Four Key Concepts:Your Starting Points

E x c e r p t e d f r o m

Negotiation

Harvard Business School PressBoston, Massachusetts

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2Four Key Concepts

Key Topics Covered in This Chapter

• BATNA (best alternative to a negotiatedagreement)

• Reservation price

• ZOPA (zone of possible agreement)

• Value creation through trades

Your Starting Points

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Wh e n p e o p l e don’t have the power to force adesired outcome, they generally negotiate—butonly when they believe it is to their advantage todo so.A negotiated solution is advantageous only under certain con-ditions, that is, when a better option is not available. Consider thisexample: One of your best employees, Charles, is being courted byanother company. Replacing him will be costly, but perhaps not ascostly as negotiating some combination of financial inducementsand work changes that will persuade him to stay and keep on con-tributing.Your mental calculator tells you that the cost of these in-ducements is less painful than your only other option—losing a staremployee.

Any successful negotiation must have a fundamental frameworkbased on knowing the following:

• The alternative to negotiation

• The minimum threshold for a negotiated deal

• How flexible a party is willing to be, and what trade-offs it iswilling to make

Three concepts are especially important for establishing this frame-work: BATNA (best alternative to a negotiated agreement), reserva-tion price, and ZOPA (zone of possible agreement). This chapterdevelops these three concepts using distributed negotiations as ex-amples. It then expands the framework to include a fourth concept:value creation through trade, switching to integrative negotiations

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for an example.This switch simultaneously illustrates how the con-cepts of reservation price and ZOPA shift when you move from dis-tributive to integrative negotiations.

Know Your BATNA

BATNA, a concept developed by Roger Fisher and William Ury, is theacronym for best alternative to a negotiated agreement. It is one’s pre-ferred course of action in the absence of a deal.Knowing your BATNAmeans knowing what you will do or what will happen if you fail toreach agreement in the negotiation at hand. Consider this example:

A consultant is negotiating with a potential client about a month-longassignment. It’s not clear what fee arrangement she’ll be able to negoti-ate, or even if she’ll reach an agreement. So before she meets with thispotential client, she considers her best alternative to an acceptable agree-ment. In this case, the best alternative to a negotiated agreement—theconsultant’s BATNA—is spending that month developing marketingstudies for other clients—work that she calculates can be billed out at$15,000.

Always know your BATNA before entering into any negotia-tion. Otherwise, you won’t know whether a deal makes sense orwhen to walk away. People who enter negotiations without thisknowledge put themselves in a bad position. Being unclear abouttheir BATNAs, some will reject a good offer that is much better thantheir alternatives because they are overly optimistic. For example,Fred has brought a damage suit against a former employer.That em-ployer has offered to settle out of court for $80,000. But Fred wantsmore.“I know that I’m in the right and can get what I want if I don’tsettle, but go to court,” he tells himself. Going to court is his best alternative to the $80,000 settlement offer. But how good is that al-ternative? Fred hasn’t really done a thorough job of estimating theprobability of winning in court, nor the size of a potential award. Inother words, he has no real idea of the alternative to the employer’ssettlement offer.

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Others run the risk of accepting a weak offer, one that is less fa-vorable than what they could have obtained elsewhere if there wereno agreement (“I probably have some other options, but this seemslike a good deal”).

Strong and Weak BATNAs

Your best alternative to a negotiated agreement determines the pointat which you can say no to an unfavorable proposal. If that BATNA

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Long before the acronym BATNA was invented, savvy opera-tors kept their best alternatives in mind as they dealt with op-ponents. Consider France’s Louis XI, one of the most craftymonarchs in fifteenth-century Europe.When England’s EdwardIV brought his army across the Channel to grab territory fromhis weaker rival, the French king decided to negotiate. Know-ing that his BATNA was to fight a long and costly war, Louiscalculated that it was safer and cheaper to strike a deal with Edward. So he signed a peace treaty with the English in 1475,paying 50,000 crowns up front and an annuity of 50,000crowns for the rest of Edward’s life (which proved to be short).To seal the deal, Louis treated his royal counterpart and the En-glish army to forty-eight hours of eating, drinking, and merry-making.As an added token, he assigned the Cardinal of Bourbonto be Edward’s “jolly companion” and to forgive his sins as hecommitted them.

As Edward and his army staggered back to their boats, endingthe Hundred Years War, Louis remarked:“I have chased the En-glish out of France more easily than my father ever did; he drovethem out by force of arms while I have driven them out by forceof meat pies and good wine.” Such is the power of negotiatingwhen you know your BATNA.

source:–Richard Luecke, ScuttleYour Ships Before Advancing (New York: Oxford University Press, 1993), 49.

A King Who Knew His BATNA

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is strong, you can negotiate for more favorable terms, knowing that you have something better to fall back on if a deal cannot bearranged. A weak BATNA, on the other hand, puts you in a weakbargaining position. Consider the position of the consultant in ourearlier example if she had no other work lined up. In that case her alternative to a deal might be sitting around waiting for the phone toring—a terrible position to be in during negotiations.

Whenever a negotiator has a weak BATNA (or hasn’t taken thetime to determine what that BATNA is), it is difficult to walk awayfrom a proposal—no matter how paltry it might be.And if the otherside knows that its opponent has a weak BATNA, the weak party hasvery little power to negotiate. Not that this stops some people fromtrying to drive a hard bargain. For example, in late 2001, an organizedgroup of the unemployed in France threatened to strike if the gov-ernment failed to meet their demand for higher unemploymentbenefits! Needless to say, this group had little negotiating power.

Take a minute to think about your own best alternative to what-ever deal you are presently negotiating. Do you have one? Is it strongor weak? Can you quantify it?

Improving Your Position

A weak BATNA is not the end of the world.Whatever hand you’vebeen dealt, here are three potential approaches to strengthening yourposition:

1. Improve your BATNA.

2. Identify the other side’s BATNA.

3. Weaken the other party’s BATNA.

Each of these options is discussed in the following sections.

I M P R OV E YO U R B AT NA–BATNA seems a given. Our consultanthas $15,000 of other work she can turn to if negotiations with thenew client fail. But she might be able to expand that other work,thereby improving her BATNA and giving her a strong hand in ne-gotiations. For instance, she might call her current client and say,

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“You know those marketing studies you asked me to develop. For aslightly higher fee—say, $5,000 more—I could expand the scope ofthose studies to include sales estimates of your two leading competi-tors’ products.Would you like me to do that?” If she got the go-aheadto expand the project, her new BATNA would be higher—$20,000.

Anything that can be done to improve your BATNA willstrengthen your negotiating position.Take a minute to think of waysyou could do that, given current circumstances.

If you have a strong BATNA—and if you are certain that it’smuch stronger than anything the other side can muster—don’t beshy about it. Discreetly let the other side know that you’re negotiat-ing from a strong position.

I D E N T I F Y T H E OT H E R S I D E ’ S B AT NA–Knowledge of the otherside’s BATNA is another source of negotiation strength. Is its alter-native to a deal strong or weak relative to yours? A good estimationof the other side’s BATNA can be a big help to you. For instance, inthe example given earlier, our consultant would have a stronger bar-gaining hand if she knew that her potential client would have to pay$25,000 to another firm for the same work. Twenty-five thousanddollars would be the client’s BATNA; knowing that would help ourconsultant be more effective at the negotiating table. Better still, a lit-tle sleuthing might reveal that the competing consulting firms werebooked solid for the next four months. If the work had to be donesoon, the potential client would have a very weak BATNA, and ourconsultant could pursue negotiations with much greater confidence.“My price is $30,000, and I can begin the work later this month.”

Thus, knowledge of the other side’s BATNA is extremely help-ful when you can obtain it. But how can you obtain that knowledge?The opposing negotiator won’t tell you unless his BATNA is verystrong. He may even bluff about it. Sometimes, however, the otherparty’s circumstances can be discovered.Asking questions during thenegotiation can help you learn about the other side’s BATNA, butyou can also learn in advance by doing the following:

• Contacting sources within the industry

• Checking potentially relevant business publications

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• Reviewing annual reports (or public filings)

• Asking questions informally of the negotiator or others withinthe company

• Imagining what your interests, preferences, and needs would beif you were in their position

Knowing the other side’s BATNA lets you know how far youcan go. But other knowledge is equally important. For instance, themore you know about the other side’s broader concerns, industry,corporate structure, and other deals and goals, the better able youwill be to find creative ways of meeting their interests (preferably atlow cost to you).

W E A K E N T H E OT H E R PA RT Y ’ S B AT NA–Anything that weakensthe other side’s alternative to a deal will improve your relative po-sition. In some cases, weakening the other side’s BATNA may bedone directly.

Four Key Concepts 7

Although it’s absolutely essential that you know your ownBATNA and try to estimate that of the other side, be aware thatmost people don’t do a good job of estimating BATNA values.For example, Lax and Sebenius describe an experiment involv-ing the value of a company up for sale. “Even given identicalbusiness information, balance sheets, income statements, and thelike,” they write, “those assigned to buy the company typicallyrate its true value as low, while those assigned to sell it give muchhigher best estimates. Neutral observers tend to rank the poten-tial someplace in between.” 1

The lesson here is that BATNA values can be influenced byyour personal perspective. So be as objective as possible. Checkyour thinking with a neutral third party.

A Caution on BATNA Values

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Final Haven, Inc., a Texas-based chain of funeral homes, had been ac-quiring independently operated rivals in the northeastern United Statesand was in preliminary negotiations with Jim and Barbara Stanley forthe purchase of their establishment in central Connecticut.When thosenegotiations began, the Stanleys were confident that they could get ahigh price since another funeral home operator in the area, Bob’s Dis-count Funerals, had been saying for years that he’d like to buy themout.“That’s a fine funeral business you have there,” he had told themrepeatedly.“If you ever want to sell it, talk to me.” Bob had evenhinted at $800,000.

The Stanleys thought of $800,000 as their best alternative to cut-ting a deal with Final Haven.“If we can play Bob off Final Haven,”Jim Stanley told Barbara,“we should be able to get a still betterprice—maybe $1 million.” Needless to say, the Stanleys were crest-fallen when the local newspaper announced “Bob’s Discount Funeralsto Be Acquired by Texas-Based Chain.”Their alternative had justevaporated, leaving them in a weak position relative to the deal makersfrom Final Haven.

In this example, Final Haven neutralized Jim and Barbara’s alter-native deal. Their $800,000 BATNA had been taken off the table,leaving continued operation of the business as their only alternativeto an offer by Final Haven.Thus, Final Haven strengthened its posi-tion relative to the other side by weakening the Stanleys’ BATNA.Of course, the Stanleys’ position may not be entirely untenable.They

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might take steps to strengthen their BATNA. For example, theymight entice another potential bidder into the game—perhaps arival chain of funeral homes.

When You Have No Alternatives

No negotiator is in a weaker position than one with no alternative toa deal. In this case, the other side can dictate the terms.The BATNA-less party is a deal taker, not a deal maker. If you find yourself in thisdangerous situation, you must create an alternative. Writing in theHarvard Business Review, Danny Ertel described how Colbún, Chile’sthird-largest electric power producer, managed to do this:

Colbún has often found itself at a substantial disadvantage in terms ofscale and negotiating leverage. It had to bargain for transmission capac-ity, for example, with the transmission arm of the largest power com-pany. If it had gone into those negotiations without an alternative, itwould have been at the mercy of the other side, and it would haveended up paying dearly for the capacity. But Colbún had an expresscorporate policy requiring the establishment of a BATNA in any nego-tiation. Because there were no other existing options for purchasingtransmission capacity, Colbún had to create one—developing its owntransmission line, conducting feasibility studies, and even putting con-struction contracts out to bid.2

As described by Ertel, this approach worked.The other side steadily re-duced its price quote as development of Colbún’s BATNA progressed.

Are you without an alternative in any of your current negotia-tions—with your boss, with a customer, or with someone else? If youare, stop to think about how you could create one.Think, too, aboutwhich type of alternative would most strengthen your hand.

BATNA Is Not Always Simple

BATNA is a straightforward concept. But applying it is not as simpleas we’ve made it appear. Most business negotiations involve manyvariables, some of which cannot be quantified or compared. Thismakes for a fuzzy BATNA. For example, let’s suppose that you are

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contemplating the purchase of a used 2001 Volvo sedan with an au-tomatic transmission and 28,000 miles on the odometer.The dealerhas it listed for $26,000 and offers a ninety-day warranty.Your neigh-bor, however, owns a 2001 Volvo station wagon with a standard trans-mission (which you prefer) and 53,000 miles on the odometer. Hesays that it has no known mechanical problems, and will part with itfor $18,000—with no warranty.As you negotiate with the car dealer,your neighbor’s vehicle would seem to be your BATNA. But is it auseful benchmark of what you could achieve in the absence of anagreement?

If price were the only issue, the neighbor’s Volvo would be yourBATNA, but there are substantial quantitative and qualitative differ-ences between the two vehicles.The neighbor’s car has a lower priceand a standard transmission—which you like—but it has highermileage and no warranty—which you don’t like. Most negotiationsinvolve similar complexities.

In a transaction that involves price and various other features,such as the car example, you can make the BATNA less fuzzy by as-signing a monetary value to the various features and adjusting theBATNA value by that amount. For example, you could assign a pricepenalty of $4,000 to your neighbor’s Volvo to adjust for its highermileage, and another $1,000 for the fact that it comes with no war-ranty. At the same time, you could add a price premium of $500 tothat same car for the fact that it has the standard transmission, whichyou prefer. Netting these adjustments, you have $4,500 (or $4,000 +$1,000 – $500).Add these to the neighbor’s offer of $18,000 and youhave $22,500—your new, less fuzzy BATNA. If the auto dealerwould reduce his asking price to $22,500, you’d be indifferent as towhich car you’d buy—at least theoretically.

Not all situations are amenable to price adjustments, for the sim-ple reason that price is not always the fulcrum of negotiated deals.Qualitative issues also matter. For example, a person who is negoti-ating the purchase of a small business may be concerned with whenthe transaction will take place and with the level of the currentowner’s involvement as a consultant. In these cases, the negotiatormust be able to make trade-offs in both sizing up the deal and devel-oping his or her BATNA.

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Reservation Price

The reservation price (also referred to as the walk-away) is the least fa-vorable point at which one will accept a deal.Your reservation priceshould be derived from your BATNA, but it is not usually the samething. If the deal is only about money, however, and a credible dollaroffer is your BATNA, then your reservation price would be approx-imately equal to your BATNA.

Consider the following example:

You are currently paying $20 per square foot for suburban office space.Thelocation is satisfactory and you believe that the price is fair, but you wouldn’tmind paying more to be closer to your downtown customers.While prepar-ing to negotiate with a commercial landlord for an office lease in a down-town high-rise, you decided that you would not pay more than $30 persquare foot.That’s your reservation price. If the landlord insists on more, youcan walk away and attempt to lease space in a different building. Or youcan stay where you are at $20 per square foot (your BATNA).

At the end of a lengthy negotiation session, the landlord declaresthat he will not accept less than $35 per square foot—and he won’t budge.You graciously terminate the negotiation and walk away from the deal.

In this example your reservation price is different from your BATNA.BATNA in this case is the current rent at the current location: $20per square foot. But the new location has different characteristics

Four Key Concepts 11

Do you know your reservation price in your current negotia-tions? What variables affect your price? What value have youtraded off in figuring your walk-away? The appendix contains ahandy worksheet that can help you set an objective reservationprice.The worksheet and other tools can also be found online atthe Harvard Business Essentials Web site: www.elearning.hbsp.org/businesstools.The site offers free interactive versions of theworksheets, checklists, and other tools introduced in this series.

Setting Your Reservation Price

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that enter into the equation. It’s closer to customers, and it may be amore attractive space with greater workplace utility. You’d be willingto assume the added expense and the hassle of moving, even if itmeant paying $30 per square foot.Anything more than that, however,would be unacceptable.Thus, there’s a subtle difference between yourBATNA and your reservation price.

The fact that the prospective landlord would not take less than$35 per square foot suggests that $35 is his reservation price.

ZOPA

The ZOPA, or zone of possible agreement, is a third key concept toremember. ZOPA is the area or range in which a deal that satisfiesboth parties can take place. Put another way, it is the set of agree-ments that potentially satisfy both parties.

Each party’s reservation price determines one end of the ZOPA.The ZOPA itself exists (if at all) in the overlap between these highand low limits, that is, between the parties’ reservation prices. Con-sider this example:

A buyer has set a reservation price of $275,000 for the purchase of acommercial warehouse.“That’s as high as I’m willing to go,” she tellsherself. Naturally, she would prefer paying less. Unbeknownst to her, theseller has set a reservation price of $250,000.That is the least he’lltake for the property.The ZOPA, therefore, is the range between$250,000 and $275,000, as shown in figure 2-1.The two partiesmight haggle a bit in reaching agreement, but an agreement in thisrange would satisfy each.

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F I G U R E 2 – 1

Zone of Possible Agreement

$250K

Seller’s Reservation Price Buyer’s Reservation Price

ZOPA$275K

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BUYER: “What would you say to an offer of $255,000? I couldagree to that.”

SELLER: “Thanks, but I believe that the building is worth more—and Ican get more if I leave the building on the market for another month or so.”

BUYER: “Maybe, but maybe not. I’d be willing to pay $260,000now if we could reach an agreement.”

SELLER: “$265,000 and it’s yours.”

BUYER: “Then $265,000 it is.”

In this commonplace example, each party had a reservationprice, and they bargained within the ZOPA. In doing so, each got abetter price than his or her walk-away.We can assume here that nei-ther knew the reservation price of his or her counterpart.As you canimagine, that knowledge would have been extremely valuable. Forexample, with foreknowledge of the other side’s reservation price,the buyer might have driven a tougher bargain, holding out forsomething closer to $250,000. Estimating the other side’s reservationprice is sometimes possible. If, for example, equivalent properties inthe area were listed for $260,000, the buyer could assume with someconfidence that the seller’s reservation price would be close to thatfigure. Likewise, if investigation revealed that the seller was highlymotivated to sell, the buyer would offer less.

Now consider what would happen if the numbers were re-versed—that is, if the buyer had set a reservation price of $250,000and the seller had set a reservation price of $275,000. That is, thebuyer won’t pay more than $250,000, and the seller wouldn’t takeanything less than $275,000.There would be no overlap in the rangesin which the two parties could reach agreement—no ZOPA. Noagreement would be possible, no matter how skilled the negotiators,unless there were other elements of value to be considered or if oneor both sides’ reservation prices changed. For example, if the ware-house seller determined that the potential buyer needed parkingspace for ten delivery trucks, and if he happened to have that manyunused spaces available at an adjacent location, he might offer themto the seller as part of the package.That “sweetener” might break the

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impasse.This would be an example of the way value is created in in-tegrative negotiations, as described in chapter 1. Information sharingmakes it possible.

Value Creation Through Trades

Another fundamental concept of negotiation is value creation throughtrades.This concept tells us that negotiating parties can improve theirpositions by trading the values at their disposal.Value creation throughtrades occurs in the context of integrated negotiations. It usually takesthe form of each party getting something it wants in return for some-thing it values much less. Consider the following example:

Helen and John are collectors of rare books and view their holdings assources of artistic satisfaction and investment gain.“With rare books Ican achieve a higher financial return than I can in the stock market,”says Helen confidently,“and I experience the exquisite pleasure of hav-ing these wonderful first editions in my home.” Helen’s pride and joy isher set of Hemingway novels. She has every one in a first printing, withthe exception of For Whom the Bell Tolls. She is negotiating withJohn, who has a copy for sale.

John is pleased to have his original Hemingway, but as negotiationsover the phone reveal, his primary interest is in building a collection ofthe works of the nineteenth-century American historian William Prescott.He currently has first printings of Prescott’s multivolume History ofthe Reign of Ferdinand and Isabella and is aggressively looking forVolume 2 of that same author’s The Conquest of Mexico. As luckwould have it, Helen has a first printing of Volume 2, and is agreeableto parting with it since it is not part of any collection she is building. Itis merely something she had purchased at an estate sale.

In the end, John sells Helen the Hemingway book, completing herset, for $100 plus her copy of Prescott’s Volume 2, which completes his set.

Both are extremely happy with the deal.

This is a case in which two individuals were able to create value,not simply claim it. Both emerged with substantial satisfaction from

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the deal. This was possible because the goods exchanged had onlymodest value to their original holders, but exceptional value totheir new owners.

Think for a moment about your own negotiations—with cus-tomers, suppliers, and fellow employees.Are you pulling and tuggingwith each other in a win-lose framework? Now think of ways thatyou might be able to satisfy the other side with something that wouldcost you very little.

• For a supplier, that greater value might take the form of an ex-tended delivery period. For the customer, having deliveriesspread out during the month might be of no great consequence,but for a supplier with strained production facilities, it may bevery important.

• For a customer, greater value at low cost might take the formof three months of free repair services if needed. For a vendorwho has great confidence that its products will need no repairsduring that period, free service is nothing of consequence. Inproviding it to the customer the vendor incurs little cost, eventhough the customer values the repair service highly.

• For another department in your company, greater value mightbe found in your offer of two high-powered workstations thatyour people rarely if ever use.That department may be able to offer something in exchange that you value more than itdoes.

• For an employee, the opportunity to work from a home officetwo days each week may produce great satisfaction while cost-ing the employer nothing.

Few of the things that others value highly will have little value toyou, and vice versa. But they are sometimes there, and a little thinkingand probing can identify them.That’s value creation. Just be sure thatif you give something of value, then you ask for something in trade.

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Summing Up

This chapter has explained the fundamental concepts used by skillednegotiators.

• BATNA is the best alternative to a negotiated agreement. It isone’s preferred course of action in the absence of a deal. Know-ing your BATNA means knowing what you will do or whatwill happen if you fail to reach agreement. Don’t enter a nego-tiation without knowing your BATNA.

• If your BATNA is weak, do what you can to improve it. Any-thing that strengthens your BATNA improves your negotiatingposition.

• Identify the other side’s BATNA. If it is strong, think of whatyou can do to weaken it.

• Reservation price is the price at which the rational negotiatorwill walk away. Don’t enter a negotiation without a clear reser-vation price.

• ZOPA is the zone of possible agreement. It is the area in whicha deal will satisfy all parties.This area exists when the partieshave different reservation prices, as when a home buyer is will-ing to pay up to $275,000 and the home seller is willing to takean offer that is at least $250,000.

• Value creation through trades is possible when a party hassomething he or she values less than does the other party—and vice versa. By trading these values, the parties lose little but gain greatly.

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Notes

Chapter 2

1.–David A. Lax and James K. Sebenius, The Manager as Negotiator (NewYork: Free Press, 1986), 57–58.

2.–Danny Ertel, “Turning Negotiation into a Corporate Capability,”Harvard Business Review, May–June 1999, 55.

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Harvard Business Essentials

The New Manager’s Guide and Mentor

The Harvard Business Essentials series is designed to provide com-prehensive advice, personal coaching, background information, andguidance on the most relevant topics in business. Drawing on richcontent from Harvard Business School Publishing and other sources,these concise guides are carefully crafted to provide a highly practi-cal resource for readers with all levels of experience, and will proveespecially valuable for the new manager. To assure quality and accu-racy, each volume is closely reviewed by a specialized content adviserfrom a world-class business school. Whether you are a new managerseeking to expand your skills or a seasoned professional looking tobroaden your knowledge base, these solution-oriented books put re-liable answers at your fingertips.

Books in the Series:

Business CommunicationCoaching and Mentoring

Creating Teams with an EdgeCrisis ManagementDecision Making

Entrepreneur’s ToolkitFinance for Managers

Hiring and Keeping the Best PeopleManager’s Toolkit

Managing Change and TransitionManaging Creativity and Innovation

Managing Employee PerformanceManaging Projects Large and Small

Marketer’s ToolkitNegotiation

Power, Influence, and PersuasionStrategy

Time Management

For the exclusive use of G. Zephirin, 2022.

This document is authorized for use only by Gabrielle Zephirin in Negotiations and Conflict Management, Spring 2022 taught by Rex Hammond, Virginia University – Lynchburg from Jan 2022 to Jun 2022.