Elements to BATNA analysis

1. Snapshot of the P&L and other basic business metrics. 
   Notice the words “metric” as in ‘to measure’.   The first job of BATNA analysis is to have a very clear idea of where you really are now. Everyone thinks they are doing this implicitly, but that’s simply not good enough.  You have to sit down and articulate in very explicit terms just what your financial and operational status will be if this negotiation doesn’t yield an agreement.   
    
2.  Deal Structure. 
   The BATNA and Goal analysis work together to tell you what you should be negotiating for.  Put another way, the BATNA sets the M in your LIM analysis. The goal analysis tells you where you want to be. The BATNA analysis tells you where you are.  Now you understand the gap – and hopefully have numbers on it.  The BATNA forms the floor of your negotiating strategy.  You can now build your walk-away position as one that puts you marginally better off than your BATNA.  From there, putting your ‘most likely’ and ‘best case’ scenarios on the map are pretty easy.
    
3. Vector. 
   BATNAs fall and rise.  This is particularly important if your environment is in flux (i.e.: now, everyone) or if your competitive position is shifting. You should know if your own BATNA is rising and falling in the near term.  Is your steady-state business remaining stable, or are you in a deteriorating position in a failing industry?  This is more of an environmental analysis than an inward looking audit.  I referred to ‘rising or falling BATNA’ in my class when the recession shifted the negotiating balance of power from suppliers to purchasers – and now my class thinks that this is the main purpose of the BATNA analysis.  Determining if your BATNA is rising or falling is an interesting issue to analyze – after you already have a solid understanding of your operational and financial status in the event of no deal.  BATNA’s shouldn’t be referred to as ‘rising’ or ‘falling’ until you’ve already stated what yours is.
    
4.  Short Term Tactics. 
   The BATNA analysis can act as your own personal ‘devil’s advocate’.  If performed seriously, it will let you know your own weaknesses and friction-points.  Your job is now to address your immediate shortcomings with good bargaining while simultaneously hiding or disguising your shortcomings from counter-parties.  In other words, the BATNA tells you what to look for and what to lie about.
    
5. Long Term Strategy. 
   In the short term, you can just react to deficiencies and weaknesses revealed by the BATNA.  In the long term, it’s your job as a manager to steadily improve your company’s strategic position — or to increase your company’s BATNA.  You can think of BATNA as a key metric for understanding a company’s strategic position — and every deal you do now should contribute to raising your company’s BATNA in the future.

Right now, the power balance is in your favor.  Smart purchasing managers, however, will take care not to alienate their network of suppliers.  In the future, there may be shortages and technological breakthroughs that will give the seller more power in the relationship.

Here are a few ideas for handling the deal-renegotiation call with a western or MNC supplier:

1. Be as direct as you can.  They are expecting the call.  Don’t make it worse by dragging it out.  I know that if the counter-party is Chinese you may be a bit more polite and round-about.  When the counter-party is Western (or has Western bosses) then you are being kinder by being quicker.  Start out with, “I’m afraid I’ve got some bad news.  We have had new orders from the very top to cut costs and review all existing contracts…”.   You can take it from there.
2. Show a little transparency.  Give your suppliers a little information about your situation – particularly when you expect to be big buyers again.  If you are in financial trouble, be as honest about the situation as you feel is appropriate.  Chinese buyers can very tight-lipped at times – and it often serves them well.  This is not one of those times.  Share a little info and learn more about the seller’s situation as well.  
    
3. Don’t let it get ugly.  You remember when the situation was reversed and you were begging for reasonable prices and the other guy showed you no love.  Now is your chance for revenge, right?  Wrong.  Now is the time to secure your future relationship with key suppliers and strategic partners.  You want to come out of this global recession in a stronger position — not just see your suppliers fail.  

Go to www.ChineseNegotiation.com for their take of how Western sellers are handling the renegotiation call.

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Please help with a research project by taking a brief, simple & anonymous survey about US-Mainland negotiation. 

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My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

Click here to take online survey:

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Simply stated, position-based negotiation is about tactics and relative power base.  It is standard win-lose, competitive negotiation.  Interest-based negotiation is about your own long-term strategic goals – and how to best match them with the goals of your partner.  This is a long-term, collaborative form of negotiation that looks beyond bargaining demands and attempts to uncover the true drivers that lay at the heart of negotiating positions.  It requires honesty, transparency, and senior level buy-in.

This is key for purchasers and buyers in China because you are being pulled in two different directions.  On the one hand, you are expected to bargain hard to meet your internal goals and keep prices as low as possible.  In recent months, you’ve probably noticed that you have more power as demand around the world has plummeted.  Your supervisors and bosses have probably notices the same thing — and are pressuring you to take an even harder line with suppliers.

But on the other hand, you know that strategic relationships with key suppliers are going to be important to you and your firm for the long term — well after the global recession is over.  That’s where interest-based negotiation comes in.   This type of negotiation looks beyond short term tactics and focuses on longer term strategic goals.

Position Based

• Goals are ill defined or relative to broad benchmarks.
• Price or cost are the key – or only – variables
• No relationship with counter-party
• Little or no transparency
• Power struggle
• Limited time & deadlines

Interest Based Negotiation

• Goals are strategic and objective
• Wide range of variables
• History of relationship with partner
• Transparent
• Partnership
• Time is not an issue

Purchasing managers in China seem to have an easy job these days – everyone wants to sell and there are very few buyers.  That seems to give Chinese purchasers a huge advantage.  The fact is it makes your life much easier with one counter-party – the seller.  But it makes your life very dangerous and stressful when you are dealing with another negotiating counter-party – your boss!

 Don’t let this opportunity slip away!

Now is the time for internal negotiation.  Your bosses think you can wave a magic wand and produce tremendous price cuts. After all, things are tough in your own company, and HQ expects to make up for their own weaker sales by cutting operating costs all up and down the line – especially from your department. 

 Now is your time to be pro-active and ‘get in front’ of this cost-cutting trend.  You know who you want to keep as a key supplier, and who you want to get rid of.  This is a great opportunity to present your bosses with your top suppliers and a wish list of other

 You have to get out in front of this new trend and take leadership.  What kind of changes, new metrics or improved processes would you like to see implemented?  You have leverage with your suppliers – but you also have more leverage with your boss – and with HIS boss.   Sit down with them and determine exactly what they expect of your department, and where you all want to be in a year.  Make sure everything is consistent and logical.  They can’t tell you to cut all prices by 40% but still maintain good relations with your existing key suppliers.  If there is a relationship you want to protect and you have good reasons for staying with someone who may be a little more expensive, talk to your people about it NOW.  If you wait, you may be too late to save the relationship — and you just might see your favorite supplier go bankrupt.

 The worst situation you could find yourself in is when your bosses complain you are being too soft on suppliers but your suppliers think you are driving them out of business.  This time, they might not be exaggerating.

 It’s true that your negotiating position vis a vis your suppliers has gotten stronger.  Now you have to make sure that your position vis a vis your BOSS is equally strong.  You have to take the time to re-affirm your goals and make sure you are on the same page.  Otherwise, they will expect too much of you and be disappointed when you only cut costs by 25%!

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Please help with a research project by taking a brief, simple & anonymous survey about US-Mainland negotiation.http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

 My name is Andrew Hupert, and I’m a teacher and writer in Shanghai. I am now working on a project for my International Negotiation class at New York University’s Shanghai campus (in cooperation with East China Normal University). 

Thanks very much for your cooperation in my research. I would be happy to share raw data with any participants who wish to see it, and will publish my findings on ChinaSolved.com , ChineseNegotiation.com and DiligenceChina.com .

http://app.icontact.com/icp/sub/survey/start?sid=6256&cid=355149

Purchasing managers in China can expect to meet up with 3 kinds of overseas suppliers.  Some know China well and have good experience operating here.  Others are new to China, and don’t know much about doing business here – but they know it.  This is a great opportunity for building a solid relationship and securing a key supplier.  But there is a third group that doesn’t know China at all – but believes they do.  This is trouble.  Whether it’s a manager with experience in Korea and Japan or a young overseas Chinese who knows a few words of Mandarin, these guys are going to give Chinese purchasing managers a lot of grief.  Make sure the business justifies it.

Dealing with the 3 kinds of western counter-parties.

• They Know China.  Don’t make problems where there aren’t any.  Deal with this guy in a professional, businesslike manner, and you’ll win the day.   You be a pro and he’ll be a pro.  He doesn’t want to hear how good his Chinese is or how he’s been her for so long.  He probably knows the market and can judge how reasonable an offer is, so make sure your expectations are reasonable and you don’t go for too much at the beginning.
   
• They Don’t Know China.  This can be a great contact – if you handle it the right way.  Is this guy a new hire or transfer with one of your long-term suppliers, or is he cold-calling for the first time.  When dealing with a China newbie, your first job is to figure out how long he’ll be around.  If he works for a small firm and is just testing the waters with a few sales calls, then you don’t have to invest too much time or energy into teaching him too much.  But you can expect to see more and more expats and overseas managers ‘cycling through’ Shanghai for a few years.   As China becomes a more developed market, you can expect to see more young management-types put in time here in order to round out their global management skills.  These can be valuable contacts, so take the time to orient new suppliers and salesmen to the way you do things – and to the way things are done in China.
   
• They don’t know China but think they do.  The problem here is suspicion and inexperience.  If your counter-party ‘thinks he understands’ your situation, then it usually means that he is skeptical of your claims and suspicious of your motives.   Your best bet with these guys?  Be their second deal.  They’ll be fine – once they make their mistakes with someone else.  But if you have to deal with a skeptic, go right to the issues he cares about:  price, payment, scheduling and referrals.   If you can make a new Western counter-party comfortable with your firm in those areas, you are well on your way to a successful deal.

One thing is certain:  As businesses around the world try to access the China market, there will be a wider range of sellers trying to convince Chinese purchasing departments.

One of my main points was this:

 “Don’t continue negotiating with someone if you know it won’t end up in a transaction.  If there is a “deal-breaker” on the table, then that should be the first thing you deal with”. 

 The example we discussed was credit terms.   If your company has a policy of only giving a maximum of 45-day credit terms, but the customer insists on 90 days, I say that you should try to reach an agreement on that point first.  If not, it will ultimately kill your deal and waste everyone’s time.

A participant of the seminar disagreed.  His logic was that if you agreed to all the other points first and saved your major SPECIFIC point of disagreement until last, you improved your chances of reaching a final agreement.  He felt that if you reached a compromise on all the other points first, it would put a great deal of pressure on both sides to find a solution to the last disagreement.

 We went back and forth for a while, and I understand his point of view.   BUT…I think his way will only work under the following conditions:

1)      Both sides agree that the potential “deal-breaker” exists.

2)      Both sides agree to deal with it last.

3)      You acknowledge that by investing time in this negotiation — which has serious   problems – you are passing up the opportunity to do other business.

The pitfall here is that your counter-party might not understand that you consider a specific point to be a deal-breaker.  If I am engaging in drawn-out discussions over many months and the other side suddenly comes back to me with a proposal that contains what I feel to be a deal-breaking point, I am going to be very angry if I think he has just wasted my time.

Look at this example.    We are negotiating for sales training services, and I have the responsibility for finding a sales trainer in Shanghai.  My company policy –set by the New York HQ — is to pay all service-related expenses 90 days after completion of the contract.  I am negotiating with a sales trainer who wants to be paid in advance.

IF he tells me that we have a significant disagreement with the payment terms BUT he thinks we should “shelve” that issue – or delay dealing with it until later, maybe I will agree.  Then we can discuss all the other points, and if we find that our companies are a very good fit, we may be able to work out a special case.  I will have my boss contact the head of HR in New York and we will find a compromise – maybe pay him 20% up front, 50% within 30 days of the training, and 30% after 90 days. 

BUT – and this is important – if we meet 5 times and I reveal a lot of sensitive information about my company and THEN he tells me about his company policy on pre-payments for the first time, I may feel he is not honest or competent.  I may feel that he has wasted my time – or tricked me into telling him too much about my company.  We have a special term for people who do this – we say they negotiated in “bad faith”.    Not only will they not get this deal, but we will never discuss any future business with them. 

Western negotiators tend to be very sensitive about wasting time in drawn-out negotiations that don’t result in a deal.  Sometimes this can be useful to Chinese negotiators – it can put pressure on western counter-parties to reach an agreement or grant concessions.  But it can also cause problems if the other side assumes you are negotiating in bad faith and are therefore not a suitable business partner.

You’ll hear it when someone owes you money or a supplier is trying to defend his price (or other bad news).  ”If you push any more I’ll go bankrupt and then you’ll have nothing”.   It’s a pretty common tactic when a small or shaky business partner is the counter-party.  The bad news is that it may not be an empty threat. The worse news is that this guy may be using the same line all over town, and the first one to call his bluff loses less than you do.   

Is there a defense or counter-tactic?  The only thing you can do once it happens is to assess the situation objectively and decide how much you need the other party in the short term.  If they are strategic or leaving them will cause a short-term bottleneck, then you’ll have to find a compromise and keep them around long enough for you to find a replacement.  If the only leverage they have over you is the recovery of money they owe, then this is a much riskier proposition.  You might be best off cutting your losses.

In order to prevent this kind of thing from happening, make sure you A) have a deep list of suppliers and B) try to gain transparency with key and strategic suppliers to assess their finances and production capacity.  Consider expanding the number of suppliers you work with to minimize the impact of one of them going out of business or shutting down production temporarily.  

Negotiating in tough times requires you to shift from Win-Win to Win-Lose and back again quickly.  This is a fact of life for everyone in business, but is particularly true for purchasing managers negotiating in China.

If you are a buyer, your LIM on a whiteboard would start with a single point — your M.  Say rmb 1,000. Your I would be lower — maybe 750.  You L is theoretically 0, but let’s say that a reasonable figure is 500.  You have a line from 500 (on the left) to 1000 (the point where you started the line).

Your seller also has a LIM, but his moves in the opposite direction.  He will start high — maybe rmb 1,500, and draw his line in the opposite direction.  His I might be 1100, and his M could be 800.

Are you going to reach a deal?  Where?

Your starting position is 500 while he starts at 1,500.  Pretty big difference. If you are not careful, this could get personal and emotional.  His offer sounds unreasonable — yours is insulting.  But hold on.  

His counter-offer of 1100 and yours of 750 are still pretty far apart.  But if the negotiation continues, it becomes clear that neither of you are in BATNA territory.  Your LIM-MIL profiles overlap from 800 to 1000.  That means that THEORETICALLY you should be able to do come to an agreement at around 900.

What can go wrong?  2 things.

1)  Your opening offers can be so far apart that it seems unlikely you’ll ever reach a deal.  That’s the danger of setting unreasonably high Ls (opening positions).  If the buyer has offered rmb 1 in the opening round, the seller would probably walk away and invest the time in finding other counter-parties.   And that leads to the next problem;

2)  Lack of visibility.  If both sides in the above negotiation had showed each other their positions at the very start, then this deal could be arrived at quickly and easily.  But transparency is not a common tactic in China, and very few counter-parties will show you their M (bottom line price) at the beginning of the negotiation.   

Like:  L is what you would like to get from the negotiation.  This is your opening position.  If everything goes really well and you score a big success from your negotiation, L is what you are going home with.  Make sure you start off asking for enough — but not for so much that the other side thinks your are crazy, naive, dishonest or all three.   If your L is too high, then you may not get a second chance at negotiating — particularly if your counter-party is a MNC sales or purchasing department that works with a ’short-list’ system.  The goal of their first round negotiations may to set a short-list of 3 – 5 counterparties, and then conduct the real negotiations only with members of that group.  Set your LIM too high, and you may find yourself out in the cold — or forced to offer a price concession just to get to the second round.   

Intend:  I is what you can reasonably expect from the negotiation.  This is industry average or your existing arrangement.  I changes over time as international business cycles and prices shift.  You have to know what your I is likely to be — and to make sure that your boss agrees with you.  Figuring out I can be easy if you work with a stable, deep market that has many buyers and sellers.  If you are selling a unique or new product, figuring out I can be tricky.  For most of us, I is an established industry benchmark, price of a major local supplier or the price you are already getting (or giving).  Watch out for inflation-indexing schemes that can change your I as the economy changes — and make sure the terms are favorable to you.

Must:  M is the point at which you say ‘take it or leave it’.  M slots in just above your BATNA, which we talked about last week as your Best Alternative To No Agreement.  Professionals know not to do the “walk-away” too often — but they also know that sometimes a slow walk to the door is the best negotiating technique in China.  When the other side says, ‘no deal’ to your last offer then you have no choice but to leave the table.  

Make sure that everything is cordial and professional,however, since there’s a good chance that they will try to call you back to the table.   Try this:  “I’m sorry, Bob, but it just doesn’t seem like we’ll be doing business this time.  Good luck, and if your situation changes please get in touch.  I’d love to be able to do a deal in the future.”   It’s much better at keeping the door open than saying, “Go to hell you lying, cheating bastard”.  Just a thought.  

M is relatively easy to set.  It’s marginally above your BATNA.  If your BATNA is maintaining the arrangement you have with an existing supplier or client, then you can figure it out to the 3rd decimal point.  If your BATNA is bankruptcy, unemployment and ruin — then you had better know that walking in and set your targets accordingly.

 So much of what gets written about negotiating with Chinese managers and bureaucrats usually refers to the last crop of managers that either made the transition to free market competition or were reporting to people who did.  That’s where the buzzwords really come into play:  guanxi, preserving face, banquets & toasting, red envelops etc.  This style of negotiation – socialist bureaucracy meets 21st Century commerce – still goes on, but it is starting to give way to more modern approaches.

In newer or re-organized Chinese companies and China-based MNCs, however, you’ll encounter a younger type of Chinese counter-party who works in an operating environment similar to yours.  For him, deal-making is a structured process that must be governed by rules, logic and profit.  He has probably received formal training in negotiation, team management, and sales or procurement – depending on which side of the table he sits.  He answers to superiors and committees about specific price and delivery issues.  This guy isn’t asking for pay-offs or drinking parties – he wants the paperwork filled out properly and a rock-bottom price.

That’s not to say that New Chinese negotiating is any easier or more pleasant than Old Chinese negotiating.  You still won’t meet the boss and you may not be sure who really decides anything.  Payment schedules and quality issues still take a lot more time and energy than you think they should, and there’s absolutely no guarantee that language or cultural issues still won’t sink the deal.    But the process of negotiating in China has changed a great deal in the last 5 years, and you should be using that to your advantage.

1) Know what age group makes the decision.  Young Chinese use polite key-words like “this company is still very traditional” or “Mr. Chen is quite conservative” to indicate that the decision-making structure is going to be opaque and indirect.  If your contact refers to his company as very “international” or “modern”, you MAY be looking at an RFP or other structured system.  It’s ok to ask your new contact about the best procedures for submitting a bid or dealing with proposals. 

2) You have more choices now.  If you want to negotiate directly with the boss, you may be able to do that – but only if you select an organization that works that way.  40-something traditional managers haven’t changed their style much, and they’re not going to.  But now there is plenty of competition from newer or more international organizations.  Shop around for your counter-party, and you’ll be much happier in the long run.

3) Beware of mixed messages.  Lots of traditional Chinese companies and state-owned enterprises have brought in consultants and trainers and slapped a modern whitewash over their convoluted, cob-webby operating systems.  If you’re sitting in a giant board room waiting for the tea leaves to sink with a couple of bright, eager young grads who seem happy to see you but don’t  know much, then you are probably talking New China but walking Old China.  On the other hand, don’t be quick to write off giant state-owned giants – many of them have taken modernization and efficiency to heart, and you may be surprised at how quickly things move.