the second-year MBA elective Negotiation. "But I think we're obliged to give our students a realistic picture of how the world can sometimes work."
To be effective, he says, negotiators must be adept at both styles of negotiating. That doesn't need to mean going for the jugular, but it does require being prepared to deal with other people intent on dominating, and who refuse to engage in problem solving.
Skillful negotiation starts with having a clear sense of when to walk away, in order to avoid being browbeaten into accepting unreasonable terms, he explains. It also involves having a keen sense of where the other party will be left if you hold firm on your terms. Careful analysis may reveal that the other party needs the deal as much or more than you do. Then there are psychological factors to consider, like the power of working from one's own ideal number rather than getting anchored by the other side's demands.
In class, Wheeler reminds students of a core strategic choice: assessing when to focus on dividing the pie and when to focus on growing it. "Sometimes getting 70 percent of the small pie might be better than getting 50 percent of a marginally larger one," he says.
Wheeler also wants students to weigh the moral issues that negotiation inevitably raises. Acknowledging the distributive aspect of the process makes them confront the issue of fairness. "How much do we owe the other side?" he asks. "Is there an ironclad rule, or does it vary from case to case?"
Go back to the example of the two strangers negotiating the sale of the lakeside cottage. What if the current owner is putting it up for sale because he has lost his job, while the businessman just happens to be Bill Gates or Mark Zuckerberg? Scenarios like that spark spirited discussion in class. "Some students say 'buyer [and seller] beware,' while others say they'd be uncomfortable making a lopsided deal," Wheeler says. In each instance, he presses students to articulate their underlying principles.
Real-world negotiators face strategic and moral issues every time they go to the bargaining table. "In the long run, reputations matter," Wheeler says. "And what we think of ourselves when we look in the mirror may matter even more. When parties can get beyond mere haggling and are able to create tangible value, they may also be more inclined to reach outcomes that square with one another's personal values."