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.

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.