Learnings From Stanford GSB: Wk5
- Dylan Pathirana
- Feb 18, 2024
- 8 min read
This week's classes were focussed around negotiation and competitive strategy
Negotiation
Preparation
One of the keys to a successful negotiation is effective preparation. The more you can understand your counterparty, the more leverage and options you have. You should also spend time thinking about your target and your reservation price. The reservation price is the point at which no agreement is preferable to accepting a deal below this threshold. Setting these beforehand can make sure that you don't change your mind during negotiations.
Understand alternatives for you and your counterparty
Get background info on things that impact the deal
Counter-party, the market etc.
Set your range/limits
We will explore some different ways to get some of this information later.
All forms of negotiation success ultimately come down to power.
The Five Horsemen of Power
Alternatives
Having a strong alternative in negotiation is a valuable tool which gives you leverage. Those with the strongest Best Alternative To a Negotiated Agreement (BATNA) have a higher probability of success. It is in your best interest to ensure that you don't have a weak BATNA as this will set a 'low anchor', causing you to set lower expectations rather than working towards your target outcome.
However, studies have shown that having multiple BATNAs will increase the probability that you accept a lower outcome. This is primarily due to the feeling that your BATNAs must represent and "appropriate value" and instead of chasing your target you are happy to settle for an outcome close to your BATNAs.
Information
Understanding your counter-party in a negotiation is critical. Spending time prior to the negotiation trying to understand their background, expectations and ideally their reservation price. There are a few ways to get this information:
Due diligence prior to the negotiation
Ask during the negotiation
Conduct perspective taking, where you try to put yourself in their shoes and understand what they would want
Information during the negotiation can also be used as leverage. Your goal should be to not be the first to give up information. By getting your counter-party to give up their preferences, you can identify the areas in which you are aligned and where you are strongly misaligned. Even if your preferences are aligned, you have the opportunity to pretend they aren't and leverage this to get more out of the deal.
Status
Status in this context is the degree to which the negotiator has the respect of the counter-party. In most negotiations, the negotiator with lower status is more likely to concede to their higher-status counterpart. This is due in part as there is a general feeling that the higher status actor has more competence in negotiation, even if that isn't the case. This can be used as a form of leverage by high-status negotiators.
Social Capital
This involves leveraging your social influence and network. For example, a Partner at a huge venture capital firm, could leverage their network and tell you that if you give them a bad offer, they will make sure everyone in silicon valley finds out. While this is pretty manipulative, it gives them the upper hand in the negotiation. If your network is strong enough, your counter party may be willing to settle for a lower outcome in order to build a relationship with you. This happens a lot in the job market. People take jobs with lower salaries to help build relationships with people who can potentially connect them with a better network.
Interpersonal Behaviour
This relates to how you carry yourself during a negotiation. You can derive extra power by being more assertive or being more visible with your emotions. Assertiveness can also be achieved non-verbally by using your body language and presence. A prime example of this is is former American president Lyndon Johnson who towers over his opponent and creates power.
Target
Try to get the other party to focus on what will happen if they don't close the deal and target their reservation price. For example, describe the scrutiny that they will face from their boss if they don't close the deal and try to make your offer seem like a good solution to avoid that outcome.
It is wise to start your offer with a higher non-round number. This will give the elusion that you have done some fancy calculation to land on this number and that is why it isn't a nice clean number. It won't work all the time, but it sets a strong anchor and may slightly improve your perceived credibility.
Zone Of Possible Agreement (ZOPA)
Pareto Efficiency
A Pareto efficient outcome is when it is impossible to improve one party's prospects without making the other's worse. This is when all the value is extracted from the deal and there is nothing left on the table. However, in negotiations, there is often a Pareto inefficient outcome. This is largely due to the fixed pie bias, where each negotiator thinks that the other side wants the opposite of what they want, even though this is rarely the case. Thus, they are not able to work towards the most ideal solution.
Improving outcomes
There are a few methods to minimise the value left on the table when negotiating a deal. Firstly, you can add contingent clauses into your contracts that condition future actions
on a set of criteria. A rough framework for this is:
If ____ then ____
for example, "If you exceed expectations by X%, then your bonus will be X%". By doing this, both parties get want they want from the deal, given they both deliver on expectations.
Self-Evaluation after Negotiations
After you end a negotiation, it is valuable to reflect on the process and how you did. This will enable you to identify potential weak points for you to focus on next time. The following guiding questions can be used:
Instrumental outcomes
Did I get the money, power, benefits, status or influence I wanted?
Self image
Did I behave in accordance with my principles and not lose face?
The process
How did I find the process? Was it fair? Was it easy to reach an agreement?
Relationships
Did I leave a good impression, build trust or create the foundations for a future relationship?
It is important as part of your reflection to think about which of these you are willing to make trade offs in (i.e. Am I willing to sacrifice a relationship in exchange for better instrumental outcomes?).
Negotiating Remotely
When we negotiate face-to-face we can use non-verbal cues to judge how the other person is feeling and adapt or approach. Remotely, this becomes a challenge. There are three factors that can play a big role in negotiations: Sight, Sound and Synchronicity (Three S's). Research shows thats negotiating parties with neutral or cooperative settings benefit from these three factors. However, these factors all have a negative impact on non-cooperative negotiating parties.
This fact can be used to decide which medium you will use to negotiate via. If you feel it will be a non-cooperative negotiation, it might be beneficial to do it via email or a similar medium to reduce the three S's.
Final tips
Try leading with humour. It has been shown to lower the other person's guard and get better results
Before heading into your negotiation, invest some time into building a value matrix where you can actually quantify what is valuable. You can assign points to each category and your aim is to get the most points.
Focus on the interests of both parties and try to reach a conclusion that both parties feel as though they are getting a good deal
Competitive Strategy
There are many definitions of what competitive advantages are, but we defined it as:
A property of the business or its environment that provides higher profitability in comparison to existing and potential competitors
Having strong competitive advantages is critical as it helps to minimise direct competition. This means there are less players competing with you on price, which means you are able to set comfortable margins.
Barrier to Entry
A barrier to entry is a form of competitive advantage. It is a property that hinders potential competitors’ ability to enter the market.
Attributes of Competitive Advantages
Competitive scope
While a competitive advantage my provide defensibility against a segment of competitors, it may not protect against all of them. Thus, it is valuable to understand the scope of each advantage and identify who it protects you from (i.e. new startups, specific incumbents etc.). This process can also help you to identify who your competitors are.
There are a host of other competitive advantage attributes to consider:
Duration
How long the advantage will last before a competitor can catch up?
Strength
How profitable is your advantage?
Transferability
How easily transferred is the advantage between companies?
Replicability
How easily can this advantage be replicated by others?
Cost to build
How much it cost you to build this advantage?
Time to build
How long it took you to build up this advantage?
Adaptability
How easily can your advantage be adapted to keep up with the ever-changing market?
Uncertainty about ability to build
What is the probability that you will be successful in building the advantage?
Volatility
What is the variance in the sustainability of your advantage?
A combination of the market volatility and the sensitivities of your advantage in the market.
Dynamics of maintenance costs
How much will it cost you to maintain the advantage?
Sustainability in the long run
A combination of the strength of the advantage, the long run costs to maintain it and the threats to the advantage/probability of maintaining the advantage.
Path to build
Your plan to build your advantage
Complementarities
Does this advantage help or hinder other advantages/disadvantages you already have?
The Strategy
Your competitive strategy dictates how you plan to win. This is not a static plan. It is incredibly dynamic.
A plan is useless, but planning is critical
You should plan, execute and then go back and assess the assumptions you made in your original plan. Testing these assumptions early is the key.
Since the 'Logic' of the business relies on its competitive advantages, for every major decision, we must ask one key question:
How would this decision impact our strategic advantage?
This allows for visualisation of outcomes based on current competitive advantages. Some decisions will rely on this vision of our advantages, whilst others will drive what advantages we look to create in the future.
Creating and Sustaining Advantages
There are many ways to create and sustain an advantage in the market.
Here is a list of potential ways to create and sustain competitive advantages
Production Scale cost advantage
Human Capital efficiency advantage
Human Capital Cost advantage
Culture advantage
Process advantage
Advantaged access to resources
Customer perceived value advantage (i.e. Brand Name)
Customer loyalty advantage
Customer switching cost advantage
Customer specialisation/focus
Proprietary distribution channels
Speed to market/First mover advantage
Intellectual Property advantage
Government support
Management sophistication advantage
Ultimately, you need to keep asking:
Can I create a new advantage for my venture?
This will ensure you stay in-front of your competitors and focus on investing in your competitive strategy.
Back to the Business Model
In previous weeks, we have discussed the business model and its importance when developing a business. Now that we understand that competitive advantages are a key part of the logic of a business, we can complete the business model:
This is the fundamental structure of any successful business. This is another one of my key takeaways from the course. You can have an amazing product, but if you don't have a solid business model, you will not succeed. The flip side is also true. You can have a mediocre product and a brilliant business model and this will lead to success. Spend time building your business model.
Culture
Bad company culture tends to emerge only when there is a lack of culture set by the company. Time should be spent to build a set of values and clearly define the culture of the company. However, establishing any form of culture is preferable to having none at all. On a personal note, I see a lot of companies which publish their values and hang them on their wall....and that's it. Culture should be the fundamental roots of the business and rather than just talking the talk, businesses should align their incentives, promotions, reviews, hiring, firing, communications, and processes around their culture and values. This will promote a workplace which actually lives the values they are preaching.
A few closing points
When you have a competitive advantage, it is easy to take your foot off the accelerator and take a breather. In reality, when you have a competitive advantage, you should capitalise on moving at speed so that you can maintain your advantage. Your competition will be doing everything to chase you down, so make the most of your advantage.
Identify markets where there is currently disruption and think about what will be needed to facilitate this disruptive technology. For example, rather than becoming another electric vehicle manufacturer, think about what will be needed in a few years once the disruption is common place. Think charging infrastructure or vehicle-to-grid. By acting early, you will give yourself a competitive advantage over others who may not see these solutions until the disruption becomes mainstream. Thinking forward and investing early in adapting to market changes will help keep your competitive edge.
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