Strategic Negotiations for Sustainable Value: A Guide to Lasting Business Deals 2021060665, 2021060666, 9780367430597, 9780367430603, 9781003001010

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Strategic Negotiations for Sustainable Value

Strategic Negotiations for Sustainable Value is a guide to learning how to conclude lasting business deals that are environmentally, socially and economically sustainable in an international business context. Managers today need to negotiate with multiple stakeholders, such as suppliers, customers, agencies, governments and authorities, to be able to access the resources that they need. Creating and capturing sustainable value is not a fixed entity but rather the outcome of long and time-consuming negotiations that affect further negotiations. Providing illustrative international case studies throughout each chapter, this book explores: • the strategic challenges that managers face in their markets today; • the practical, analytical tools that needed to create and capture value that is sustainable; • the behavioral biases and cognitive errors in strategic negotiations; • the various ways by which negotiators manifest their business agreements in contracts; • the managerial implications of strategic negotiations. The book is ideal for advanced undergraduate and postgraduate students in negotiation, business administration, management, or related courses such as business marketing, and customer or key account management. It is equally valuable to industry professionals, managers involved in negotiating with customers, suppliers or partners and those pursuing professional qualifications or accreditation in marketing, sales or management. Stefanos Mouzas is a Professor of Marketing and Strategy in the Department of Marketing at Lancaster University Management School, UK.

STEFANOS MOUZAS

Strategic Negotiations for Sustainable Value A Guide to Lasting Business Deals

Cover image: © Getty Images First published 2022 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2023 Stefanos Mouzas The right of Stefanos Mouzas to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing-in-Publication Data Names: Mouzas, Stefanos, author. Title: Strategic negotiations for sustainable value: a guide to lasting business deals / Stefanos Mouzas. Description: Milton Park, Abingdon, Oxon; New York, NY: Routledge, 2022. | Includes bibliographical references and index. Identifiers: LCCN 2021060665 (print) | LCCN 2021060666 (ebook) | ISBN 9780367430597 (hardback) | ISBN 9780367430603 (paperback) | ISBN 9781003001010 (ebook) Subjects: LCSH: Negotiation in business. | Success in business. | Deals. Classification: LCC HD58.6.M68 2022 (print) | LCC HD58.6 (ebook) | DDC 658.4/052--dc23/eng/20211230 LC record available at https://lccn.loc.gov/2021060665 LC ebook record available at https://lccn.loc.gov/2021060666 ISBN: 978-0-367-43059-7 (hbk) ISBN: 978-0-367-43060-3 (pbk) ISBN: 978-1-003-00101-0 (ebk) DOI: 10.4324/9781003001010 Typeset in Joanna by MPS Limited, Dehradun

The Core Message of this book A Strategic Perspective on Negotiations List of Figures List of Tables List of Cases

vii ix x xi xii

One

1

1.1 Negotiating for sustainable value 1.2 The dichotomy between the negotiator and the environment 1.3 The environment of negotiations

1 4 6

Two

12

2.1 An overview of the challenges in negotiations 2.2 Challenge No 1: Uncertainty as a faceless topology 2.3 Dealing with uncertainty 2.4 Challenge No 2: Embedded in networks 2.5 Negotiating in Networks: Why it matters 2.6 Challenge No 3: Creating and capturing value 2.7 The role of interests and entitlements 2.8 The laundry and cleaning case 2.9 Laundry & cleaning: tasks and activities

12 13 14 15 17 21 23 27 41

Three

45

3.1 The process of negotiation 3.2 Differences: The raw materials of the negotiation process 3.3 The NIMBY problem 3.4 Dealing with Emotions 3.5 Zone of possible agreement (ZOPA) 3.6 Best Alternative to the Negotiated Agreement (BATNA) 3.7 Demanding vs. giving in

45 48 51 58 60 61 63

Understanding strategic negotiations

The challenges that negotiators face

Negotiation as a process

v Contents

Contents

3.8 The limits of negotiations 3.9 Negotiating an agreement to combat climate change 3.10 Learning from climate negotiations

69 71 79

Four

83

4.1 Bounded rationality and behavioural biases 4.2 Present bias and procrastination 4.3 Create focal points for anchoring 4.4 The endowment effect 4.5 Herd behaviour 4.6 The UBS case 4.7 Learning from the herd behaviour of banks

83 85 88 90 91 95 99

Five

102

5.1 Closing a deal with a contract 5.2 Pre-contractual agreements 5.3 Open terms agreements 5.4 General terms and conditions 5.5 Has a contract been concluded? 5.6 Ethical considerations 5.7 The problem of contract incompleteness 5.8 The use of relational contracts 5.9 The use of framework contracts 5.10 Legal and non-legal enforcement of negotiated contracts 5.11 Baird v Marks and Spencer 5.12 Learning from Baird v Marks and Spencer

102 104 105 107 107 109 112 114 116 126 129 130

Six

135

6.1 The unintended consequences of strategic negotiations 6.2 Strategic negotiations to build resilience 6.3 The skills of great negotiators 6.4 Becoming a mindful negotiator

136 141 143 146

References Acknowledgements About the author Index

152 166 168 169

Behaviour in negotiations: Biases and errors

vi Contents

Negotiating contracts

Managerial implications: Looking ahead

This book is about strategic negotiations for sustainable value. The core message that encapsulates the essence of the book is learning how to negotiate deals that create sustainable value. In other words, the book is not about learning short-term games, tactics or persuasion; instead, the book is a negotiator’s guide to lasting business deals, deals that are environmentally, socially and economically sustainable in an international business context. Strategic negotiations are highly relevant in today’s globally interconnected business landscape. The resources that managers, policymakers and organisations need to solve their problems, gain and retain valuable customers, launch and re-launch new products or services, and develop profitable business are not available in a single, concentrated form. The resources that negotiators need to solve their problems are widely dispersed among many actors in different geographies and within various networks of inter-connected business relationships. Managers, for example, need to negotiate with multiple stakeholders, such as suppliers, customers, agencies, governments and authorities, often with conflicting interests. This interconnected business landscape is not a homogenous and harmonious environment, where we could presume that mutual gains among different stakeholders are transparently clear. Creating and capturing sustainable value is not a fixed entity but rather the outcome of time-consuming and often agonizing negotiations that affect further negotiations. Providing illustrative case studies, this book on strategic negotiations elaborates in a pragmatic and intellectually stimulating way: 1. The strategic challenges that negotiators face in an interconnected business landscape. 2. The intellectual tools of a mindset that aims to create and capture sustainable value.

vii The core message of this book

The core message of this book

viii The core message of this book

3. The behavioural biases and cognitive errors encountered in strategic negotiations. 4. The various avenues by which negotiators manifest their agreements in contracts. 5. The managerial implications of negotiating strategically.

The book develops a strategic perspective on how to negotiate with their major customers, suppliers, and partners for sustainable value. This strategic perspective complements other work on negotiations. The book builds on real-life business cases and state of the art literature on negotiations to enhance learning on how to negotiate for sustainable value in an international context. The book is ideal for advanced undergraduate and postgraduate students in business administration, management, or related courses such as business marketing, customer or key account management. The book is equally valuable to industry professionals and managers involved in negotiating with customers, suppliers or partners and those pursuing professional qualifications or accreditation in marketing, sales or management. Specifically, the book adds to existing literature by enabling the reader to develop an: • In-depth understanding of today’s pressing challenges in culturally diverse, inter-connected business world. • Appreciation of the intellectual, analytical tools on negotiations that challenge conventional thinking of how to address problems and how to embrace opportunities. • Understanding how behavioural biases and cognitive errors affect strategic negotiations. • Understanding the importance of manifesting negotiated deals in business contracts and the role of relational, incomplete and framework contracts. • Understanding the managerial implications of negotiating for sustainable value creation.

ix A Strategic Perspective on Negotiations

A Strategic Perspective on Negotiations

x Figures

Figures

1.1

Each dyadic negotiation affects further negotiations

7

1.2

Connectivity between firms forms a network structure

8

2.1

Identifying existing and latent needs

15

2.2

Manufacturer-Retailer Network

28

2.3

The supply chain

40

3.1

Reverse the sequence of negotiation moves

52

3.2

Start negotiations by exploring interests

53

3.3

Zone of Possible Agreements (ZOPA)

62

3.4

The dynamic interplay between interests and entitlements

64

3.5

Demanding vs. giving in

65

4.1

Balancing the short-term and long-term

87

6.1

The consequences of strategic negotiations

136

Tables

2.1

Interests: The means of creating value

24

2.2

Entitlements: The means of claiming value

25

3.1

Negotiating a joint venture

49

3.2

Timings and restrictions on a joint venture

50

5.1

An example of a framework contract

xi Tables

124

xii Cases

Cases

The laundry and cleaning case

27

Laundry & cleaning: Tasks and activities

41

Negotiating an agreement to combat climate change

71

Learning from UN climate negotiations

79

The UBS case

95

Learning from the herd behaviour of banks

99

Baird v Marks and Spencer

129

Learning from Baird v Marks and Spencer

130

Understanding strategic negotiations

One

Understanding strategic negotiations

• • • • • •

Negotiating for sustainable value Sustainable profitability vs. ephemeral profitability Investments and intangible assets Dichotomy between the negotiator and the environment Bias towards a science of choice No negotiation episode is an isolated island

This chapter is an introduction to strategic negotiations. It explains why managers need to engage in strategic negotiations, in other words, it explains why we need strategic negotiations. The introduction builds on the core message that the essence of this book is learning how to negotiate for sustainable value. The chapter discusses the dichotomy between the negotiator and the environment and elaborates on the idea that no negotiation episode is an isolated island.

1.1 NEGOTIATING FOR SUSTAINABLE VALUE

Global challenges, such as environmental degradation, climate change, growing inequalities, natural disasters, pandemics and economic risks have increased the relevance of sustainability among stakeholders, such as customers, suppliers, employees, investors, banks and rating agencies. Negotiating for sustainable value means negotiating business deals that are 1) environmentally, 2) socially and 3) economically sustainable (Lloret, 2016; Savitz, 2013). Environmental sustainability involves the pursuit of deals that meet “the needs of present generations without compromising the needs DOI: 10.4324/9781003001010-1

1 Understanding strategic negotiations

Overview of relevant themes:

2 Understanding strategic negotiations

for future generations” (WCED, 1987, p. 166). Social sustainability refers to the impact of negotiated deals on people. For example, social sustainability covers human rights, work conditions, gender equality, health and education, children, indigenous peoples and people with disabilities. Economic sustainability refers to a stable economic development that can be sustained in the long term. Managers, policymakers, lawyers, diplomats and organisations might be aware of the triple bottom line of achieving economic, social and environmental sustainability. Nonetheless, their efforts to negotiate for sustainable value is confronted with the rugged reality of four persistent problems: Firstly, our socioecological systems are not delivering for all stakeholders evenly and this is evidenced in growing concerns regarding inequalities, inclusiveness, fairness and justice (Deaton, 2019; Sen, 2016; Stiglitz, 2018). Secondly, the operation of markets often fails to combat environmental degradation, protect our common-pool resources and fully price the cost of externalities (Hahn et al., 2018; Nordhaus, 2013; Ostrom, 2017). Thirdly, various stakeholders may interpret sustainability differently, resulting in conflicting cultures and incompatible logics (Levy and Spicer, 2013; Kok, de Bakker and Groenewegen, 2019; Veal and Mouzas, 2012). Fourthly, individuals and organisations are confronted with inter-temporal trade-offs, uncertainties, conflicts and vulnerabilities (Nordhaus, 2013; Shevchenko, Lévesque and Pagell, 2016). These four persistent problems hinder strategic negotiations for sustainable value. This is frequently evidenced in negotiators’ myopic vision, i.e., the excessive focus on short-term results at the expense of long-term interests. The Covid-19 pandemic has exposed individuals and organisations’ immense vulnerability and raises concerns about the way we interact with each other to pursue ephemeral value. We experience being caught up by a series of contingencies resulting in health, environmental, social and economic crises. All these crises are interconnected and present us with the need to transform our thinking and interaction. The most important lesson that we can take from these crises is the need for a strategic vision in creating and capturing sustainable value. Experienced negotiators know that they cannot retreat into isolation to defend their own entitlements. They also know that they cannot foresee and assess all possible contingencies alone but need to engage with multiple stakeholders to build together towards a brighter horizon. Rapid technological changes in renewable energy, de-carbonisation, digitisation, shifting economic, social and cultural conditions, ambiguous

3 Understanding strategic negotiations

rules and legislation, as well as rapid changes in the global competition create a deep uncertainty about the appropriate perspective and the changes needed. The use of science and information technology in decision-making is conducive to risk reduction (Shaw, 2020) but is not delivering the necessary mindset for crafting strategic negotiations and arriving at a jointly decided action that is environmentally, socially and economically sustainable. Strategic negotiations for sustainable value are not about tactics and short-term performance. The Covid-19 fallout has shown us that a narrow focus on short-term performance might harm the pursuit of sustainability. For example, individuals and organisations focussing on deals that maximise short-term profitability are likely to become vulnerable as soon as adversity kicks in. The importance of ensuring profitability remains unquestionable. This, however, does not imply that individuals and organisations pursue only the unitary goal of maximising profitability above anything else (Hart and Zingales, 2017). There is robust evidence that the profitability of negotiated deals is only conditionally a sign for successful business development. Profitability measures indicate results for a single period and do not capture the long-term value of the negotiated deals (Wibbens and Siggelkow, 2020). While profitability improvements affect the bottom line of a P&L immediately, business growth and economic development are rather time-consuming, e.g., an organisation’s business growth compounds value over time (Mass, 2005). This might explain the inherent propensity towards operational efficiency, and why individuals and organisations often neglect to negotiate lasting business deals that enhance market effectiveness (Mouzas, 2006; Mouzas and Bauer, 2022). Negotiating for sustainable value requires individuals and organisations to go the extra mile and make investments in long-term capital goods, including intangible assets, business relationships, reputation and innovation. Such investments in capital goods would trigger a new chain of negotiations with different stakeholders, e.g., new suppliers, new customers and new partners. Investments in long-term capital goods, such as technology, innovation, research, reputation and relationships, could pay off because they enhance sustainable growth prospects. However, they are immediately cost-effective, reducing the short-term profitability. For example, investments in intangible goods are costly and risky while their value today is uncertain. Investments in intangibles, such as building relationships to promote social and

4 Understanding strategic negotiations

environmental sustainability, corporate reputation and brands, are expensive, difficult to assess their net present value and have no immediate impact on profits. They might create, nonetheless, long-term competitive advantages and stimulate growth and development through synergies and the exploitation of new business opportunities, such as in the areas of renewable energy, de-carbonisation and digitisation. The intangible nature of these long-term assets, however, makes the prediction of future performance problematic resulting in underestimating the involved risk and harming current profitability. Negotiating profitable deals is necessary for generating liquidity needed to finance the business growth. While in stable contexts, organisations can rely on debt financing to promote profitable short-term deals, in periods of adversities, banks might become more reluctant to support unsustainable deals (Becker, Hege and Mella-Barral, 2020; Morrison and Saavedra, 2020). While unsustainable deals might hollow out organisations’ assets and result in ephemeral profitability, neglecting sustainability might limit the ability to recognise and seize business opportunities. On the other side, a long-term focus that involves investments in long-term assets, such as relationships, reputation and innovation, might just trigger risks reducing the current profitability of organisations. The challenge that negotiators face is to manage intertemporal trade-offs wisely achieving sustainable value, i.e., achieving sustainable profitability that is neither ephemeral nor results in unprofitable growth. 1.2 THE DICHOTOMY BETWEEN THE NEGOTIATOR AND THE ENVIRONMENT

Negotiators are often regarded as solitary entities confronting a hostile, faceless environment. The pioneering negotiation analysis of Howard Raiffa,1 for example, examines negotiators’ decisions in a given context. This view could be traced back to an open-system conceptualisation, which regards negotiation as an attempt to achieve a degree of harmony between the resources and activities of a negotiator, and the characteristics of the environment. As a consequence, there is an inherent bias towards a science of choice. As Williamson (2002) put it, the science of choice has become the dominant intellectual lens throughout the 20th century; thinking that individuals maximise their personal utility whilst firms maximise corporate profits. With deep roots in game theory and decision analysis (Neumann and Morgenstern, 1944; Nash, 1950; Luce

5 Understanding strategic negotiations

and Raiffa, 1957; Roth, 1985), practical negotiation theory, blended with simple but elegant mathematical models, provided a fruitful basis for the prevalence of a perceived dichotomy between the negotiator and the environment. Schelling2 criticised traditional game theorists for failing to recognise that negotiating parties actually achieve much better coordination when they are able to rely upon focal points, defined as intuitively perceived mutual expectations, shared appreciations, pre-occupations, obsessions and sensitivities to suggestions. In a series of experimental studies, Schelling (1960) asked individuals to imagine a situation in which they were unable to communicate but wanted to meet each other in New York. The majority of respondents chose Grand Central Station as their location because this place at that time provided a “focal point for each person’s expectation of what the other expects him to expect to be expected to do” (Schelling 1960, p. 57). Mehta, Starmer and Sugden (1994) repeated Schelling’s experimental investigation in a more formal setting with incentives in which they confirmed that actors are more successful at coordination if they rely on a set of prominent and salient constitutions. Deviations from game-theoretic approaches became frequent. Lax and Sebenius3 looked deeply into the subtleties of managerial work of business managers, investment bankers, diplomats, politicians, lawyers and entrepreneurs to develop the first pragmatic approach on bargaining for cooperation and competitive gain. Subsequent work of Lax and Sebenius (2002) characterises the prevalent view of negotiation involving interpersonal dynamics and tactics as ‘one-dimensional’. Instead Lax and Sebenius propose a ‘three-dimensional’ approach to negotiation. In addition to the first dimension of interpersonal dynamics, negotiations need to pay attention to the second dimension, the ‘deal-crafting’ which is about the effort to create economic value, as well as to the third dimension, the ‘set up’ which involves the structure of the negotiation and entrepreneurial moves by which negotiating parties try to change the game advantageously.4 The deviation from the game-theoretical approaches in negotiations was accompanied by significant advances in behavioural studies. Building on research in psychology and neuroscience, the search for optimal and rational solutions for value creation was broadened in the last three decades to encompass pre-conceptions and errors that people usually make when forming judgments and decisions,5 as well as social and

6 Understanding strategic negotiations

personal factors, such as perceptions and barriers to dispute resolution and behavioural decisions.6 Today’s advances in behavioural studies provide intriguing insights into behavioural biases and errors.7 Nonetheless, these advances in our understanding of how people behave do not resolve the problem of the dichotomy between the negotiator and the environment. Empirical findings, for example, provide evidence that people consistently overlook opportunities for wise trades, in other words, they consistently ignore the possibility to create value.8 What explains our propensity to ignore wise trades? Wise trades require a shift in negotiators’ selfperception from the ‘self as independent’ to the ‘self as part’ of a larger whole (Bigelow, 1992). We could, therefore, posit that wise trades are possible among actors who have the ability to see the broader picture and the connectedness of their actions. Existing behavioural studies advance our knowledge of the effects of psychological, social and cultural factors on interpersonal negotiations and draw our attention to negotiators’ bounded rationality9 and their systematic behavioural biases.10 Nevertheless, existing behavioural studies build on a science of atomistic choices; the idea that a negotiator makes decisions and crafts a negotiation strategy based on its own resources and skills in a given context. 1.3 THE ENVIRONMENT OF NEGOTIATIONS

How can we conceptualise the environment of negotiations? Negotiation is most commonly seen as dyadic, interpersonal processes of bargaining. For example, manufacturers are faced with a number of significant customers and suppliers with which they must negotiate in dyads numerous issues such as offering, prices, property rights and terms of payment. Each of these dyadic negotiations, however, does not take place in isolation (Figure 1.1). No negotiation episode is an isolated island but part of a complex relationship between businesses and each negotiation affects and is affected by other relationships and negotiations (Håkansson and Snehota, 1989; Håkansson and Ford, 2002). As every relationship of an individual negotiator is connected with other relationships, this connectivity forms a network structure that gives access to and affects a wide array of proximate and distant resources (Powell, 1990; Nohria and Eccles, 1992; Uzzi, 1997; Dyer and Singh, 1998). Consider, for example, financial negotiations between lenders and borrowers. Each

Negotiation

Manufacturers in competition

Manufacturer

Negotiation

Figure 1.1 Each dyadic negotiation affects further negotiations

Suppliers in Competition

Supplier

Wholesalers in competition

Wholesaler

Issues: Offerings, Prices, Property Rights, Terms of Payments

Negotiation

Retailers in competition

Retailer

8 Understanding strategic negotiations

negotiation between lenders and borrowers affects and is affected by other relationships and negotiations with investment banks, equity analysts, commercial and central banks as well as media and governmental bodies. Consider the case of negotiations in manufacturer-retailer networks. Mouzas and Ford (2003) describe negotiation episodes that occurred between two manufacturers and two retailers. Morningstar and Deluxe are both multinational manufacturers of cookies, crackers and other food and drinks while Amecon and Econ are two grocery retailers (Figure 1.2). Amecon is a leading retailer with a corporate policy of everyday low price and is a newcomer in many European countries. In contrast, Econ is a retailer with a focus on discount outlets and private labels with strong presence in many European countries. Following successful negotiations between retailer Amecon and manufacturer Deluxe, retailer Amecon appointed manufacturer Deluxe as Category Captain and both counterparts agreed to implement Efficient Consumer Response projects optimising product category, shelf design, trade and consumer promotion Manufacturer MORNINGSTAR

Manufacturer DELUXE

Retailer ECON

Retailer AMECON

Other Retailers Negotiated deals

Competition

Figure 1.2 Connectivity between firms forms a network structure

9 Understanding strategic negotiations

and pricing policy. Following this deal, manufacturer Morningstar requested a re-negotiation with retailer Amecon and confronted them with new business proposals that would change aspects of their existing business. Following challenging and long negotiations retailer, Amecon agreed with manufacturer Morningstar to implement permanent price offers combined with extra point-of-sale displays. The negotiated deals between Amecon and Morningstar had a significant impact on third relationships. Retailer Econ observed warily the negotiated deals between its rival retailer Amecon and manufacturer Morningstar. Through the negotiations with other manufacturers, retailer Econ learned that there was an excess production capacity among all manufacturers. Retailer Econ realised that because of the entry of retailer Amecon, the discount market had become more competitive. For example, price offers agreed in the negotiation between manufacturer Morningstar and retailer Amecon, made evident that retailer Econ could not ensure that its branded products were offered at the lowest possible price in the market. Retailer Econ responded with a request for a re-negotiation of the deal with Morningstar and requested the production of private labels by manufacturer Morningstar. Manufacturer Morningstar rejected the request with the rationale that we sell only our brands and “we do not produce for anybody else”. Overnight, retailer Econ de-listed all Morningstar’s brands from their outlets. Consequently, manufacturer Morningstar lost 30% of their revenues and the Morningstar’s brands were replaced by Econ’s own private labels produced by smaller manufacturers. Manufacturer Morningstar was surprised by the network effects as they had not expected this response. Morningstar’s management was replaced by a new management and the urgent need to recover lost revenues and profits provided the impetus for new negotiations with other retailers in their business network, such as convenience stores, petrol stations which are smaller retail outlets with 7–11 opening hours. The case above exemplifies that each negotiation does not take place in isolation. Each negotiation is not an enclosed event independent from other factors and players but rather embedded in a complex network. As such, a network perspective on negotiations helps us understand individual negotiation episodes. Considering the environment of negotiations as a network of interconnected relationships enables individuals and organisations to see clearly the constraints under which they operate, but at the same time allows them to unleash the power of options inherent in networks of

business relationships. In this case, the negotiated outcomes between retailer Amecon and manufacturer Deluxe provided the impetus to manufacturer Morningstar to re-negotiate deals with retailer Amecon. The negotiated deals affected a series of other seemingly unrelated business relations, such as the de-listing of Morningstar’s brands within discount retailer Econ and the start of new negotiations with convenience stores.

10 Understanding strategic negotiations

Key learning points from manufacturers and retailers • The environment of the negotiations evolves a network of interconnected negotiations. • Each dyadic negotiation is not an isolated episode but affects further negotiations. • Organisations collaborate with each other for joint gains and compete for advantage. • Negotiators need to think in advance about post-deal settlements and re-negotiations.

NOTES 1 Raiffa’s work on the art and science of negotiation provides a systematic gametheoretic analysis of decision making in negotiations, see Raiffa (1982). The art and science of negotiation. 2 Schelling’s ideas of ‘focal points’ and ‘credible commitments’ are among the most significant intellectual achievements in social sciences, see Schelling (1956, 1960). For a review of what we can learn from Schelling’s strategy of conflict, see Myerson (2009). Schelling’s approach to negotiation inspired a whole generation of scholars to study interaction patterns and identify behavioural biases. 3 See Lax and Sebenius (1986). The manager as negotiator. Bargaining for cooperation and competitive gain. 4 For a comprehensive analysis and illustrative cases see Lax and Sebenius (2006). 3-D Negotiation: Powerful tools to change the game in your most important deals. For a summary of 3-D negotiations, see Lax and Sebenius (2003). 3-D negotiation. Playing the whole game. 5 See Kahneman and Tversky (1979), Kahneman (1992, 2011), Bazerman (1983), Bazerman et al. (2000), Bazerman and Neale (1992), Thaler (1980, 2017), Thaler and Sunstein (2008) and Sunstein (2014, 2020). 6 See Fisher and Ury (1981), Mnookin (2003), Mnookin, Peppet and Tulumello (2000), Mnookin and Susskind (1999) and Thompson (2001).

11 Understanding strategic negotiations

7 See Laibson, Zeckhauser and Tversky (1998), Glaeser et al. (2000), McClure et al. (2004) and Sunstein (2020). 8 See Bazerman, Baron and Shonk (2001). You can’t enlarge the pie: Six barriers to effective government. 9 See Simon (1972). Theories of bounded rationality. Decision and organisation. 10 See Bazerman (1983). Negotiator judgment: A critical look at the rationality assumption. The work of Max Bazerman since the early 1980s has advanced our understanding of imperfections in how negotiators make decisions.

The challenges that negotiators face

Two

The challenges that negotiators face

12 The challenges that negotiators face

Overview of relevant themes • Uncertainty as a faceless topology • Embedded in networks • Creating and capturing sustainable value Think about the impact of these three relevant themes on companies. What are other specific challenges that companies face? Think about pandemics, climate change and economic crises. Consider the tremendous uncertainty that individuals and organisations face. Increasingly, individuals and organisations realise that they cannot address their challenges alone. No business is an isolated island. Individuals and organisations are embedded in networks. They need to negotiate with other individuals and organisations to address existing and latent customer needs and thus create and capture value in interconnected business relationships.

2.1 AN OVERVIEW OF THE CHALLENGES IN NEGOTIATIONS

The specific problems that negotiators face nowadays are manifold. They include the challenge of global diversity, technological change, the challenge of economic, social and environmental sustainability, building partnerships in a digital business landscape, alliances and continuing business relationships with customers, suppliers and third parties to create and capture sustainable value. The unified idea of all these problems is that negotiators are confronted with three strategic challenges simultaneously:

DOI: 10.4324/9781003001010-2

Challenge No 1: Uncertainty as a faceless topology Challenge No 2: Embedded in networks Challenge No 3: Creating and capturing value

The chapter discusses these three challenges to examine the driving forces of strategic negotiations. In a continuously changing business landscape, the three challenges have significant implications for global competition for resources and market shares and the need for negotiators to access the resources they need. The chapter concludes with the consequences for creating and capturing value.

The uncertainty that negotiators face is akin to a faceless topology, a topology in which we cannot ascribe any probabilities because we simply cannot foresee all possible eventualities that may occur. Who could have predicted the Covid-19 pandemic at the start of 2020? Who could have predicted the severity of the last economic crisis? Who could have predicted that the world would enter a period of sluggish economic growth, rising interest rates and high inflation? Negotiators are confronted with multiple unforeseen contingencies that may impact their actions. Perceptions of uncertainty vary (Duncan, 1972; Milliken, 1987) and negotiators cannot easily ascribe probabilities to unknown events; negotiators simply don’t know which events will occur and which events will affect them. Even if negotiators were able to predict some of these unforeseen events, they will have struggled to assess the consequences of these events. This raises the question “what makes it possible for negotiators to deal with the inherent uncertainty”? If the uncertainty that negotiators face is an amorphous topology, where we cannot assign probabilities; then, uncertainty differs from risk, where the outcomes of decisions are usually determined by wellestablished probability distributions. Hundred years ago, Frank Knight was among the first to differentiate between risk and uncertainty (Knight, 1921). Nowadays, more than ever, the question of what makes it possible to deal with ‘unknown unknowns’ is exceedingly relevant. Rapid technological changes in digitisation, automation and de-carbonisation of the economy, shifting economic, social and cultural conditions and ambiguous global rules, as well as rapid changes in the global competition for customers and market shares, make

13 The challenges that negotiators face

2.2 CHALLENGE NO 1: UNCERTAINTY AS A FACELESS TOPOLOGY

14 The challenges that negotiators face

individuals and organisations vulnerable. Yet it appears that negotiators are capable to turn the amorphous topology of uncertainty into a landscape of opportunity. Addressing the question of what makes negotiators capable to deal with uncertainty, we face the Hayekian problem that “knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”. The pervasive problem is, thus, “how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know” (Hayek, 1945, p. 519). The Hayekian problem appears inescapable and raises further questions: If the knowledge of circumstances does not exist in an integrated form, but as bits of incomplete and often contradictory knowledge (Hayek, 1945), then what enables negotiators to amalgamate the knowledge needed to deal with uncertainty? We need to look at the processes and the tools needed to detect the mechanisms that enable negotiators to deal with the inherent uncertainty. In this way, we can develop a stratified view of how negotiators are capable to resolve uncertainty gradually over time. 2.3 DEALING WITH UNCERTAINTY

Let us reconsider the Hayekian problem.1 One of the missing pieces of the puzzle of how negotiators are capable of dealing with the inherent uncertainty is their interconnectivity through business relationships. Through their business relationships, negotiators relate to each other to achieve three tasks: 1. Sense the needs of others. 2. Secure access to dispersed information, knowledge, skills and resources, which might reside with other actors. 3. And, transform themselves to address other actors’ needs profitably. The needs that can be identified through negotiations may be existing needs or latent needs. Existing needs are needs that are known to negotiators and they may have already been articulated. In contrast, latent needs need to be discovered and expressed. When it comes to existing needs, the critical issue for negotiators is to understand the expectations

EXISTING NEEDS

LATENT NEEDS

Current, Articulated

Future, Unarticulated

Understand Expectations

Create New Opportunities

Figure 2.1 Identifying existing and latent needs

2.4 CHALLENGE NO 2: EMBEDDED IN NETWORKS

Despite the obvious relevance of considering the environment of negotiations as a network of interconnected relationships and repeated calls for a new path that could turn negotiation into an organisational or corporate capability and not just as one more individual skill (Ertel, 1999; Movius and Susskind, 2009), existing literature on negotiations pays limited attention to the full impact of the embeddedness of negotiations in networks of business relationships. Many negotiation books tend to focus on individual skills and the examination of isolated dyadic interactions and ignore that negotiators are actually embedded in networks of interconnected relationships. Specifically, extant negotiation analysis proceeds with an “asymmetrically prescriptive/descriptive orientation” providing prescriptions of what an individual negotiator should do given a description of what others will actually do (Sebenius, 2009, p. 449). For example, negotiation analysis would suggest that negotiators would choose a deal when the deal is better than their best alternatives. What is the problem with the examination of isolated dyadic interactions and the provision of prescriptions of what an individual negotiator should do, given a description of their environment? Notwithstanding the validity of the assumption that the alternative is mutually exclusive to the negotiated agreement, negotiators’ environment is plausibly not a fixed parameter of what others will actually do but rather a continuously evolving environment.

15 The challenges that negotiators face

of others. When it comes to latent needs, the critical issue for negotiators is not to address existing expectations but to spell out future needs and thus create new opportunities (Figure 2.1).

16 The challenges that negotiators face

Our analysis in this book proceeds with the argument that the environment of negotiations can realistically be conceived as a network. Networks are nowadays ubiquitous; there are social networks, clubs, political, diplomatic, water networks or business networks. Networks are specific to a certain domain, industry or region; hence, each network has its own spatiotemporal relevance. As networks are ubiquitous, we need to look closer at the full impact of the embeddedness of actors, resources and activities in networks of business relationships. This embeddedness is the result of (1) the way actors control resources and activities and (2) the way actors combine and recombine activities and resources.2 The observation that negotiators are embedded in networks implies constraints in the form of interlocking interdependencies, as well as new potentials that derive from membership in networks. My interest in networks as an intellectual lens dates back three decades when I first started to investigate negotiations between manufacturers and retailers. Conducting research, I have been involved in the Industrial Marketing and Purchasing (IMP Group), which has carried out a large number of wide-ranging international studies into the management of complex business networks. The group’s approach3 is based on the importance for both researchers and managers of understanding complex business networks and the interaction between individually important buyers and sellers in continuing relationships. Consider, for example, the relationships between major suppliers and major customers, companies and trade unions or the relationships between sovereign nations. This approach had a profound impact on the way we think about the embeddedness of actors, resources and activities and prompted researchers to describe the characteristics of networks and analyse interaction processes.4 The idea of embeddedness in networks of interconnected relationships, allows us to examine some intriguing effects. Firstly, considering networks of relationships allows us to operate at a higher level of aggregation than focusing on negotiators’ individual choices. Thus, networks allow us to move beyond individual negotiators and isolated negotiation episodes and use them as a lens to examine whole webs of relationships, supply chains, industries or markets. Secondly, connecting different relationships within networks makes us more sensitive to transmission effects and developments over time. By looking at interconnected relationships, we examine how actors negotiate to carry out exchanges within relationships to access and transform resources and

that the cumulative effect of negotiations influences both the position in which the negotiator is located, as well as the network structure. 2.5 NEGOTIATING IN NETWORKS: WHY IT MATTERS

Negotiation is a process through which individuals or organisations embedded in networks of interconnected relationships aim to arrive at a jointly agreed action that confronts aspects of the status quo with new evolving possibilities, whilst conforming to other existing patterns or developments. The reality of negotiating in networks exhibits three distinct characteristics: 1) infinite connectivity, 2) constitutional pluralism and 3) ongoing consent.5 Let us examine these three characteristics and discuss their relevance.

17 The challenges that negotiators face

Infinite connectivity

How many actors are needed to build a network? Theoretically, there are an infinite number of actors in a network. According to Georg Simmel (1950), it is, however, the leap from the dyad to a triad that elevates us to a network level. Consider the connectivity within a family. With the birth of a child, a couple is elevated to a network level. In a triad, as the elementary form of a network, actors may be physical in form and readily visible. For example, the triad between a supplier, a customer and an intermediary technology or service provider. In a business landscape, however, the network consists not so much of the visible actors themselves, but of the relationships and interdependencies between actors. We may view markets as networks,6 yet network relationships and interdependencies within networks are more or less invisible.7 Consider the infinite connectivity in the networks in which financial institutions and investors are embedded. Each individual bank, insurance organisation or fund is connected in a web of business relationships with further actors that include households, retail banks, investment banks, hedge funds, rating agencies, companies, pension funds, sovereign wealth funds and charities. In these financial networks, negotiators may perform many different roles. For example, households are savers, hence, investors; but households are also borrowers. Investors such as households, companies, pension funds, sovereign wealth funds and charities are the providers of capital to be invested. Financial institutions, such as banks, investment banks, insurance companies and pension funds play a significant role across many different business networks as they provide a

18 The challenges that negotiators face

vital link between creditors and borrowers (Eccles and Crane, 1988). Because of the infinite connectivity within these investment networks, every negotiated deal is impacting further negotiations even in more distant relationships. The severe crisis that followed the mortgage defaults in the subprime household segment in 2007 and the wider liquidity shortage that emerged demonstrate how contagious network effects can become (Shiller, 2008; Akerlof and Shiller, 2009; Haldane, 2009). In individual negotiations between households and retail banks or retail banks and investment banks, the involved actors ignored the network effects of their agreements by over-weighting certain events, such as fixed income through the purchase of collateralised debt obligations, and under-weighting probable risks such as liquidity and property prices. The infinite connectivity in financial networks started to become apparent in 2007 when liquidity dried up following widespread mortgage defaults. It must be noted that investment bank managers initially believed that the liquidity problems were attributed to externalities and, thus, investment bank managers supposed they simply needed a better granularity of risk representation (Sims, 2001; Mouzas and Ford, 2011). Infinite connectivity imposes a serious challenge because it is impossible to determine the structure and actual boundaries of a business network. For example, it is impossible to capture the multiplicity of simultaneous, interconnected negotiations within a network. Moreover, it is virtually impossible to isolate the impact of any one action, reaction or re-reaction and assess its significance for the network as a whole or for individual actors. Constitutional pluralism

Negotiations today are much concerned with how different actors can bring about an exchange of complementary resources to create and appropriate value (Raiffa, 1982; Lax and Sebenius, 1986; Sebenius, 1992; Allred, 2000). Exchanges among different actors might be organised in various systems, such as price systems, associative systems, moral systems or communal systems (Biggart and Delbridge, 2004). Within a system of exchange, processes of how negotiating parties should proceed to an agreed exchange are usually based on multiple conventions and rules (Choi, 1993; Young, 1993). Negotiation among actors is a complex exchange process that does not occur in a vacuum. Negotiation is based on a constitutional pluralism, ranging from cultural customs and norms to explicit rules and laws that guide parties’ efforts to create an appropriate value.

19 The challenges that negotiators face

The constitutional pluralism has not been made up by individual negotiators for the achievement of a specific purpose. Instead, constitutional pluralism has evolved as people co-ordinated their initiatives and their responses to the initiatives of others. Schelling (1960) observed that people achieve much better coordination by drawing on focal points. These focal points are prominent and salient ways of mutually perceived expectations that embody preferences (Sudgen, 1995). Indeed, customs, norms, conventions and laws “have evolved because people who practiced them were more successful and displaced others” (Hayek, 1973, p. 18). A constitutional pluralism frames a conditional platform of understanding negotiations because it builds on actors’ central values as they interact with each other in networks of exchange relationships. In labour negotiations or collective bargaining, for example, central values are often expressed as ground rules (McKersie, 1991, 1994). In this way, central values draw upon bases of agreement that exist among actors and apply those “agreed-upon principles to resolve more controversial issues” (Strauss, 1999, p. 581). Nonetheless, agreed-upon principles may also limit the types of relationships in which the businesses are able to participate (Håkansson and Ford, 2002); they increase the “predictability of group members” behaviour and give expression to a group’s “central values” (Feldman, 1984, p. 47). In business negotiations, constitutional pluralism may refer to the nature of the rights that individual actors may possess, acquire or transfer. For example, negotiators may agree with each other on a number of issues, such as information sharing, work sharing, domain consensus, lobbying, price-fixing, competitive behaviour, reciprocity, co-operation etc., and their agreements are continuously re-defined or re-adjusted over time. Consider the example of framework contracts between negotiating parties. Framework contracts define the constitutional bases of how counterparts wish to work together (Mouzas and Ford, 2006). These forms of agreements can be found in all sorts of business alliances, strategic partnerships, collaborations or other give-and-take exchange processes between individuals or companies. The benefit of defining the constitutional bases of how negotiation counterparts intend to relate to each other is three-fold: First, constitutions reduce transaction costs, which are the costs in terms of time and effort to select, manage, oversee and verify single exchanges. Second, constitutions provide certainty regarding the conditions under which exchanges can take place. Third,

constitutions create legitimacy for subsequent processes of value creation and appropriation. Nonetheless, the legitimacy of constitutions in networks will be based upon the evolution of consent over time (Barnett, 1986). Constitutions themselves evolve over time in several ways, depending on how consent is sought. For example, consent may be sought by business leaders, policymakers and organisations through majority voting or broader processes of consultation of stakeholders and joint-problem solving (Susskind, 2006; Susskind, McKearnan and Thomas-Larmer, 1999; Islam and Susskind, 2012).

20 The challenges that negotiators face

Ongoing consent

It is a truth universally acknowledged, that the exchange surplus from the negotiation between counterparts, i.e., the mutual gain from the negotiation, is maximised only if the exchange involves an “actual meeting of minds” (Kronman and Posner, 1979, p. 5). In other words, mutual gains are maximised when the exchange is based on informed and voluntary consent (Susskind and Landry, 1991). Consent in networks of relationships is a moral component that treats negotiating parties as actors that bring certain entitlements in their relationships with others. By agreeing a deal, negotiating parties manifest their consent to the transfer of entitlements. In this way, the agreed deal is a commitment to an exchange between the negotiating parties and “consent is the criterion that distinguishes enforceable from unenforceable commitments” (Barnett, 1992, p. 1176). Notwithstanding the benefits of an actual meeting of minds, disagreements among negotiating parties appear to pervasive.8 Even if negotiating parties reach a consent, their consent requires an ongoing update over time (Mouzas and Ford, 2018). The following reasons might explain why ongoing consent appears to be relevant in today’s business landscape. Firstly, asymmetric information immanent in business creates significant barriers to identifying potential sources of value creation with certainty (Shamir, 2013). Secondly, ambiguity about counterparts’ values and vagueness about the spirit of the deal (Fortgang, Lax and Sebenius, 2003) in the anticipated agreement leave even competent negotiators in precarious and constantly changing positions. Thirdly, in today’s highly competitive environment, business deals may involve a mix of both negotiation and auction elements that make the process of interaction inherently complex.9 Fourthly, even if the deal has been agreed, unforeseen

2.6 CHALLENGE NO 3: CREATING AND CAPTURING VALUE

In general terms, the idea of ‘value’ refers to the perceived worth, often expressed in monetary terms of a set of psychological, functional or economic benefits, received to address specific challenges, in exchange for price paid or sacrifices made, taking into consideration alternative competitive offerings and prices (Anderson and Narus, 1999). Hence, the determinants of value are three-fold: 1) perceptions, 2) exchanges and 3) competition. Firstly, perceptions imply that value is always determined by the beneficiary (Vargo and Lusch, 2008, p. 8). The value to a negotiator from a product or service is, therefore, not a characteristic of what is involved in the product, service but is determined by the perceived worth of benefits and sacrifices made. Within a negotiated business landscape, the value to each negotiator of a product or service is that negotiator’s interpretation of the worth of the product or service’s contribution towards coping with one or more specific challenges of the negotiator, as identified by that negotiator (Ford and Mouzas, 2013). In industrial markets, offerings that move beyond products or services to address

21 The challenges that negotiators face

contingencies, such as external circumstances, bankruptcies, strikes, wars or natural disasters may interrupt the continuation of business performance. Managers may subsequently receive new competitive offers from other parties or may need to re-consider the exclusivity of their supply or subcontracting policies. As managers continuously negotiate with themselves as they negotiate with others, their reservation values change over time (Susskind, 2011). Negotiators know that all the above reasons could force them to substantially re-negotiate their deal (Segal, 1999). For example, in manufacturer-retailer networks, counterparts arrange quarterly meetings in which they review their business performance and agree upon joint action. Moreover, every year between September and December, manufacturers and retailers enter into a process of re-negotiating their agreements and updating their consent. Consent might require an update because of new assignments or requests from counterparts or because of the transfer of property rights, the adjustment of volumes and prices or changes to a payment schedule. A counterpart may even decide to terminate an existing business and a renewal of consent may not be possible because of irreconcilable differences between the parties.

22 The challenges that negotiators face

one or more specific challenges is known as systems selling strategy (Mattsson, 1973). Hence, the value as the ‘perceived worth’ will be different for each negotiator, and in all cases that value is time and problem-specific. Secondly, value is not produced but comes about through exchange processes of give-and-take. This dialectic nature of value poses great difficulty to negotiating parties. In a business landscape marked by negotiations between parties in continuing relationships, some of the value accruing to actors may be the outcome of side-effects of negotiations in which they were not involved and some of that value could be incidental, unintended or against the wishes of some or all of those involved. Commonly, negotiating parties agree formally or informally about their exchange, thus negotiators agree about the costs and benefits that would accrue to them and when they would accrue (Mnookin, Peppet and Tulumello, 2000). For example, an engineering company may have agreed with a manufacturer and a retailer that they would work on the development of a package for semi-liquid food that would give five days of shelf-life and that was microwavable (Ford and Mouzas, 2013). In return, the manufacturer and the retailer may have agreed that they would transfer food technologists to the engineering company to assist in the work, provide sample foods and prototyping facilities and if the development was successful, they would pay a lumpsum fee for the development and a licence fee for subsequent usage. It is possible that some of the actual service provided and received in this development and its timing would approximate to agreements made by the actors beforehand and to their expectations of themselves and their counterparts. Unforeseen contingencies might kick in and impede the implementation of the negotiated agreement. The delivery of services or products may have been late, cooperation may not have been forthcoming, adaptations may not have been fully carried through, payment may have been less than expected. In contrast, technical assistance could have produced greater than anticipated cost savings or a cooperative development could have enhanced an actor’s relationship with a third party (Ford and Mouzas, 2013). Thirdly, competitive offerings and prices may change negotiators’ perceptions of value. Negotiators may attempt to analyse the negotiated agreement for themselves or their counterparts in terms of either its general or specific value. For example, the recipient of

2.7 THE ROLE OF INTERESTS AND ENTITLEMENTS

Interests and entitlements vary among negotiating parties. Negotiators should consider inherent differences in interests and entitlements as the raw materials of creating and capturing value. Interests refer to what negotiators, e.g., managers, policymakers, organisations or other actors care about. The interests that actors pursue will affect actors’ perceptions. Negotiators pursue interests to achieve ends determined by themselves. While actors pursue a variety of interests, our society has decided that some interests need to be protected as entitlements. The unified idea of entitlements is that each person is entitled to a bundle of rights. Thus, entitlements specify what a person may possess, acquire or transfer to another person. In this way, entitlements establish a connection between actors and resources; they specify actors’ rights to resources. Interests and entitlements can help negotiators to

23 The challenges that negotiators face

service in the form of payment may note its contribution to the general financial well-being of the company. But the same recipient may have a very different perception of the same payment if she considers alternative competitive offerings and prices. For example, for a company and early payment or advance payment might be important in coping with a short-term cash flow problem and alternative competitive offerings might offer payments that address the company’s cash flow needs. Thus, negotiators’ perceptions will vary and these different perceptions will be important inputs into an evolving negotiation process. The existence of different perceptions among business people explains why profitable business opportunities may exist whenever prices fail to reflect the value of a resource’s specific use (Denrell, Fang and Winter, 2003). The challenge of creating and capturing value is inextricably linked with negotiators’ perceived interests and entitlements. As networks are characterised by a heterogeneity of actors, resources and activities (Håkansson, Ford, Gadde and Snehota, 2009), negotiating parties need the courage to recognise different interests and entitlements and move on to exchanges that create mutual gains beyond and above competitive offerings. While different interests among negotiating parties are the means to create value, i.e., mutual gains that enlarge the pie; different entitlements are the means to capture value, i.e., making claims about how the pie should be divided among counterparts.

24 The challenges that negotiators face

understand the levers by which they can create and capture value. While interests are the means for creating value, entitlements are the means of capturing value i.e., claiming value. As interests and entitlements are the levers by which negotiators create and capture the value, it is worth to look at their distinct conceptual dimensions in terms of space, time, unit of analysis, functionality and outcomes. Interests refer to what negotiators i.e., individuals and organisations care about. There is a diversity of interests among negotiators. Interests might be individual or collective.10 The difference between individual and collective interests is demonstrated vividly in the tragedy of the commons,11 where herders acting in accordance to their own interests, kept adding animals to their herds and eventually overgrazed and depleted their common pasture. Table 2.1 provides an overview of the conceptual dimensions of interests. The idea of interests circumscribes perceptions of improving life in the future (Habermas, 2015; Kelman, 2006; Senger, 2002). Yet it appears that parties’ interests tend to remain implicit and obscured in negotiations. Negotiators need to work diligently to identify the hidden interests of others and they need to look at a broader set of interests, such as ethics, sustainability and welfare (Brennan and Jaworski, 2015). Table 2.1 Interests: The means of creating value Dimensions

Characteristics of interests

Space

Diversity of preferences Senger, 2002; Medlin, 2006, Habermas, 2015 Future-oriented Howden, 2020; Kelman, 2006 Self-interests versus collective interests Habermas, 2015; Hardin 1968; Munksgaard, Johnsen and Patterson, 2015; Medlin, 2006 Sensemaking Ford and Redwood, 2005; Hahn et al., 2014; Colville and Pye, 2010; Weick, 1993 Creating value Anderson, 1995; Lepak, Smith and Taylor, 2007; Wagner et al., 2010

Time Unit of analysis

Functionality

Outcome

Table 2.2 Entitlements: The means of claiming value Conceptual dimensions Entitlements Space

Time Unit of analysis Functionality

Outcome

Resource heterogeneity Hoffman and Spitzer, 1985; Leach et al., 1999; Sen, 1984 Past-oriented Bromley, 1992; Demsetz, 2002 Bundle of rights Hohfeld, 1913; Calabresi and Malamed, 1972 Capabilities, order, justice Nussbaum, 2003; Sen, 1984, 2016; Hoffman and Spitzer, 1985 Claiming value Lepak, Smith and Taylor, 2007; Wagner et al., 2010

25 The challenges that negotiators face

Entitlements specify the rights that a person may possess, acquire or transfer to others. In this way, entitlements establish a connection between actors and resources; they specify actors’ rights over resources (Bromley, 1992; Coase, 1960; Morris, 1992). The resources that negotiators need to solve their problems are heterogeneous and they are not distributed evenly. Entitlements to resources specify the rights that negotiators may possess, as well as acquire or transfer to others by joint consent (Barnett, 1986; Mouzas and Ford, 2018). Entitlements are not restricted to physical resources. Entitlements include market-based assets, e.g., relationships, reputations and skills (Srivastava, Shervani and Fahey, 1998), as well as knowledge-based resources, e.g., intellectual property, know-how and information (Mouzas and Ford, 2012; Varadarajan, 2020). Some of these entitlements, e.g., knowledge or design, may be seen by some negotiators as ‘non-rival goods’ (Cornes and Sandler, 1996). The non-rivalry of these entitlements indicates that the use of knowledge-based resources by one party does not limit their use by another. Table 2.2 provides an overview of the conceptual dimensions of entitlements.

26 The challenges that negotiators face

Entitlements may exist in various forms. The work of Hohfeld (1913) was fundamental, as he conceptualised entitlements as rights, privileges, powers and immunities. In the Hohfeldian framework of entitlements, to have a right means that others have a corresponding duty. Building on Hohfeld (1913), previous research conceptualised entitlements as a bundle of rights protected by property rules, liability rules and inalienable rules (Calabresi and Malamed, 1972). Hence, property rights are an integrative part of negotiators’ entitlements.12 The right to own a property came into being when people combined their labour with some elements of common resources, for example, the use of land for agriculture and farming. Subsequent research work has expanded the application of entitlements to distributive justice (Hoffman and Spitzer, 1985), environmental goods(Leach, Mearns and Scoones, 1999), fairness (Kahneman, Knetsch and Thaler, 1986) and capabilities (Nussbaum, 2003; Sen, 1984, 2016). For example, individuals and organisations may be entitled to and claim environmental goods or services that are instrumental to their well-being (Leach, Mearns and Scoones, 1999). Community standards of fairness are another example of entitlements in the market (Kahneman et al., 1986). Similarly, entitlements may include capabilities (Nussbaum, 2003) that comprise what an actor can “command in a society using the totality of rights and opportunities that he or she faces” (Sen, 1984, p. 497). In this way, entitlements constitute the currency that negotiators bring into exchange relationships with others and it is this currency that enables negotiators to claim value (Lepak, Smith and Taylor, 2007; Wagner, Eggert and Lindemann, 2010). The idea of entitlements helps negotiators to develop a pragmatic approach to strategic negotiations because entitlements move the idea of negotiation beyond the sphere of dialogues; entitlements substantiate the process of negotiation to include the resources that actors are entitled to and explain why negotiators are capable to address problems and resolve disputes and simultaneously claim value.

Case study: The laundry and cleaning case The laundry and cleaning case Overview of relevant themes Sustainability Environment-friendly products Competition and collaboration Manufacturers and retailers Cost structure and profitability Private labels Networks of exchange relationships Supply chains

Following disappointing years, manufacturer Alpha is determined to incorporate the environmental variable in all new product development plans. To support new sustainable products, manufacturer Alpha asks for the co-operation of their customer Engel. Competitor Beta, the market leader in laundry and cleaning products is considering how to respond.

2.8 THE LAUNDRY AND CLEANING CASE

Manufacturer Alpha and Manufacturer Beta are multinational producers of a wide range of fast-moving consumer goods (FMCGs) and successful manufacturers in the area of laundry and cleaning products. Retailer Engel operates large hypermarkets, supermarkets and local convenience shops. Retailer Econ is a discount retailer focusing on smaller supermarkets and reduced assortment at highly competitive prices. This manufacturer-retailer network (see Figure 2.2) is a significant part of social, cultural and economic life which cannot be discussed without considering the multiplicity of dynamics affecting the economy, population and households. Population trends, migration, income, legislation, technology and consumers’ buying behaviour define the contingencies that affect manufacturers’ and retailers’ policies. Recent developments in

27 The challenges that negotiators face

• • • • • • • •

Manufacturer Beta

cooperation

Manufacturer Alpha

competition

28 The challenges that negotiators face

Retailer Engel

Retailer Econ

Figure 2.2 Manufacturer-retailer network

the economy and society and environment are creating a new competitive framework. Retailer Engel’s current market share of approximately 20% is declining. On the other hand, discount stores are increasingly gaining market shares. Retailers such as Engel and Econ are developing retailer brands (private labels) that are becoming more popular because of their significant price advantage. These private labels are property that retailers own. Nonetheless, retailers have no manufacturing, so they need to find a manufacturer who would agree to produce for their private labels. On the other hand, manufacturers such as Alpha and Beta are developing and marketing strong full-price global brands. Consumers’ increasing leisure time and leisure spending combined with shorter household and time budgets speed up the trend towards discount stores, hypermarkets and retailer brands. Consumers have to generate time and budget savings especially in the product categories of household, laundry and cleaning and food and drinks to finance their travel and leisure spending. At the same time, increasing leisure spending and shorter time budgets set new demands for convenience products and services in convenience stores, home-services, petrol stations, online shopping (e-commerce) and other new channels that compete with the traditional retailers. More recently in 2020, the Covid-19

29 The challenges that negotiators face

pandemic boosted retailers’ revenues in both supermarket outlets as well as online shopping. The global competitive framework requires manufacturers and retailers to work together and make strategic deals that address existing and latent consumer needs and improve operating margins. One area where collaboration between manufacturers and retailers is needed to take advantage of new opportunities is environmental sustainability. Greenhouse gases, such as carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) have been increasing exponentially since the culmination of the Industrial Revolution seriously threatening sustainable development. Simultaneously, the world population has grown from 1.2 billion in 1850 to 7.8 billion in 2019. Environmental sustainability issues are widely discussed in society and climate change issues are the subject of intense negotiations amongst political parties, authorities, environmental organisations, consumers, manufacturers and the retail trade. For example, the Paris Agreement on climate change which was ratified in 2016 by the UN, EU and the UK parliament is an extraordinary achievement that aims to hold global temperature rises well below 2 °C above those of pre-industrial times, pursue efforts to limit the temperature increase to 1.5 °C and make the global economy carbon neutral in the second half of the 21st century. The Intergovernmental Panel on Climate Change (IPCG) and 24th COP (Conference of the Parties) in Katowice in 2018 have issued the most extensive warnings yet on the risks of rising global temperatures by 1.5 Celsius. Rising temperatures create a pandemonium of risks and vulnerabilities evidenced in the intensification of hurricanes, droughts, wildfires, floods and rising sea levels and the subsequent effects on food security, safety, health and well-being of present and future generations. Consequently, humans’ liveability requires urgent, large-scale changes and initiatives from companies, policymakers and consumers. A series of consumer research studies have confirmed that consumers increasingly expect concrete initiatives and solutions for environmental sustainability problems from both manufacturers and retailers.

30 The challenges that negotiators face

AC Nielsen and GfK’s Market Research in 2019 has revealed that environmentally conscious consumers buy more frequently from retailers assuming environmental responsibility but that these consumers are not willing to pay a higher price for environmentallyfriendly products. Despite the multi-level complexity of climate change impact, evidenced in storms, droughts, floods, rising sea levels and subsequent effects on food security, socio-economic dislocation, conflicts, health and well-being, the common discourse tends to focus on behavioural issues, while the equivocality of the impact of concrete activities and eco-products on turnover, cost and profit is high. The information deficit and insecurity among decision-makers and authorities hinders green investments. On the other hand, there is a deficit in the credibility of environmental initiatives from a consumers’ perspective. Consumer research indicates increasing uncertainty concerning the appraisal of the environmental quality of products. This uncertainty often leads to the rejection of substantial initiatives and environmental innovations. One of the most frequently encountered phenomena are deceptive claims by manufacturers and retailers such as “environmental friendliness”, a rather vague term- “recyclable packaging”, -even when no recycling infrastructure exists. Beyond environmental concerns, consumers are increasingly concerned with health and well-being, which results in increasing demand for healthier or natural products. This trend and the consequent product proliferation in the lights and the biological and natural segment is reflected in the AC Nielsen retail panel data which are provided to retailers and manufacturers on a bimonthly basis. Disappointing years for manufacturer Alpha

The past years were disappointing years for manufacturer Alpha in the detergent business. Alpha’s market share at ca 30% was still high but increasingly declining. Proto, the flagship brand of manufacturer Alpha had been positioned as the detergent for “outstanding stain removal in the 1st wash”; nonetheless, Proto had seen shipments (sale deliveries) decrease and market share decline, while Seco, manufacturer Beta’s major brand, was leading the market. Manufacturer Alpha judged this development to be traceable to the initial absence of an adequate marketing mix, especially in the areas of product development, advertising

31 The challenges that negotiators face

strategy and to the lack of product ideas able to generate strong consumer interest and trade support. In search of the big product idea, manufacturer Alpha decided to address the environmentally-conscious consumers to build up the declining user-base of the brand Proto. To check the attractiveness of this idea, manufacturer Alpha invested heavily in ad hoc qualitative market research. A new consumer research study confirmed that environmentally conscious consumers were even prepared to pay a higher price for environmentally-friendly products, but they increasingly expected concrete initiatives and solutions for environmental problems and rejected empty promises. The consumer research results urged manufacturer Alpha to place greater emphasis on research and development and to take the strategic decision to incorporate the environmental variable into all packaging and product development projects. The company took a holistic perspective and reassessed the environmental impact of the life cycle of packaging, distribution, usage, disposal, materials as well as manufacturing. In order to support the new product initiative in retailing, manufacturer Alpha asked for the co-operation of their key account (their major customer) retailer Engel. The choice to cooperate with retailer Engel was not random. Retailer Engel’s environmental concerns date back to some decades ago when retailer Engel had seized the initiative to exercise enormous pressure on all detergent manufacturers to produce phosphatefree detergents. Retailer Engel is determined to develop a positive, environmentally-friendly profile among consumers. Retailer Engel had invited all manufacturers to help in reducing the increased waste of packaging. The response of manufacturer Alpha to this invitation had been almost immediate. Manufacturer Alpha was determined to resume business growth after consecutive years of decline. The past years saw the introduction of Proto Ultra as a line extension behind massive investments to rebuild and rejuvenate the steadily declining user base and the vigorous defence of the mother brand Proto, as the core of the detergent business, via significant product upgrades. Alpha estimated that if all households would use compact detergents like Proto Ultra, 170,000 t less detergent and less packaging would be released into the environment. Moreover,

32 The challenges that negotiators face

manufacturer Alpha increased the support for Proto liquid and launched an unperfumed line extension. Lastly, Alpha launched refill packs for all its products as a response to increasing environmental concerns from consumers and government legislation on the subject. Manufacturer Alpha had not attached its arguments to the environmental issue only. Alpha’s key account managers introduced the new product range to retailers by using the following argumentation: Firstly, the turnover per square metre of the new products would be higher resulting in higher space profitability for the retailers. Secondly, according to the analysis of off-take data from Engel’s scanner terminals, consumers that bought Proto Ultra purchased a basket of other products that was worth £221, while consumers of conventional detergents purchased a basket that was worth £109. The retailers responded in a positive way to the arguments of manufacturer Alpha and accepted the new product range. Key account retailer Engel supported all manufacturer Alpha’s initiatives with enthusiasm and ran intensive promotional programmes at the point of sale. All launches and relaunches were inextricably linked with trade and promotion allowances and made a good opportunity for retailer Engel to increase the profitability of the detergent category. According to retailer Engel, manufacturer Alpha’s initiatives were exercising pressure on manufacturer Beta, making the business more competitive, a necessary condition for price reductions. Furthermore, price reductions helped retailer Engel in its competition against other retail outlets, especially against discount retailers such Econ who sold cheap, conventional detergents. Manufacturer Beta defends market leadership

Alpha’s main competitor, manufacturer Beta, kept a close eye on the co-operation between manufacturer Alpha and retailer Engel. Manufacturer Beta has been a market leader with a total share of approximately 33%. Beta’s most important brand in the laundry and cleaning category was Seco. It was not only the leading detergent with a large volume and profit base; it was also the brand with the greatest tradition, a brand that was a legend and

33 The challenges that negotiators face

symbol for the company. Seco was positioned as the best detergent that cares for and protects the colour of quality textiles. Here lay the difference to the main competitor. Manufacturer Alpha’s Proto was a detergent that was positioned as a highquality detergent that removes dirt from textiles. Various consumer research results confirmed the fact that consumers had developed their brand perception according to this differentiated positioning. According to an internal study, consumers appraised the protection of their fabrics as being of equal importance as the removal of dirt. On a scale from 1 (less important) to 6 (very important) they regarded the “removal of dirt” as equal to 5.6 and the “protection of the colour” of fabrics as equal to 5.5; the “looking as new” equalled 5.3, the “price” equalled 5.2 and the “pleasant perfume” equalled 5.1. If they had very dirty clothes and wanted to remove the dirt, they washed at high temperatures with Alpha’s brand Proto and if they had expensive or quality textiles they were careful and washed with Beta’s brand Seco at low temperatures. The last few years were years of prosperity for manufacturer Beta and its leading brand Seco. The growing consumption of synthetic textiles shifted the laundries from high temperatures to low temperatures. Consumers increasingly washed at low temperatures not only to protect their expensive fabrics but also because they thought that this was environmentally-conscious behaviour. All trends were in favour of Beta’s brand Seco. The brand managers of Seco were also among the most qualified and successful managers in the company. They were recruited as management trainees from the best universities and were trained in the Marketing of Fast-moving Consumer Goods. The successful initiatives of manufacturer Alpha were first interpreted by manufacturer Beta as desperate moves to regain market share. However, manufacturer Alpha’s positive sales results after each product launch caused anxiety and alertness within manufacturer Beta. The new situation was discussed frequently and intensively among the managers of the company. No one from Beta’s brand managers wanted a race in launches and relaunches because they were afraid that such a race would cause cannibalisation among Seco’s brand styles. However, they felt that they were forced to respond because the risk of losing market

34 The challenges that negotiators face

leadership was high and unacceptable. Beta’s brand managers said that the risk of cannibalisation among Beta’s products in case of response was more affordable than the risk of losing their market share in case of inertia. In these discussions, Beta’s top management emphasised that every response decision should consider three fundamental needs. Firstly, came the need to keep the distinctiveness and uniqueness of Seco’s brand positioning. Beta’s top management argued that they were still the market leaders because the brand Seco was a detergent that offered the best protection of fabrics in terms of colours and quality. Secondly, came the need to respond if it was proven that competitor Alpha was gaining a share of the market. Thirdly, there was a need for real product innovation. Finally, manufacturer Beta responded with an aggressive “metoo” product line strategy and two innovations, staying very close to the positioning dogma. Beta introduced a number of new products such as: • Seco Supra, a compact detergent, as a response to Proto Ultra. • Seco Supra colour as an innovation in the category of compact detergents • Refill packs were introduced for all products in the category • Seco Mega-pearls as an innovation that claimed superior washing performance. Manufacturer Beta did not reduce the price of the brand Seco, despite enormous competitive pressures. Consumer prices in retail outlets were stable just below the £3.20/kg barrier. Manufacturer Beta’s response brought more market share, but the incremental share and volume that came out of these line extensions were generated at a high price. The new product strategy was very expensive in terms of marketing budgets to advertise the products to consumers and trade allowances to obtain a listing from retailers. Manufacturer Beta’s main success was the Seco mega-pearls. The line extension of Seco has introduced a major innovation. Beta was the only manufacturer who had the extruder technology. This allowed them to create a super-compact detergent with visible white pearls instead of powder. Retailer Engel supported the launch of the new detergent technology enthusiastically. With the help of this line

Retailer Engel’s promotes private labels

Engel is an important retailer with a focus on large hypermarkets, supermarkets and recently also on in convenience stores called Engel’s Local which operate 7 am to 11 pm. Engel’s competitors

35 The challenges that negotiators face

extension, the brand Seco increased its market share by 10%. The share of Seco Mega-pearls in the Seco family increased to 15%. Beta’s management traced back their success to the fulfilment of consumer needs and to the close adherence to the suggestion to respect positioning, response and innovation. The success of the mega-pearls innovation prompted the company to use the new technology in other brand styles of the brand Seco, like the colour version, and introduce it into other detergent brands. Manufacturer Alpha responded to the innovation of megapearls. Manufacturer Alpha’s response aimed at generating further consumer interest and trade support. The competitiveness of this strategy lay in consumer convenience (less weight/more performance), environmental protection (less waste) and increased direct product profitability (less space, fewer handling costs). The new battlefield for both manufacturers Alpha and Beta was in the area of bio and non-bio detergents. The basic difference between bio and non-bio detergents is that bio detergents contain enzymes that are very effective at cleaning stains. These enzymes were very useful for both powder detergents and liquid detergents, as they serve as a booster technology, designed to break down protein, starches and fat which are usually found in stains. Beta emphasised in their communication to consumers that enzymes work also at lower temperatures. Therefore, bio detergents are very effective at more temperatures (30–50 °C) than non-bio detergents. That means that bio detergents may work better for families or for consumers who wish to wash quickly at lower temperatures. On the other hand, many consumers in the United Kingdom prefer to use a non-bio, especially if they feel that they have sensitive skin. Non-bio detergents contain no enzymes. Therefore, there is a reduced risk of irritating sensitive skin. Many parents like to use non-bio products for their families, especially when washing their baby’s clothing. For this reason, Beta worked with the British Skin Foundation to conduct research and promoted vigorously Seco Non-Bio and Comfort Pure.

36 The challenges that negotiators face

are retailers with a clear and consistent focus on discount outlets and retailer brands. Retailer Engel’s objective is to regain market share by attracting price-sensitive consumers to Engel’s stores. Nonetheless, retailer Engel is also aware of consumer research showing that environmentally conscious consumers bought detergents more frequently from retailer Engel (61%) than from the discount retailers (11%). Moreover, a significant proportion of environmentally conscious consumers bought their detergents from speciality ecologically friendly shops (27%). Retailer Engel recognised that if the retail group wanted to be successful in such a competitive marketplace, then it needed to cooperate with a capable manufacturer and produce private labels with the newest technology. Engel’s category managers examined three options. A co-operation with manufacturer Alpha as a first option was preferred but manufacturer Alpha claimed that they did not produce retailer brands on principle. Manufacturer Beta was examined as the other option. Manufacturer Beta used retailer brands as a key to develop business with key account retailers. The objective behind this involvement was not to exploit spare production capacity. Manufacturer Beta had seen its involvement in retailer brands as a necessary condition to build up good-will, and to intensify ties and co-operation with retailers, which in turn strengthened the position of its full-price brands. Nonetheless, managers within manufacturer Beta were increasingly reluctant to engage in private labels because they felt that retailers attempted to turn manufacturers into mere production subcontractors of retail outlets. Manufacturer Beta had a very strong position with its full-price brands like Seco and any launch of private labels will seriously damage the profitability in the marketplace. Retailer Engel formulated a two-fold objective: Firstly, to increase profitability in categories such as laundry and cleaning where trade margins were squeezed. Secondly, keep consumers away from discount retailers such as Econ. Retailer Engel realised that they needed to negotiate strategic deals with both manufacturers Alpha and Beta. Retailer Econ’s strategic positioning resulted in continuous and breath-taking growth during the previous decade. Retailer Econ observed rapid developments in the product category of laundry and cleaning. The great number of new innovative products, launches and relaunches from leading manufacturers worried the management of the company who did not want to lag behind

Manufacturer-retailer negotiations

Retailers such as Engel and Econ reach millions of consumers who demand consumer goods to satisfy their basic needs. To do so, retailers need manufacturers’ resources and expertise in the production and marketing of strong consumer brands in specific product categories such as laundry and cleaning products. Consumers are not merely the final stage in the manufacturer-retailer network. Their buying behaviour, which is influenced by socioeconomic and cultural trends, provides the primary stimulus of negotiation and re-negotiation among manufacturers and retailers. A manufacturerretailer network is, therefore, characterised by the high degree of connectivity between manufacturers and retailers. Manufacturers’ ability to supply retailers and retailers’ ability to supply consumers does not rely entirely on their own internal resources. The relationship of manufacturers and retailers with third-party

37 The challenges that negotiators face

developments. Retailer Econ was also aware of consumer research showing that environmentally conscious consumers bought detergents more frequently from retailer Engel (21%) than from the discounter Aldi (11%), yet a significant proportion of environmentally conscious consumers bought their detergents from speciality shops (17%). Econ recognised that if the retail group wanted to be successful in such a dynamic environment as the laundry and cleaning business, then it needed to co-operate with a capable manufacturer, who would produce retailer brands (private labels) with the newest technology. Econ considers a possible co-operation with manufacturer Alpha or Beta as an attractive option; nonetheless, Alpha and Beta are rather reluctant. Manufacturers Alpha and Beta did not produce private labels for others on principle. Some smaller manufacturers with weak brands are more open to embrace the idea of producing private labels for retailers; their rationale is to exploit spare production capacity and create goodwill in their cooperation with retailers that strengthen ties with retailers, which in turn might strengthen the distribution of their full-price brands. Econ chose to limit fullprice manufacturer brands in order to promote strong retailer brands. For this reason, manufacturers with strong global brands feel that retailer Econ attempts to turn manufacturers into mere production subcontractors of retail outlets.

38 The challenges that negotiators face

suppliers, logistics companies, banks, insurance companies, consulting agencies and advertising agencies can be seen as external resources that enable them to conduct their business. Manufacturers must negotiate with retailers on issues such as shelf space, pricing and promotional terms. In these negotiations, retailers, such as Engel and Econ are more concerned with the competitiveness of their outlets, the development of a distinct image among consumers, the growth of their own retailer brands and the profitability of their businesses. Regular rounds of price increases create a significant friction between manufacturers and retailers. The leading manufacturer will usually initiate a price increase at the start of the year, which will often be followed by other manufacturers of similarly branded products. Manufacturers often announce their price increases unilaterally by issuing a new or revised price list. In turn, Engel is concerned with the increasing cost of goods bought from manufacturers because they have to pass on the higher prices to consumers. This prompts retailers to introduce “variable pricing” in which final consumer prices change continuously according to costs and encourages them to launch their own retailer brands produced by manufacturers. The breakdown per kg for a typical laundry and cleaning product.* Cost structure Raw materials Packaging Labour Distribution Advertising, promotion Depreciation and overhead Manufacturers’ profit margin Wholesale price to retailers Retailers’ profit margin Retail price to consumers

£0.42 £0.19 £0.52 £0.14 £0.75 £0.40 £0.40 £2.82 £0.38 £3.20

*Figures have been altered to preserve confidentiality of data.

Private labels (retailer brands) not only offer lower prices to consumers; they also offer an improved margin to retailers. Therefore, retailer Engel shows resistance towards the increasingly higher prices of branded products of Alpha and Beta; and enthusiastically intends to promote private labels (retailer brands) by fostering cooperation with manufacturers. Despite this friction, manufacturers and retailers

• • • •

Manufacturers over-produce to achieve economies of scale. Manufacturers keep safety stocks in their warehouses. Manufacturers follow ambitious marketing and sales plans. Retailers order ambitious purchasing volumes to achieve better conditions. • Manufacturers load the distributors. • Distributors load the retail outlets. • Retail outlets keep either excessive stock or run out of stock. Two inter-relating symptoms appear in the above traditional business process. The first symptom is distorted information from one end of the supply chain to the other and the second is a resulting average stock inventory in the whole supply chain. The use of information technology is regarded by manufacturers and retailers as a major step towards managing the increasing data flow from the consumer’s decision up to merchandising and production planning. It tightens the interlinkage between retailers and manufacturers and contributes to a reduction in slack and administrative costs. Furthermore, manufacturers and retailers need to intensify their dialogue by engaging in several rounds of negotiations to identify opportunities and craft a jointly decided action.

39 The challenges that negotiators face

recognise their interdependence and seek strategic deals that pave the way towards a jointly decided strategy. Despite the recent growth of supermarket sales because of the Covid-19 pandemic, manufacturers and retailers have experienced a long-term stagnation. This volume growth limitation revealed an intrinsic and chronic profitability weakness. Within the laundry and cleaning product category, the average trade margin for retailers is at 11.9%; while for manufacturers their trade margin is at 14.2%. There is a potential to improve operational efficiency but simultaneously there is a competitive pressure to keep prices low. Manufacturers and retailers need to think about innovative products and services that address the sustainability challenge effectively. A lot of the traditional activities within the supply chain lack innovation as they are characterised by a tendency to push the product to the end of the supply chain, to the consumer ( Figure 2.3). The push effect is evident at present by a series of phenomena in the supply chain:

Sales

Marketing

Figure 2.3 The supply chain

Distribution

Production

Manufacturer

Wholesale

Purchasing

Retailer

Sales

Retail Consumer

2.9 LAUNDRY & CLEANING: TASKS AND ACTIVITIES

The laundry & cleaning case study can be used as a simulated environment for role-playing among negotiating teams. Each team will assume responsibility for one company (e.g., 3 to 5 individuals in each negotiating team): Negotiating Team: Retailer Engel Negotiating Team: Retailer Econ Negotiating Team: Manufacturer Alpha

Negotiating teams are self-organised to perform tasks and negotiate with other negotiating teams. Negotiating teams need to develop an action plan, present their action plans to their suppliers or customers and negotiate business deals. Negotiating teams may report back to shareholders, e.g., tutors. Negotiating teams need to self-organise. Tips for self-organising negotiating teams

• Get to know your negotiating team members as well as the other teams ( get to know your suppliers/customers,incl. their bearings, e.g., emails, WhatsApp, skype etc.). • Assume different roles within the team (e.g., one person takes responsibility for managing the time, one looks at financial aspects, one looks at technical or environmental aspects, one acts as the ambassador, e.g., as a contact person to other companies (other teams) organising meeting etc.). • Engage in several rounds of negotiations with each other (e.g., several rounds of meetings). • Be practical, open and collaborative with each other. Task 1

Objective: The purpose of this activity is to develop a contextualised understanding of the strategic challenges that companies face in the Laundry & Cleaning case. Team Task: Negotiating teams should have read carefully the Laundry & Cleaning case study and complete the following activities:

41 The challenges that negotiators face

Negotiating Team: Manufacturer Beta

1. Identify the strategic challenges that companies face in the case. 2. Identify the resources that companies need to solve their problems. 3. Be prepared to engage in a discussion. Task 2

42 The challenges that negotiators face

Objective: Prepare for strategic negotiations. Team Task: 1. Each negotiating team will prepare an action plan for the company that they are responsible (the action plan is within the business of laundry & cleaning). • Objective of your company. • Strategy (the recommended way to achieve your objective). • Implementation and Resources needed (activities, products, prices etc). • Critical Issues (critical contingencies that you anticipate). 2. Negotiating teams may present the action plan. The presentations are akin to a press conference. They create public knowledge, therefore, negotiating teams need to be very succinct. 3. Teams need to be prepared to answer questions asked by the other teams (team groups are allowed to rethink and revise their action plan at any time). Task 3

Objective: Negotiate a sustainable business deal Team Task: 1. Manufacturers present their revised Action to the retailers. Their action plan includes a proposal for business cooperation. 2. Manufacturers’ objective is to 1) secure the distribution, 2) visibility of their brands at the point of sale and 3) promote their brands to consumers. 3. Retailers’ objective is to secure 1) availability of those brands that consumers demand (avoid the listing of brands that consumers do not want), 2) maximise their revenues and profits for each product category and 3) promote their outlets and promote private labels (store attractiveness and store loyalty).

Task 4

Objective: Manifest your business deal in a contract

Task 5

Objective: Reflect on the implications of the negotiated deals. Team Task: 1. Negotiating teams will reflect on their negotiated deals. 2. Discussion and feedback. 3. Negotiating teams will receive forward guidance.

NOTES 1 Hayek observed that a preoccupation with statistical aggregates delivers a picture of stability that hinders a closer examination of the myriads of small changes that occur through local interactions, see Hayek (1945). 2 See Baraldi, Gregori and Perna (2011). Network evolution and the embedding of complex technical solutions: The case of the Leaf House network; Håkansson and Johanson (1992). A Model of Industrial Networks. 3 See Håkansson et al. (2009). Business in Networks. See also Ford (1980). The development of buyer‐seller relationships in industrial markets. 4 See Uzzi (1997), Gnyawali and Madhavan (2001), Kranton and Minehart (2001), Henneberg, Naudé and Mouzas (2010) and Mouzas and Ford (2009). 5 See S. Mouzas (2016). A network perspective on negotiation: What is new and why it matters. 6 The view of ‘markets as networks’ of interconnected relationships should not be mistaken as ‘relationship marketing’. Relationship marketing is limited to activities

43 The challenges that negotiators face

Team Task: Close the deal and specify your agreement on the following 5 points: 1. Agreed wholesale prices (taking into account the cost/profit margin). Retail prices to consumers are defined by the retailers. 2. Shelf space (as % of total space). 3. Private labels: Wholesale prices and shelf space as % of total space. Retailers need to define retail prices of private labels. 4. Product and services (e.g., new products/re-launches). 5. Promotion and collaboration (visibility, promote consumeroff-takes).

7

8 9

10

44 The challenges that negotiators face

11 12

that aim at customer loyalty, retention, and satisfaction. In contrast, the view of markets as networks is based on the embeddedness of individually important actors and relationships in a broader context of interdependencies, see Mattsson (1997). This is particularly true when it comes to distant or indirect relationships and interlocking interdependencies which comprise the business landscape, see Ford and Mouzas (2008). Is There any Hope? The Idea of Strategy in Business Networks. See Farber and Bazerman (1987). Why Is there Disagreement in Bargaining? For a thorough analysis of this phenomenon see the work of Guhan Subramanian. See Subramanian (2009). Negotiation? Auction? A deal maker’s guide. See also Subramanian (2011). Dealmaking: The New Strategy of Negotiauctions. For psychological review of the role of interests, see Kelman (2006). For a more general philosophical discussion of human interests, see Habermas (2015). For a discussion of individual and collective interests in business relationships, see Medlin (2006) and Munksgaard et al. (2015). See Hardin (1968). The tragedy of the commons. For the role of property rights, see Coase (2005), Demsetz (2002) and Smith (2006). Negotiators often make the error to focus only on property rights, thus overlooking other entitlements.

Negotiation as a process

Three

Negotiation as a process

• • • • • • • •

Negotiation as a process aiming at a jointly decided action Differences are the raw materials of the negotiation process ZOPA and BATNA Interests, issues, positions Five core concerns Value creation through wise trades Give-and-take process Giving in vs. demanding

Think about differences as a source of value. How is value created in strategic negotiations? What happens when we ignore the interests and the core concerns of our counterparts or when we treat them as adversaries. Price negotiations and ZOPA. Do you need to negotiate sequentially or simultaneously? Consider moves away from the negotiation table to create a favourable setup. Think about the role of options, e.g., BATNA in strategic negotiations. Think about balancing the process of giving in and demanding, and reflect on when to negotiate. What are the limits of negotiations and what is your personal experience when applying these concepts?

3.1 THE PROCESS OF NEGOTIATION

What comes to our mind when we hear the word negotiation? Connotations and images connected with the word ‘negotiation’ may vary. Some might think about negotiations as endless discussions and arguments, others might think about negotiation as juxtaposition, DOI: 10.4324/9781003001010-3

45 Negotiation as a process

Overview of relevant themes

46 Negotiation as a process

competition and fighting. Not all of these connotations make negotiators feel comfortable. Hence, many managers, policymakers, lawyers, as well as groups of people and organisations remain sceptical and are rather reluctant to engage in negotiations. The intensity of negotiations, archaic images of ruthless fighting between negotiators or images of hagglers that bargain prices might prevent individuals and organisations from embracing negotiation. Yet, in an increasingly inter-connected business landscape, executives need to access the resources, skills and capabilities of other actors, both internally within their own organisations, as well as externally in the market. How should, then, individuals and organisations view negotiation? I have found that the best way to embrace negotiation is to view negotiation as a process. Thus, negotiation can be seen as a process over time by which inter-dependent actors (e.g., countries, policymakers, companies, business units, managers and other individuals) with different entitlements to resources and different interests, aim to arrive at a jointly decided action when a jointly decided action is better than other alternatives. So, if we view negotiation as a process of aiming at a jointly decided action, we might want to consider making the first step. Consider the following story. It was 1912: An election year in the USA. The campaign team of President Theodore Roosevelt was nearing the end of a hard-fought presidential election. At that time there was no television, no internet and no social media except for printed press. Therefore, the campaign team decided to print an elegant pamphlet with a stern presidential photo of President Theodore Roosevelt on the cover and a stirring speech with the title Confessions of Faith inside the pamphlet. Time was of the essence and the campaign team produced three million copies. An intern of the team noticed the small print below the photo on each pamphlet cover that stated copyright: Moffett Studios, Chicago. The legal counsel advised the President that since Moffett Studios held the copyright, unauthorised use of the photo could cost the campaign one dollar for each copy. Thus, there was a risk of having to pay a fine as high as $3,000,000 which was a huge amount at that time. Moreover, there was a risk of negative publicity, if the President was accused of breaking the law. The team had no time to reprint the pamphlet. Not using the pamphlets would seriously damage President Roosevelt’s election chances. Yet, if they went ahead to distribute 3 million illegal pamphlets, a scandal would seriously damage re-election prospects, and they would be liable for financial

1. Their organisations are not free, independent and immune from the actions of others. 2. Their command and authority can not necessarily ensure the desired co-operation and commitment.

47 Negotiation as a process

compensation. The campaign team quickly realised that they needed to negotiate with Moffett. The campaign team conducted some initial research to identify the interests and entitlements of Moffett Studios in Chicago. The research revealed that Moffett Studios was a small photographic unit in Chicago that received limited recognition and faced financial difficulties. Bitterly Mr Moffett was approaching his retirement with a single-minded focus on money. President Roosevelt did not want to be involved in any negotiation. He asked his campaign manager George Perkins, a former partner of J.P. Morgan, to obtain the photo’s copyright. George Perkins did not waste any time and dispatched the following cable to Moffett Studios: “We are planning to distribute pamphlets with Roosevelt’s picture on the cover. It will be great publicity for the studio whose photograph we use. How much will you pay us to use yours? Please respond immediately”. Within the same day, Moffett replied: “We’ve never done this before, but under these circumstances we would be pleased to offer you $250”. Reportedly, Perkins accepted Moffett Studios’ offer without any further negotiation. What can we learn from this story? President Roosevelt’s story provides us with two important lessons. Firstly, we need to reverse our perspective and look at the situation from our counterpart’s point of view. Perkins did not lie to Mr Moffett but approached the situation from Moffett studios’ side, namely that “it will be great publicity for the studio whose photograph we use”. Secondly, we need to create a sense of urgency. Never make an offer without a time limit. Mr Perkins did not allow Moffett Studios a lot of time to consider other alternative options; instead, he requested “please respond immediately”. At a more fundamental level, the Roosevelt story raises one simple question: Why we need negotiations? In today’s inter-connected business landscape, managers, policymakers, lawyers and diplomats increasingly realise that:

3. Their best endeavours to create a good atmosphere or relationship alone cannot ensure the achievement of best results. 3.2 DIFFERENCES: THE RAW MATERIALS OF THE NEGOTIATION

48 Negotiation as a process

PROCESS

The increasing realisation of inter-dependence may cause anxiety among managers, policymakers, diplomats and individuals about the appropriate path of the negotiation process. Many executives are therefore afraid to negotiate because of significant ‘differences’ that might exist among counterparts. When differences are revealed, anxious negotiators usually start to search for compromises. In their rush to wrap up negotiations, they ask their counterparts to split the difference. The conventional wisdom is that humans don’t like differences and they often try to bridge them. When it comes to differences, effective negotiators, however, are courageous. Effective negotiators look at existing differences and try to identify the inherent interdependences. Different interests and entitlements as well as different perceptions among negotiators can be a point of departure in solving joint problems. For example, negotiators may look at different languages and different presumptions. Consider the word profit. It means different things in different languages. While in English-speaking countries, such as the USA, the United Kingdom, Canada and Australia the word profit means earnings. The French equivalent is winning. And, the German equivalent is deserving. The different meanings of the word Profit: English: Earning French: Winning (Gagner l’argent) German: Deserving (Verdienst) Russian: Working for (Zarabotat dyengi) Hungarian: Searching for it (Penzt keresni)

The differences that negotiators will discover are usually real; they are not simply semantic. Consider, for example, the real differences among negotiators in terms of: • The relative cost or revenue structures. • The priority or valuation.

The The The The

forecast or belief. attitude towards risk/time. capabilities. tax or accounting treatment.

Negotiators need to embrace these differences as the raw materials of the negotiation process. Differences in perceptions, resources, skills and capabilities can be a source of value. The following example illustrates this. Consider the differences between two companies Body Line and Body Care that are negotiating a Joint Venture ‘Line Care’ (Table 3.1). It becomes immediately apparent that because of these real differences, Body Care has lower cost of capital and lower variable cost, while Body Line has more efficient logistics and supplying capabilities as well as some existing customers. The two parties decide that Body Care will negotiate with the banks and assume responsibility for production in the Joint Venture. In return, Body Line should assume responsibility for supplying the products and bringing existing customers into the joint venture. But Body Line is rather sceptical. The new business might cannibalise the existing Body Line business. Body Line demands that their existing customers are kept out of the Joint Venture. In contrast, Body Care considers the inclusion of existing customers essential for an equitable distribution of responsibilities and for ensuring a successful joint venture. The parties decide to look closer at time-limited restrictions to the use of existing customers and their impact on Body Line as well as on the Joint Venture (Table 3.2). In practical terms, zero restrictions to the use of existing customers generate a net present value (NPV) for the Joint Venture of $100 Million. If restrictions to the use of existing customers are applied, the realised NPV for the Joint Venture is reduced while the benefit for Body Line is increased. On this basis, the parties decide that a restriction of six Table 3.1 Negotiating a joint venture Differences

Body Line

Body Care

Cost of new debt Variable production (% of sales) Cost of logistics/supplying Existing customers

9% 30% $40/unit Yes

3% 22% $55/unit No

49 Negotiation as a process

• • • •

50 Negotiation as a process

Table 3.2 Timings and restrictions on a joint venture Duration of restrictions

Net present value for Body Line (in $ million)

Net present value for Joint Venture (in $ million)

None 6 Months 12 Months 18 Months 24 Months

0 15 18 21 23

100 98 84 73 67

months appear reasonable as this maximises the value that can be created collectively. No other combination generates more value collectively. There are multiple examples of companies with different resources, skills and capabilities that opted for a jointly decided action. In 2019 before the outbreak of the Covid-19 pandemic, Marks & Spencer (M&S), a department store retailer and Ocado, a technology-led global software platform business, negotiated a joint venture deal that gave M&S a home delivery service for the first time. M&S bought a 50% share of Ocado’s retail business for £750 million. The joint venture is called Ocado and according to the deal, the joint venture supplies private labels and branded products directly to consumers. M&S financed the deal with Ocado by selling £600 million worth of shares to generate cash and by cutting its dividends to shareholders by 40%. Steve Rowe, M&S CEO confirmed in the media that negotiating a deal with Ocado was the only way M&S could have gone online within an immediately scalable, profitable and sustainable business. In September 2016, Sainsbury’s a leading supermarket retailer, acquired Argos, a catalogue retailer for £1.4 billion. Sainsbury’s and Argos were different businesses, as they appealed to very different customers with limited overlap. Differences are not always conducive to synergies. Sainsbury’s attempted to integrate Argos into their retail business; they decided to transplant Argos outlets into the spare store space within Sainsbury’s outlets. The plan did not work well, and the integration of the two different businesses failed to bring the promised synergies. Sainsbury’s is now concerned with the need to cut costs in order to enable a lowering of consumer prices and keep up with the intense competition.

The NIMBY problem occurs when there is a general agreement about usefulness of a proposed initiative but one of the involved parties asserts: Not In My Back Yard. The acronym NIMPY is often used to characterise residents’ opposition to proposed developments plans in their local community. Usually, residents are against a proposed development, if the proposed development is close to them and creates externalities. Examples of development plans which create externalities that local residents might not tolerate include housing development, road infrastructure, offices, large buildings, chemical plants, oil and chemical pipelines, industrial parks, wind turbines, waste treatment plants or power stations. The NIMBY problem may also occur in interfirm negotiations. Re-consider the Joint Venture between Body Line and Body Care. Body Line has existing customers; and thus, Body Line is reluctant to use them for the Joint Venture because they fear that this would cannibalise their own Bodyline business. Similarly, negotiating parties might express their concerns if a proposed initiative is beneficial collectively, but harmful individually. They will raise their voice and they will expressly state: The initiative is fine but not in my backyard. Consider the aim to construct a waste treatment plant. There is no doubt that a waste treatment plant is beneficial for the whole community, as it ensures clean water for everyone in the community. How would you react if the plan to build a waste treatment plan envisages a construction site adjacent to your backyard? You would probably be seriously concerned about possible odours and noise that would derive from the plant and you would probably think about the value of your property. The waste treatment plant is collectively beneficial but individually harmful. How shall we deal with NIMBY problems? The unified experience from dealing with NIMBY problems is twofold: Firstly, focus on maximising the whole rather than taking positions; and secondly, use the added value to compensate any individual losses. In the case of a waste treatment plant, for example, individual homeowners affected by the construction of a waste treatment plant could be compensated. Compensation can take several forms, including monetary compensation and relocation packages. Nonetheless, it appears that negotiators face tremendous difficulties in maximising the whole first, instead of taking positions. A

51 Negotiation as a process

3.3 THE NIMBY PROBLEM

POSITIONS

ISSUES

INTERESTS

52 Negotiation as a process

Figure 3.1 Reverse the sequence of negotiation moves

conventional sequence of moves is to start negotiations by taking positions (Figure 3.1). Negotiators’ positions might be antithetical or asymmetric because different positions usually reflect different perceptions as well as different backgrounds. The effect of taking positions is that issues will emerge, e.g., issues regarding terms and conditions, prices, quality and specifications. Yet, underneath these issues, a plethora of interests will remain unexplored. In order to unearth these hidden interests, negotiators could reverse the sequence of their negotiation moves. Instead of taking positions, negotiators could start the process of negotiation by exploring the interests of others. This exploration of interests would lead to the identification of relevant issues and consideration of possible positions (Figure 3.2). How could negotiators identify the interests of others? The problem with identifying the interests of others is that interests are idiosyncratic, hidden and they are not given to negotiating counterparts in a concentrated and transparent form. Negotiators need to work diligently through multiple interactions with their counterparts to unearth hidden interests. The following three best practices may help negotiators to unearth the interests of their counterparts: 1. Build social relationships. 2. Ask questions. 3. Make multiple offers. Historically, building social relationships, discussing matters in a friendly, non-demanding way and asking questions are proven methods

INTERESTS

ISSUES

POSITIONS

of exploring the interests of our counterparts. Nonetheless, negotiators should not just discuss what their negotiation partners want. They need to discover why they want something. The acid test of clarifying the interests of others is to make multiple offers. In this way, negotiators explore a wider range of possible interests and allow their counterparts to make their own choices. When negotiators build social relationships, when they ask questions or when they make multiple offers to their counterparts, they pursue one aim: They move towards amalgamating possibilities for a jointly agreed action. A jointly agreed action does not exist in a transparent and concentrated form, but solely as dispersed individual cognitive views held by the individual negotiators embedded in networks of relationships. These cognitive views, known as network pictures,1 are atomised and often contradictory perceptions. They refer to their extant understanding that different negotiators have of their surrounding networks in terms of actors, interactions and means-end relationships. Network pictures can, therefore, be given realist status akin to ‘extant knowledge’. Extant experiences, for example, enable negotiators to select certain aspects from the flow of events and build categories or schemata of understanding. One would be tempted to rush into a straightforward response to the challenge of integrating these individually held network pictures, by claiming that negotiators need to search for several individual views and compare them by using complementary elements in order to form an integrated perspective. This integration of individually held network pictures, even with the use of data analytics and artificial intelligence, appears to be insufficient.

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Figure 3.2 Start negotiations by exploring interests

54 Negotiation as a process

Negotiation with others does not flow directly out of a multitude of network pictures but requires heedful interactions and exchange processes before insights are developed. Consider a business manager who investigates entry into a new business network in a different country. The network pictures that the manager may obtain regarding customers’ interest, issues and positions are, arguably, useful first impressions. However, can the manager be sure about the underlying competitive dynamics and cooperative behaviour of potential partners or third parties? Can the manager rely on the views obtained without any prior exchanges in the business network that he/she intends to enter? Consider a business manager who finally closes a business deal by considering all the important task-specific requirements. Is this deal the best possible solution for both parties? Or does the manager leave riches on the negotiation table by ignoring non-task related interests of the other negotiating party? Is a business deal sustainable if it is based on a thorough investigation and comparison of a multitude of individual cognitive ‘pictures’ held by negotiators? These are the types of questions that underpin the problem of developing network insight.2 There are two reasons why heedful interactions are needed to address the challenge of amalgamating dispersed cognitive pictures among negotiators. Firstly, negotiators’ cognitive views are continually reconfigured to resolve inherent conflicts and exploit opportunities through activities and simultaneous negotiations undertaken in networks of business relationships. It appears that cognitive views impact each other at different levels: At the individual ‘carrier’ level, invariably at the level of an individual negotiator in a management team, at intraorganisational relationship level between individuals in management teams and at inter-organisational level between businesses and organisations. Thus, negotiators cannot fully construct and explain in advance all individual views held by other negotiators, nor can these views be anticipated to be stable. Secondly, differential knowledge for positioning within a competitive field is not self-contained but emerges as a set of possibilities through enacted tensions and the formation of discrepancies. Clearly, possibilities are not engrained in cognitive representations. Instead, possibilities emerge as strategic options and they need to be elaborated through heedful interactions. Developing a network insight (Mouzas, Henneberg and Naudé, 2008) is the outcome of continuous and iterative interplay between the factual physical and social artefacts that surround actors in networks of exchange relationships, as

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well as the cognitive schemata constructed and shaped from actors’ past experience and precedents. Managers can be good at decision making and still falter when it comes to strategic negotiations. They falter because of deficient sense-making (Weick, 1993). Individual cognitive ‘pictures’ held by managers as sense-making representations are not sufficient to incorporate the contextual complexity of negotiation. Thus, negotiators’ incomplete knowledge of their context may lead to inappropriate action. What can negotiators do to develop network insight on a continual basis as a way of life? Firstly, moving beyond the boundaries of rational, task-related actions, negotiators can increase their understanding of their counterparts’ interests and entitlements. Research in business networks indicates that existing potentials do not emerge solely from the capabilities of individuals and organisations. Existing potentials emerge from individuals’ and organisations’ membership in networks of exchange relationships. This aspect becomes tremendously important when negotiators enter new business networks, where they have not operated before. To escape the narrow boundaries of rational, task-related actions, such as the task of a bid or the task of securing an order, negotiators need to move beyond their own extant knowledge and open themselves by building new relationships and heedful interactions. Secondly, it appears that negotiators are unable to fully construct and explain in advance different views held by their counterparts; but these views are dynamic and continually re-configured through the ongoing negotiations. This underlines the importance of understanding the rationalities inherent in unarticulated interests of other actors, as well as the importance of institutionalising business forms of frequent interactions through periodic business and task reviews. Without a sufficiently deep understanding of others’ logic, and without the existence of recurrent organisational practices, negotiators will not be able to conduct multiple exchanges; and without comprehensive multilateral exchanges with counterparts, negotiators will diminish their ability to embrace possibilities that exist in their surrounding business networks. Thirdly, an understanding of the process of developing insight may help negotiators to appreciate the creation of competitive advantage. By developing network insight, negotiators gain clarity of sense-making.

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The insight that negotiators develop incorporates new ways and options for business deals in networks of exchange relationships. New or emerging potentials are not individual views that are inferred from a variety of cues. Instead, potentials are objectified and tested possibilities. Thus ‘insight’ is manifested in information, data and knowledge, in such a way that negotiators can use it practically in their organisation for differential positioning and strategic action. Therefore, developing insight can lead to a better assessment of the appropriateness of a business deal. Despite the relevance of developing network insight, business research (Mouzas, Henneberg and Naudé, 2008) indicates a considerable lack of ‘insight’ by many negotiators, be it in specific situations regarding clinching a deal, or in non-specific situations regarding an assessment of the driving forces within a network. The evidence hitherto is that negotiators face tremendous difficulties in integrating dispersed pieces of specialised knowledge held by various actors in their surrounding business networks. Consider the experience of Amazon in 2019 when they failed to establish their second headquarters in Long Island City, Queens in the state of New York. Amazon used data analytics to integrate dispersed pieces of specialised knowledge held by various individual actors to assess the quality of regions’ workforce, urban infrastructure, schools, housing and business friendliness. The company created a shortlist of 20 potential regions for the location of their second headquarters. By the end of 2018, Amazon announced that their second headquarters would be split into two locations: Long Island City in Queens, New York City and National Landing in Arlington County, Virginia. Amazon planned to invest in multi-billion-dollar headquarter sites and offer 25,000 new jobs at each location. Amazon’s executives negotiated with local politicians and state governors. According to the negotiated deals, Amazon would receive tax discounts from the city and state for future activities. Not everyone was happy with the deals. It is estimated that a fifth of households in Queens, New York live in poverty and some local politicians were seriously concerned that tax incentives might come at the expense of local taxpayers. Furthermore, social media amplified residents’ concerns that Amazon’s second headquarters in New York was likely to induce skyrocketing rents, aggravate subway congestion and result in overcrowded schools. News media reported street demonstrations led by U.S. Senator Michael Gianaris and other city representatives displaying signs that read “Scamazon” and “Rent hikes

1. Extant knowledge is an inherent trap that can be avoided. Negotiators’ knowledge should be tested and improved through several layers of heedful interactions with different counterparts. 2. Heedful interactions need to take place at all possible levels, at local or regional units and at headquarters, internally between different departments and individuals, as well as externally between organisations, groups or public bodies. A cross-hierarchical information exchange needs to be encouraged. 3. Negotiators’ openness to emerging opportunities requires the inclusion of non-task related exchanges and the ability to embrace new possibilities. This is often linked to a non-task related understanding of external developments. 4. Negotiators’ underlying raison d’être should not divert their attention from other rationales, motivations and restrictions that might be important for their counterparts.

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now with two-day shipping”. The U.S. Representative for New York’s 14th congressional district called on residents via Tweeter to rally against the “creeping overreach of one of the world’s biggest corporations”. The opposition against Amazon’s second headquarters in New York gained such momentum that Amazon was forced to cancel the deal with New York and build their second headquarters only in Arlington, Virginia. The Amazon case demonstrates that negotiators need to understand that their cognitive views might lead them to deficient sense-making, i.e., a sense-making that is insufficient to incorporate the complexity of their environment. Negotiators need to understand that the process that ultimately leads to developing network insight does not occur automatically with data analytics. Developing network insight requires heedful interactions, including interactions with local stakeholders and social media. New employees and managers in the Japanese automotive industry are taught that doing nemawashi is an indispensable activity in the process of building consent. Nemawashi3 is about ‘testing the waters’, ‘getting everyone on the same page’ and developing ‘pockets of consent’ by using heedful one-on-one interactions. Learning from the difficulties in integrating specialised knowledge and dispersed views held by various actors, negotiators and negotiating teams could carry, champion and mediate the following set of guiding principles:

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5. Negotiators need to distinguish between value rationality guided by its consequences and instrumental rationality guided by its means. To do so, negotiators could move beyond articulated interests, issues and positions and challenge their existing understanding. 6. Knowledge needs to be objectified in the form of shared data and shared information, so that it can be used practically in the negotiation process. Individual knowledge or company-centred knowledge is not sufficient to accomplish heedful interactions. 7. The achievement of objectified knowledge requires more than mere search endeavours and data analytics. It requires negotiators’ subsequent action to test and codify what is feasible. Examples of subsequent action include feasibility studies, pilot projects or test markets. 8. Negotiators should think of negotiation time as a recurrent practice of negotiation episodes and events, e.g., periodic meetings, business reviews or annual negotiations. These recurrent episodes and events may contribute to an incremental development of insight into business networks. Following these guiding principles, negotiators’ endeavours to find what is possible in their surrounding business networks becomes a way of life. It is an indeterminate managerial effort through multiple, timeconsuming interactions. Given the inherent difficulties involved in developing and sustaining this effort, negotiators need to grasp the challenge of developing network insight seriously and guide the involved process heedfully. 3.4 DEALING WITH EMOTIONS

In a real-world of infinite connectivity, negotiators would have limited time to explore in-depth all aspects of their counterparts. Even if negotiators are capable of rationally identifying and assessing information about the other side, there is a whole world of emotions. Behavioural science provides us with evidence that more than 95% of our first reactions are emotional, i.e., impulsive, automatic and unconscious. To deal with the multiplicity of emotions in negotiations, Fischer and Shapiro (2006) developed an analytical framework of five core concerns that negotiators could consider, even before they start any negotiation.

These five core concerns are:

The implications of meeting or ignoring these core concerns are significant. Fisher and Shapiro (2006) elaborate the following implications: Appreciation: This is perhaps the single most important core concern among all humans. Appreciation is the act of understanding, recognising and acknowledging that someone or something is valuable. Negotiators feel appreciated if their actions, thoughts and feelings are acknowledged by their counterparts as having merit. When it comes to investment valuation, negotiators might use the term appreciation to spell out an increase in the value of an asset over time. In contrast, the opposite term depreciation is often used to describe a decrease in value over time. In personal or business relationships, appreciation is fundamental. The most common reason why relationships fall apart is the lack of appreciation, and thus the subsequent lack of an emotional connection. If appreciation as a core concern is not met, negotiators feel disregarded and devalued. Affiliation: Negotiators feel affiliated if they are treated as an equal counterparty, colleague, collaborator or partner. Affiliation usually refers to a membership in a group, network, club, organisation or movement. Aristotle traced back the need for affiliation to the political nature of human beings. A human is by nature a political animal: ἄνθρωπος φύσει πολιτικὸν ζῷον. This means humans are innately citizens affiliated with the community. If affiliation is not met, negotiators feel that they are treated as opponents and adversaries. Autonomy: Autonomy is the right of an actor, group, organisation, region or country to be independent and govern itself. Autonomy is the right for self-determination. Negotiators feel autonomous if they can make their own and free decisions. Yet laws, rules, contracts, entitlements, age, physical as well as mental capacity may impose limits on personal autonomy. If autonomy is not met, negotiators feel that their freedom to make decisions is violated. Status: Status refers to the position or rank in a social group, profession, organisation or society. In professional life, status transcends

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1. Appreciation 2. Affiliation 3. Autonomy 4. Status 5. Role

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job titles and formal positions; status encompasses esteem, careers, capabilities and images, usually developed over a sustained period of time. Negotiators may feel that their professional status is recognised when they are treated by others respectfully. If the status is not respected, negotiators may feel that they are treated as an inferior counterparty. Role: Role is the function, the task or the purpose that an individual or a group of actors have within an organisation or society. Roles include a set of expected behaviours, actions and duties. Negotiators may find fulfilment within their role. If negotiators do not feel a sense of fulfilment within their role, they feel unhappy, unempowered and thus dissatisfied. The advantage of using Fisher and Shapiro’s (2006) framework is straightforward. Full awareness of the five core concerns could guide negotiators’ conscious efforts to develop empathy sensing and sharing others’ emotions, even before the start of negotiations. Thus, negotiators know something about others’ emotions in advance. With this ‘prior’ knowledge about the emotions of others, negotiations can move on to heedful interactions with their counterparts. 3.5 ZONE OF POSSIBLE AGREEMENT (ZOPA)

One important question that concerns many individuals and organisations is when to negotiate. Negotiation with others is an appropriate choice when negotiators are able to arrive at a jointly agreed action that is better than their alternatives. In other words, when the negotiated agreement is better than no agreement. If individuals or organisations decide to enter negotiations, they need to think about the zone of possible agreement. What is the Zone of Possible Agreement (ZOPA)? ZOPA is the space where a deal between two parties can be made: The zone in which both parties can agree to a deal. Think about the negotiation between a buyer and a seller. Conceptually, the zone in which both parties can agree to a deal is defined by the buyer’s reservation price (i.e., the highest price the buyer is willing to pay) and the seller’s reservation price (i.e., the minimum seller’s price). Within this zone, an agreement is possible. Outside the zone, no amount of negotiation will yield a deal. The reason why a deal is not feasible outside this zone is that buyers and sellers might have other alternatives.

3.6 BEST ALTERNATIVE TO THE NEGOTIATED AGREEMENT (BATNA)

Underpinned by Nash’s solution to the bargaining problem,6 the idea of the best alternative to the negotiated agreement (BATNA) refers to the most advantageous alternative course of action a negotiating party can take, if there is no deal.7 The idea of BATNA encourages negotiating parties to expand their mental horizon to consider their options outside the zone of possible agreements. In this way, negotiating parties protect themselves and yet they continue to make efforts to negotiate a deal with their counterparts. This expansion of the mental horizon enables negotiators to resist the urge to compromise for fear of losing the deal. Compromises may speed up negotiation processes, but they may also lead to huge compromises and subsequent regrets. In contrast, establishing a bottom line, negotiating parties take a step back and consider possible alternatives to the negotiated deal. Thus, being aware of your BATNA makes negotiation efforts more conscious, as negotiating parties

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Nonetheless, in the real-world of business, negotiators need to be aware that they may be trapped to agree to a deal that is inferior to their own best alternatives. In this case, negotiators might agree to a deal, even though there are other better alternatives available to them elsewhere. For example, a buyer might agree to buy a house at a significantly high price when bidding at an auction. Often negotiators are rather reluctant to walk away from a deal because they have already spent significant time, effort and money in the negotiation process. They decide to commit further to negotiations, and thus, they end up paying a much higher price.4 Knowing when to pull the plug is critical in negotiations because deciding to persevere only escalates possible risks.5 From an economic perspective, previous costs in terms of time, effort and money are considered as sunk cost that negotiators cannot recover, thus negotiators shall not take sunk costs into account when they value a counterparty’s proposition. Furthermore, negotiators might be trapped to agree to a deal that is inferior to their best alternatives because of their intention to please their counterparty, anticipating a strengthening of a business relationship. The visualisation of the ZOPA enables negotiators to map the zone of all potential negotiation outcomes and proceed consciously to negotiation (Figure 3.3).

Seller’s

Buyer’s

Reservation Value

Reservation Value The maximum the Buyer is willing to pay

The minimum Seller’s price

Zone of Possible Agreements

Seller’s Best Alternatives

Buyer’s Best Alternatives

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Figure 3.3 Zone of possible agreements (ZOPA)

aim at a deal that is better than their best alternative. Having a strong BATNA removes the pressure to close a deal at any price. Nonetheless, negotiators need to be aware not only of their own BATNA but also of the counterparty’s BATNA. More importantly, negotiators need to be acutely aware that a BATNA is a rather dynamic property that changes over time depending on circumstances. Experienced negotiators know that they need to negotiate with the aim to constantly improve their BATNA and they make efforts to identify the other side’s BATNA. This does not mean that negotiators should reveal their BATNA during negotiations. Revealing your BATNA prematurely during negotiations reduces your power dramatically and creates ill will when BATNA is used in a threatening way to intimidate a counterparty. More importantly, negotiators should not lie about alternative options. Instead, experienced negotiators signal to the other party that they have a BATNA without revealing it. For example, when companies are inviting job candidates or suppliers to their premises, they let them all wait in the reception before admitting them to a meeting room. What is relevant for negotiators is to research the other party’s BATNA before and during the negotiation process and reflect on their own options. Negotiating parties would agree to a deal only when the negotiated deal is better than their ‘real options’. A real option gives negotiators the right – but not the obligation – to take a particular course of action at some time in the future. In the context of investments in real assets or in capital investment projects, the idea of ‘real options’ enhances

3.7 DEMANDING VS. GIVING IN

With BATNAs in mind, parties may proceed to negotiation. Negotiating parties will try to reach an agreement that creates value above and beyond their best alternative options. In order to achieve this goal, negotiating parties will need to accommodate a multiplicity of interests and entitlements. Different and often conflicting interests among

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negotiators’ flexibility. Real options allow negotiators to take a ‘waitand-see’ approach to negotiation strategy and then enact on opportunities that emerge over time in the business environment. In this way, negotiators can capitalise on upside potentials that emerge and can limit downside losses if they occur. The term ‘real options’ was coined by Stewart Myers at MIT to differentiate real options (i.e., alternative options to invest in physical and intangible assets) from financial options that are common on trading floors. Thinking in terms of alternative options had been routinely applied on trading floors for commodities and equity shares.8 Organisations started to apply options increasingly in the 90s to evaluate business decisions and business contracts whose worth depends on the uncertain future value of an asset. In order to make intelligent business choices, negotiators consider the value of keeping their options open. Consider, for example, the value of a deal concerning research and development of a new product or prototype or the value of a deal to conduct a controlled experiment or launch a product to a test market. The value of these deals is that they represent real options because they might open the doors to new opportunities. Thus, there is a subtle link between today’s actions and tomorrow’s business opportunities. Traditional investment valuation techniques, such as the discounted cash flow method or return on investment that are widely used among businesses cannot adequately capture this kind of business flexibility in order to adapt and revise actions in response to unexpected market developments and assume passive commitment to certain plans and calculations. In the business landscape, uncertainty is resolved gradually over time as negotiators are updated with new information. Strategic flexibility enables negotiators to adapt or alter their initial course of action. This strategic flexibility is captured by the idea of real options.9 While negotiators create, build and maintain a portfolio of options on the future, real options provide an appropriate conceptual foundation for investment valuation.

Interests

Time / Space

Entitlements

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Figure 3.4 The dynamic interplay between interests and entitlements

negotiating parties will become the means to create value, i.e., the levers to create mutual gains. Simultaneously, different and often competing entitlements among negotiating parties will become the means to capture value, i.e., the levers to make claims about how the created value should be divided between negotiating parties. Thus, there is a dynamic interplay between interests and entitlements (Figure 3.4). Negotiators can manage the dynamic interplay between interests and entitlements by developing wise trades, i.e., developing heedful give-andtake processes of exchange. For example, think about the things that cost less to you but are valuable to others. Many negotiators accommodate the demands of others by giving in. Other negotiators are rather competitive; constantly demanding from their counterparts what is valuable to them. The golden rule is to balance give-and-take. By balancing give-and-take, negotiators manage the dynamic interplay between different interests and different entitlements. For example, if you need to give in to accommodate the demands of others, you can ask something in return that is valuable to you but costs less to others (Figure 3.5). To be able to balance give-and-take processes of exchange, negotiators need to learn to negotiate issues simultaneously and not sequentially. Sequential negotiation would make trade-offs more difficult and perhaps impossible. Instead, a simultaneous negotiation of issues would provide plenty of opportunities for wise trades. Negotiators need to be firm about the issues that are most important to them but demonstrate flexibility on things that are not as important. It appears that relationships matter more in creating value than claiming value.

High Low

Demanding

Low

High Giving in

Consider the negotiations between the United Kingdom and the EU Commission to conclude a trade deal after the referendum in 2016 in which the United Kingdom decided to leave the EU. Both the United Kingdom and EU were interested in concluding a trade deal that would minimise economic disruption and would prevent checks along the border between Northern Ireland and the Republic of Ireland. Preventing checks along the border was important because negotiating parties wanted to protect the 1998 peace agreement, known as the Good Friday Agreement. The Good Friday Agreement was achieved in 1998 when both the Republic of Ireland and Northern Ireland were part of the European single market. For the European Union, the unity of the single market has been an important priority, i.e., the interpretation of rules of the single market needed to be homogeneous for all EU member states and for third countries that have a privileged access to the European single market. The United Kingdom was interested in a privileged access to the European single market but was not interested in staying in the European single market because of its commitment to taking back full control of 1) migration and 2) laws, whilst staying outside the jurisdiction of the Court of Justice of the European Union. With the caveat that ‘nothing is agreed until everything is agreed’, the EU and the United Kingdom proceeded to a simultaneous negotiation of all involved issues. In December 2020 on Christmas Eve, the negotiating parties reached a trade and co-operation agreement which included a

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Figure 3.5 Demanding vs. giving in

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protocol that Northern Ireland would continue to follow the EU single market rules on product standards, and checks would take place on goods entering Northern Ireland from England, Wales and Scotland. Moreover, the EU and the United Kingdom agreed that the Court of Justice of the European Union, the highest legal authority within the European Union, will be the final arbiter of the interpretation of the EU law. The UK courts shall, therefore, have due regard to the decisions of the Court of Justice of the European Union. The negotiated agreement between the United Kingdom and EU has prompted criticism in the United Kingdom that de facto a new border has been created in the Irish Sea. According to the negotiated agreement, all products sold in Northern Ireland need to meet EU standards. For example, EU standards regarding food safety allow only frozen meat to enter the single market. After a grace period ending on 1 July 2021, chilled meat and sausages from the United Kingdom have not been allowed to enter the European single market. Recognising that these arrangements were a ‘huge compromise’ and that consent to the role of the Court of Justice of the European Union was given only because of ‘the very specific circumstances’ of the protocol negotiation, the United Kingdom demanded in October 2021 a re-negotiation of the Northern Ireland protocol to allow products to circulate freely in Northern Ireland if they conform to either UK or EU rules. In other words, the United Kingdom demanded that both parties shall agree to recognise the equivalence of each other’s standards. Furthermore, the United Kingdom demanded that the role of the Court of Justice of the European Union overseeing the deal shall be removed; and instead, a new governance arrangement shall be established by which disputes are managed through international arbitration. The EU Commission rejected the demand for a re-negotiation but offered a substantial reduction of custom formalities and checks of goods entering Northern Ireland. Tensions between the two sides remain high. The UK-EU case demonstrates that the balancing act between giving in and demanding creates tensions that challenge negotiating parties; yet without genuine consent between the parties, a negotiated deal may not be lasting. Mnookin, Peppet and Tulumelo (2000, p. 9–69) identified three tensions in give-and-take processes of exchange: 1) The tension between creating and distributing value, 2) the tension between empathy and assertiveness and 3) the tension between principals and agents. The tension between creating and distributing value is about efforts to enlarge the value

“When two dynamite trucks meet on a road wide enough for one, who backs up?”

Reasonable communication in an explicit or implicit way might solve the problem, but what happens when communication between the parties is impossible? In this case, making a commitment that is credible and irreversible strengthens a negotiator’s bargaining power. Hence, a negotiator’s bargaining power emanates from the power to bind oneself.11 In an essay on bargaining, Schelling (1956, p. 282) cogently claimed that: “The essence of these tactics is some voluntary but irreversible sacrifice of freedom of choice. They rest on the paradox that the power to constrain an adversary may depend on the power to bind oneself; that, in bargaining, weakness is often strength, freedom may be freedom to capitulate, and to burn bridges behind one may suffice to undo an opponent”. Examples of credible commitments that negotiators make in order to enhance their bargaining power include the public announcement of a decision, taking legal proceedings to invoke the power of a tribunal or signalling a fixed course of action.

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of the pie and efforts to increase the share of the pie that negotiators will claim. The tension between empathy and assertiveness refers to conscious efforts to listen and understand others and efforts to speak out and claim. Finally, the tension between principals and agents is a structural problem. Consider the task that professional agents such as lawyers, tax consultants, dealers or representatives perform on behalf of their clients or the tasks that managing directors are performing on behalf of company owners or shareholders. All these professionals are agents which may have different preferences, incentives and knowledge than the principals and yet agents perform tasks on behalf of principals. In the book The New Industrial State published in 1967, John Kenneth Galbraith referred to these professional managers and administrative experts as technostucture.10 Describing the process of negotiating to create value in deals and disputes, Mnookin, Peppet and Tulumello (2000) conclude that when addressing these tensions, negotiators need to develop a conscious mindset, not simply techniques and tactics. Being conscious implies awareness of the distributive dimension in all negotiations, i.e., awareness that negotiating counterparts will assert claims which may be reasonable or unreasonable. Tensions will increase exponentially when one of the parties behaves unreasonably. Consider Schelling’s (1960, p. 21) illustration of the following problem:

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Often negotiators proceed to negotiations with the presumption that all parties will negotiate rationally.12 Nonetheless, evidence from the real world of negotiations demonstrates that negotiators may be biased in their behaviour and they often make cognitive errors in systematic and predictable ways (Bazerman and Neale, 1992). If worse comes to worst, negotiators might need to negotiate with someone who might cause harm. In this case, negotiations are akin to bargaining with the devil (Mnookin, 2010). The terms devil stands as a metaphor for someone who is evil, someone who might hurt you or someone that you simply don’t trust.13 Consider, for example, negotiation with terrorists or criminals. Mnookin (2010) describes a number of critical situations in which people need to decide whether to negotiate or fight. Consider, for example, critical situations when terrorists take hostages, a theft of intellectual property in a joint venture or a class action lawsuit for a carcinogenic product. Challenges may also arise in difficult situations when strong emotions are involved, such as acrimonious divorce proceedings. In all these challenging negotiations, negotiators may fall into the trap of demonising their counterparts and believing in a zero-sum game, the illusion that they can’t enlarge the pie (Bazerman, Baron and Shonk, 2001). These challenges are often a call to battle. Shall we fight or negotiate? The two antipodes are best epitomised by Winston Churchill and Nelson Mandela. When Winston Churchill became Prime Minister in the United Kingdom in 1940 amid the second world war, he refused to negotiate with the Nazis in Germany. Churchill decided to fight back. Nelson Mandela initially refused to negotiate with the Apartheid regime while he was imprisoned in Robben Island, Pollsmoor Prison and Victor Verster Prison. Nonetheless, when Nelson Mandela was set free in 1990 after 27 years of imprisonment, he opted to negotiate with President de Klerk with the purpose to end the apartheid in South Africa. Mandela’s negotiation with De Clerk was carefully orchestrated resulting in 1994 in the first free, non-racial general election in which Mandela was elected President. Building on his success, Mandela then heedfully negotiated a broad coalition government in which De Clerk became Deputy President, a move that emphasised the importance of reconciliation. Mandela’s approach to negotiation was a presumption in favour of moving ahead in stages: Negotiating the ground rules first and then setting clear targets and milestones.

The idea of Best Alternative to the Negotiated Agreement prompts negotiators to think carefully about their options. A jointly agreed action is preferable only if this is better than other alternative options. In this way, options define the limits of negotiations. Negotiation is not an inevitability but a possibility. There is compelling empirical evidence that the options that negotiating parties may have will play a large role in shaping the course of negotiations (Lax and Sebenius, 1986, 2002). But counterparts’ options are not static; they evolve over time, and often, options may change dramatically. Thus, changes in the negotiators’ alternatives to a negotiated agreement may have a greater effect on the outcome of negotiations than bargaining tactics used during negotiations. Situational changes, such as sudden market developments, unexpected adversities, the availability of new information or the culmination of ongoing processes can change the range of reservation values and possible acceptable settlements within negotiations (Susskind, 2011). Consider the Covid-19 pandemic that spread globally during 2020. The Covid-19 pandemic changed the available options for many firms. Firms operating in the area of logistics and transportation, information technology but also food retailers were enriched with options, while other firms operating in tourism, travel and hospitability were severely constrained. When lockdown restrictions were lifted, demand for health and well-being services soared and health providers needed to rethink their offerings. As options define the limits to negotiation, Lax and Sebenius (1991, p. 98) prescribe that “resources such as effort, time or money should go toward affecting alternatives or generating new ones until the expected improvement in the value of the negotiated outcome from expending additional resources just equals the cost of doing so”. Consider how manufacturer Unilever and retailer Tesco worked towards affecting alternatives and generating new options. Unilever is a fast-moving consumer goods manufacturer and Marmite is one of its leading brands. In the aftermath of a referendum on 23 June 2016 in which the United Kingdom voted to leave the EU by 52% to 48%, the exchange rate of the pound against other leading currencies such as the Euro and US-Dollar fell significantly. As the value of the British Pound slumped to a 31-year low on currency markets, Unilever’s costs increased rapidly. Unilever is UK’s biggest food manufacturer, but many of Unilever’s products are produced outside the UK. Unilever was determined to protect the profitability of its brand Marmite and decided to

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3.8 THE LIMITS OF NEGOTIATION

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raise its wholesale prices by about 10% to compensate for the steep drop in the value of the British Pound. For such a price increase, Unilever didn’t need to negotiate with retailers. Tesco is the leading retailer in the United Kingdom but faces fierce competition by two aggressive discount retailers Lidl and Aldi. Tesco’s managers didn’t like the idea of an increased wholesale price for such an important brand as Marmite because they needed to pass on the price increase to consumers. Tesco’s managers approached Unilever but Unilever was reluctant to negotiate prices. As Unilever’s Chief Financial Officer argued, such price increases are a ‘normal’ response to shifts in currency values and Unilever’s wholesale price rises had landed with other retailers, suggesting that other retailers, such as Sainsbury’s and Morrison had accepted the higher prices. Undoubtedly, Tesco’s managers were not happy; but how do you trigger negotiations when your counterparty is not interested in entering negotiations? Unilever was not interested in entering any price negotiations with their customers. For Unilever, a unilateral decision to increase the wholesale price and thus to pass on the incremental cost to their customers was the better option. Tesco’s managers thought about the necessary resources, such as effort, time and money that could be invested towards affecting Unilever’s alternatives and the possibility of generating new options. Tesco’s managers decided to delist Marmite, i.e., remove Marmite, alongside other Unilever’s brands, such as PG Tips tea and Pot Noodles from their website and from all Tesco outlets. Although Tesco and Unilever had a good and continuous business relationship, it became obvious within a few days that both counterparts Tesco and Unilever were losing business. As both counterparts were leaving money on the table, Tesco and Unilever realised they needed to negotiate with each other. Tesco’s and Unilever’s managers approached each other and reached a settlement with regard to wholesale prices. Unilever was pleased to announce that the supply situation with Tesco in the United Kingdom and Ireland had been successfully resolved. As Unilever put it “We have been working together closely to reach this resolution and ensure our much-loved brands are once again fully available. For all those that missed us, thanks for all the love”, (BBC News, 13 October 2016). Unilever’s final customers, the consumers, were indeed the beneficiaries of this agreement, as they could find their favourite brands available within Tesco outlets once again at attractive prices.

Case study

The following case study describes negotiation episodes in the context of UN climate negotiations. The case illustrates the process and limits of negotiating a global agreement to combat climate change. The Paris Agreement on climate change in 2015 is an extraordinary achievement in pursuit of sustainable development but obscures the past and forthcoming long and agonising process of negotiations. Greenhouse gases, such as carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) have been increasing exponentially since the culmination of the Industrial Revolution, but the process of global negotiations to reduce greenhouse gases commenced only before the turn of the 20th century. The Kyoto Protocol – adopted in Kyoto, Japan in December 1997 and ratified in February 2005 – was an important milestone in the move towards the global recognition that sustainable development would be seriously threatened if greenhouse gases continue to increase. The agreement that was reached was adopted as an incremental protocol to the United Nations Framework Convention on Climate Change (UNFCCC) at the Earth Summit in Rio de Janeiro in 1992. The Kyoto Protocol committed 37 industrialised countries and the European Community (now European Union) to the stabilisation of greenhouse gas emissions. Specifically, the Kyoto Protocol committed industrialised countries to a 5% emissions reduction, compared to 1990 levels, over a fiveyear period from 2008 to 2012. The effect of the Kyoto Protocol was that the geographical space to pollute was limited because of reporting and verification requirements for the 37 industrialised countries. Developing countries, such as China and India, were exempted with the rationale that they were historically not responsible for the current levels of gas emissions. This exemption remained controversial and led to major conflicts about who should bear the burden of combating climate change. The conflicts increased after the protocol came into force in 2005 because it became obvious that growth in carbon emissions was

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3.9 NEGOTIATING AN AGREEMENT TO COMBAT CLIMATE CHANGE

72 Negotiation as a process

coming from large developing countries. It became apparent among negotiating parties that the world could not combat climate change unless developing countries such as China, India, Mexico, Indonesia and South Korea were on board. As a result of the unresolved conflicts, the Kyoto Protocol has not been submitted to the US Senate for ratification on the basis of fears that it would harm the US economy if developing countries made no emission reductions. Subsequent summits on climate change did not resolve these conflicts. A major setback was evidenced in the disarray of the highly adversarial Copenhagen summit for climate change in 2009 that followed the Bali Road Map of 2007. The Copenhagen summit revealed that individual parties had divergent interests, perceptions and goals with regard to a) targets and obligations, and b) financing of low-carbon development and adaptation. Learning from the Copenhagen setback, resilient progress was made in Durban, South Africa, in 2011 when the delegates agreed that subsequent negotiations should apply to all parties. Building on a 2014 bilateral climate agreement between the United States and China, the US forged partnerships with other major carbon emitters such as India, Brazil and Mexico. Hence, a momentum was built behind three bases of agreement: a) A forthcoming agreement on climate change ought to be enacted by all parties, b) each party ought to be allowed to design its own climate plan and c) all emissions reduction targets and financing commitments ought to be voluntary. As the Kyoto Protocol was valid for the period 2005–2012, the 18th Conference of the Parties (COP 18) in Doha, Qatar in December 2012 extended the duration of the Kyoto Protocol until 2020 and confirmed that delegates would aim at a follow-up ‘protocol’ by 2015 to be implemented by 2020 and beyond. The Doha agreement included an agreement in a principle called loss and damage which stated that industrialised countries may be financially liable to other poorer countries if they fail to reduce carbon emissions. The 19th Conference of the Parties in Warsaw, Poland in December 2013 reiterated that all countries need to be included in the effort to cut carbon emission. The 20th conference

in Lima, Peru articulated the joint aspiration to limit future temperature increases and thus prepared the ground for the Paris Agreement. In the following year, in December 2015, a total number of 10,000 delegates from 195 countries came together at the 21st Conference of the Parties (COP 21) in Paris to specify their shared understanding on how to tackle climate change. L’Accord de Paris, or the Paris Agreement, was opened for signature in New York at the United Nations (UN) on 22 April 2016. The rules for implementing the Paris Agreement were elaborated in subsequent negotiations of the conference of the parties. Diversity of parties, observers and non-party stakeholders

Annex I parties

This group included parties from industrialised countries that had been members of the Organization for Economic Cooperation and Development (OECD) since 1992. In addition to OECD members, Annex I included delegates from economies in transition, the socalled EIT parties. EIT parties included the Russian Federation and the Baltic States, as well as most of the central and eastern European states. Annex II parties

This group included parties that were OECD members but not EIT parties. The Annex II group of actors voluntarily declared that they were willing to assume two responsibilities: Firstly, to provide financial resources to developing countries to enable them to ‘reduce emissions’ and ‘adapt’ to the adverse effects of climate change; secondly, to ‘take all practicable steps’ to transfer and promote environment-friendly technologies to (a) EIT parties and (b) developing countries.

73 Negotiation as a process

The individual actors that participated in the UN negotiations to combat climate change were called ‘parties’, ‘observers’ and ‘non-party stakeholders’. The parties were agents or delegates from 195 nations and they were grouped into Annex I, Annex II and Non-Annex I.

Non-Annex I parties

This group included parties from developing countries. Recognising the special needs of developing countries in relation to technology, investment and insurance, the following subgroups were formed: a) Parties that are especially vulnerable to the adverse impacts of climate change, for example, parties from countries with low-lying coastal areas and countries prone to desertification and drought; b) parties that rely heavily on income from fossil fuel production; c) parties from Least Developed Countries (LDCs) with evidently limited capacity to respond to climate change (as classified by the United Nations). Non-Annex I parties were recognised as ‘vulnerable’ to the adverse effects of climate change because they lacked the resources to prevent ‘agricultural disasters’ and invest in clean-energy projects.

74 Negotiation as a process

Observers

The observers were agents from a variety of organisations who attended individual sessions of discussions. They included participants from the United Nations, such as the UN Secretariat Units or agencies, and organisations, such as the Intergovernmental Panel on Climate Change (IPCC). Observers included: a) 100 intergovernmental organisations (IGOs), such as the Organization for Economic Cooperation and Development (OECD) and the International Energy Agency (IEA); and b) an additional 1,880 non-governmental organisations (NGOs). Observers needed to apply to participate and were admitted to represent a wide range of individual interests in business and society, such as the energy industry, environmental groups, farming and agriculture, indigenous populations, local governments, research institutes, labour unions, women and gender and youth. Non-party stakeholders

Individuals, investors, civil society groups, businesses, trade unions, cities, regions or other signatories were encouraged to participate and make voluntary commitments to demonstrate their leadership in combating climate change. For example, the banking group HSBC was among the first global corporations, and the first FTSE 100 firm, to make a voluntary commitment to carbon

neutrality. Other non-party stakeholders included groups of organisations such as community social networks. For example, Transition Network is a charitable organisation that has committed to inspire, encourage, connect, support and train communities as they self-organise, creating initiatives that rebuild resilience and reduce CO2 emissions.

The Conference of the Parties (COP) is the supreme body of the convention and serves as the meeting of the parties to the Kyoto Protocol. All conventions consisted of a total of 10,000 to 17,000 delegates from around 195 countries. To enable wider participation by civil society, there was a multi-stage process for admission as an observer or participant in sessions, side events and exhibit applications. This process included: a) An online registration system for admitted NGOs to nominate and confirm their representatives for UNFCCC sessions by the respective deadlines, b) an online registration system that enabled admitted NGOs to attend side events and exhibits and c) an online admission system for new individuals or organisations to apply for admission as observers to the UNFCCC process. Applicants needed to create an account and submit a set of required documents to the secretariat. Following a review cycle, eligible participants were formally admitted by the COP. Admission as an observer to the UNFCCC was a one-off process. Once admitted, observers were eligible to attend future UNFCCC sessions and did not need to reapply for admission. To enable wider participation of non-party stakeholders, a special online platform with the name The Paris Pledge for Action was created (www. parispledgeforaction.org). The aim of the Paris Pledge for Action was to enable individuals, investors, civil society groups, businesses, trade unions and cities from every sector of society or every region of the world to sign up to voluntary commitments that met or exceeded the ambitions of the Paris Agreement. By January 2018, the Paris Pledge for Action had enrolled more than 1,300 non-party stakeholders representing organisations, investors, cities, communities and regions, representing an economic value of US$ 11 trillion.

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Recurrent, polycentric, bottom-up interactions

76 Negotiation as a process

Building consensus

COP 19 in 2013 and COP 20 in 2014 emphasised the parties’ agreement that “everyone needs to be included”. Specifically, they regarded sustainability as a ‘common concern of humankind’. As climate change was seen by all participants as an ‘anthropogenic’, ‘urgent’ and ‘potentially irreversible threat’, the parties were now unanimous that ‘everyone needs to be included’ and that human rights, e.g., the right to health; the rights of indigenous peoples, local communities, migrants, children and vulnerable persons; the right to development, gender equality, empowerment of women and inter-generational equity need to be respected. The parties were also certain that interactions among participants ought to be conducted in non-adversarial spirit, that all contributions need to be voluntary, and sanctions should not apply. In COP 23 in Bonn in November 2017, negotiations shifted towards ‘food’ and ‘agriculture’ as well as the role of ‘cities, communities and regions’ in addressing problems of infrastructures, transportation and mobility, waste and water. In Bonn, delegates from the EU reconfirmed the commitment of the EU as a whole “to reduce carbon emissions by 40% by 2030 compared to 1990 levels”. As carbon emissions have been rising again in 2017, due to continued use of coal worldwide, negotiations were centred on phasing out coal-fire power generation. Delegates from the United Kingdom and Canada mobilised an alliance of 18 other nations, the ‘Global Alliance to Power Past Coal’, at COP 23 in Bonn. The world’s largest emitters, China, USA and India, are not yet included in the alliance to phase out coal-fire power generation. Delegates from this alliance aim to “increase the number of participating countries to 50 members”. The COP 24 in Katowice in December 2018 continued the effort to specify the rules agreed in the Paris Agreement on climate change but did not reach any consensus on phasing out coal. As carbon emissions continued to rise on a global scale, the frustration among the 27,000 delegates participating in COP 25 in December 2019 in Madrid was unsurpassed. It became obvious that there was a gap between pledges and action, negotiators were trapped in a status quo bias and there was failure to recognise the urgency of climate change. COP 25 negotiations in 2019 failed to reach further consensus, thus the parties to the conference deferred decisions to the next years.

Specifying a shared understanding

1. The spirit of the agreement is inclusive and non-adversarial. It acknowledges that climate change is ‘anthropogenic’, a ‘common concern of humankind’, and that parties should ‘respect, promote and consider their respective obligations’ on a wide spectrum of human rights, that is: The right to health; the rights of indigenous peoples, local communities, migrants, children, persons with disabilities and people in vulnerable situations; and the right to development, as well as gender equality, empowerment of women and inter-generational equity. 2. The agreement mobilises a system of voluntary Nationally Determined Contributions (NDCs) from all countries, rich and poor, by 2020 and thereafter. A total of 146 national climate change panels presented their NDC in advance of the Paris convention. For example, the European Union submitted, in total, NDCs that amount to a 40% reduction in emissions. 3. All NDCs will be published and reviewed and, five years later, from 2020, all countries will need to resubmit new updated NDCs. Parties that have not yet submitted their NDC are invited to communicate them to the secretariat in a manner that facilitates their clarity, transparency and understanding as soon as possible and well in advance of COP 22 in November 2016. The secretariat will continue to publish the NDCs communicated by parties on the UNFCCC website. 4. The agreement is non-punitive and builds on a powerful nonlegal enforceability based on a two-tiered UN system of reporting and monitoring countries’ volume of emissions.

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While delegates at COP 18 in Doha, COP 19 in Warsaw and COP 20 in Lima articulated their aspiration to limit future temperature increases, it was only at COP 21 in Paris in December 2015 that parties specified their shared understanding to hold global temperature rises ‘well below’ 2 °C above pre-industrial times, pursue efforts to limit the temperature increase to 1.5 °C, and make the global economy carbon-neutral in the second half of the 21st century. Specifically, the parties at COP 21 specified a shared understanding, known as the Paris Agreement, that involved seven components:

78 Negotiation as a process

NDCs are now subject to scrutiny and group pressure in a highly transparent way. For example, countries need to account for anthropogenic emissions and removals in accordance with methodologies and common metrics, and ensure methodological consistency between baselines, communication and implementation of NDCs. 5. Considering the needs and priorities of poor countries, developed countries will deliver at least US$ 100 billion per year to poor countries by 2020. It is envisaged that the amount will be increased after 2020. Based on the principle of differentiated responsibility and respective capabilities set out in the convention, parties and stakeholders need to assess both the financial needs of developing countries and the sources of this financing. The Standing Committee on Finance was created by parties to the Convention with the aim of assisting the COP, with regards to transparency, efficiency and effectiveness in the delivery of climate finance. Furthermore, the Standing Committee on Finance is designed to improve linkages and promote coordination with climate finance-related actors and initiatives within and outside the convention. Building trust between parties through effective measurement, reporting and verification of climate finance is considered essential. 6. The agreement aspires to capacity-building through education, training and public awareness in order to address gaps and needs, both current and emerging, in developing countries. The Paris Committee on Capacity-building will focus annually on one theme related to an enhanced technical exchange on capacity-building. A facilitative dialogue among parties in 2018 and 2019 took stock of the collective efforts of parties in relation to progress towards the long-term goal of the agreement and inform the preparation of Nationally Determined Contributions. All subsequent UN climate negotiations from 2016 to 2019 were based on the above-shared understanding. Glasgow hosted the 26th UN Climate Change Conference of the Parties (COP26) between 31 October and 12 November 2021. The objective of the summit was to bring parties together in order to accelerate action

towards the shared understanding of the Paris Agreement and the UN Framework Convention on Climate Change.

UN climate negotiations deliver three important lessons on strategic negotiations for sustainable value and raise further questions regarding the process and limits of negotiation. Lesson 1: When it comes to sustainability, averting the tragedy of the commons remains a challenge. Consider Hardin’s (1967) parable in which herders shared a common pasture. The common pasture was open to all herders. By adding animals to their herd, individual herders received a direct incremental benefit, while the incremental cost, in terms of over-grazing of the land, was passed on to all herders. Because all herders acted in accordance with their own self-interest, they kept adding animals to their herds, at a growth rate that was beyond the rate of natural renewal of the pasture, which eventually led to the tragedy of depletion of the scarce common resources. Can we conclude that individual actors are trapped in behaviour that produces tragic collective outcomes, such as depleting the common resources? This conclusion shares similarities with Aristotle’s observation that “what is common to the greatest number has the least care bestowed upon it. Everyone thinks chiefly upon his own, hardly at all of the common interest; and only when he is himself concerned as individual”.14 The tragedy of the commons is often used metaphorically to refer to what happens nowadays on earth: A defining failure to protect the earth’s common resources. Common resources on earth, such as clean air, are scarce and are being depleted at an unprecedented rate. Pursuing growth, humans have been generating energy by burning fossil fuels, such as oil, gas and coal, releasing carbon emissions into the atmosphere, at a faster rate than the earth’s natural absorptive capability, hence depleting the natural environment over time. Nonetheless, in this parable, herders have no entitlements to resources as the pasture is commonly shared by all herders. Moreover, there is no process of negotiation among herders. Are the current parties to UN climate negotiations in a better position than the herders or are they trapped in shorttermism and unable to escape the tragedy of the commons by themselves?

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3.10 LEARNING FROM UN CLIMATE NEGOTIATIONS

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Lesson 2: Strategic negotiations signal a triumph of hope over fear. People can often accomplish things together that they cannot accomplish individually. UN climate negotiations are based on polycentric, nested structures of the multiple layers of negotiations among individual parties. Negotiation is thus a process of collaboration by which inter-dependent parties with different interests and entitlements seek to do better through jointly decided action. Differences in the interests and entitlements among parties are the raw materials of the negotiation process. The last UN climate negotiations between 2016 and 2019 reveal a variety of interests ranging from securing food, farming, resilient cities, protection from rising sea levels, protection from flooding and fires, supporting the poor up to limiting the temperature increase to 1.5 °C. At the same time, UN climate negotiations reveal different entitlements to resources, e.g., entitlements to coal, sustaining economic growth and inalienable rights, such as the right to health. The dynamic interplay between interests and entitlements implies a long, time-consuming negotiation process to combat climate change. Negotiators have started to recognise global risks and vulnerabilities, yet they tend to ignore the consequences of not arriving at a jointly decided action. At this moment of history, the world is witnessing a collective failure to appreciate the urgency, a failure to mobilise rapid, far-reaching and unprecedented changes in the way we live, eat, travel and use energy. What are the enablers and barriers to negotiation as a process? Lesson 3: The world is witnessing a shared understanding in the making. The possibility of achieving the mutuality of advantage requires a shared understanding. Each negotiation episode presupposes a shared understanding. A shared understanding may include dimensions of mutually perceived expectations, values, preferences and beliefs. The problem that negotiators face is that this shared understanding needs to be specified. Imagine a world in which negotiators’ shared understanding is not specified. In this imaginary world, there would be no specified rules, no predefined patterns of communication or specified interfaces for negotiation. Actors would impinge on other actors and adapt to other actors but no actor would need to conform to a specified pattern of behaviour, and no one would

NOTES 1 Research into business networks refers to cognitive views held by individuals in business relationships as ‘network pictures’. See Ford et al. (2003), Ford and Redwood (2005), Henneberg et al. (2006), Colville and Pye (2010), Öberg et al. (2007) and Öberg (2012). 2 See Mouzas, Henneberg and Naudé (2008). Developing Network Insight. 3 In Japanese, the term Nemawashi derives from the practice of gardening. Nemawashi involves nurturing and preparing the ground to receive a transplant. Accordingly, without appropriate Nemawashi, a plant transplanted to new soil may die, see Sagi (2015). ‘Nemawashi’ a Technique to Gain Consensus in Japanese Management Systems: An Overview. International Journal of Arts, Humanities and Management Studies, 1(4). 4 This phenomenon is known as escalation of commitment and was first identified by Barry M. Staw. See Staw (1976). Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action. 5 See Staw and Ross (1987). Knowing when to pull the plug. 6 See Nash (1950). The Bargaining Problem. Nash’s bargaining problem between two individually important actors provides us with the theoretical underpinnings to consider alternatives to a negotiated deal (BATNA). Assuming that negotiators are rational and there is no asymmetry of information, Nash proposed the following solution to the negotiation problem: First, identify negotiators’ utility gains from a deal, expressed as U1 and U2. Second, assess the money equivalent of negotiators’ set of alternatives (BATNA 1 and BATNA 2), if there is no deal. Third, compare utilities from the deal and alternatives to the deal. The solution to the bargaining problem is an agreement that maximises the function (U1-BATNA 1) and (U2 -BATNA 2), known as the Nash equilibrium. 7 See Fisher and Ury (1981). Getting to yes: Negotiation agreement without giving in. 8 Black and Scholes (1973). Developed their option pricing model shortly after the first options exchange opened in Chicago. The so-called Black-Scholes formula was further developed by Merton (1973), who showed its broad applicability.

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expect other actors to conform to some previously learned pattern or convention. What would the problem be in this imaginative world? The problem would not simply be the existence of anarchy, but rather the inherent difficulty for negotiators to build consensus; thereby, the possibility of achieving the mutuality of advantage would be severely constrained.

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9 See Trigeorgis (1999). Real Options. Managerial Flexibility and Strategy in Resource Allocation. See also Trigeorgis and Reuer (2017). Real options theory in strategic management; Ipsmiller, Brouthers and Dikova (2019). Twenty-five years of Real Option Empirical Research in Management. 10 The rapid economic development after the Second World War gave rise to a new generation of professional agents and over the following decades, the power of the so-called technostructure increased significantly, see. Galbraith (1967). Thorsten Veblen in his ‘theory of the leisure class’, was the first who discussed the tension between principals and agents, see Veblen (1899). 11 See Schelling (1956). An Essay on Bargaining. 12 See Bazerman and Neale (1992). Negotiating rationally. NY: Free Press. 13 See Mnookin (2010). Bargaining with the devil: When to negotiate, when to fight. Simon and Schuster. 14 See Aristotle (2008). Politics. Translated by Benjamin Jowett, p. 57.

Behaviour in negotiations: Biases and errors

Four

Overview of relevant themes Behaviour in negotiations: Biases and errors • • • • • •

Bounded rationality System 1 and system 2 thinking Prospect theory and framing in terms of gains and losses Focal points and anchoring Present bias and hyperbolic discounting of future Herd behaviour

Think about cognitive limitations (bounded rationality) and behavioural biases in strategic negotiations. How do prospect theory and system 1 and system 2 help us explain our behavioural biases? How can you use prospect theory (e.g., how can you use the idea of ‘loss aversion’) to frame offers and counter-offers in your negotiations? Why we tend to postpone sacrifices and seek immediate gratification and what are the consequences of present bias? What is the role of anchoring in strategic negotiations? What are the consequences of herd behaviour? Consider your experience and lessons learned. What can you do to avoid behavioural biases and cognitive errors?

4.1 BOUNDED RATIONALITY AND BEHAVIOURAL BIASES

We would like to believe that individuals, managers, business leaders, diplomats or heads of organisations and states are rational negotiators. Our tendency to presume that people are rational players dates back to the period of Enlightenment in the 17th century which was centred on DOI: 10.4324/9781003001010-4

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Behaviour in negotiations: Biases and errors

84 Behaviour in negotiations: Biases and errors

reason. By reason, we mean the rational pursuit of happiness, liberty and progress on the basis of scientific evidence and knowledge. We understand ‘reason’ as the ability to make sense of the world in logical, observable and verifiable ways. In this way, rationality implies the ability to make decisions that maximise the expected utility terms of perceived benefits. Moreover, rationality implies that there is consistency in preferences; it implies that negotiators have complete information about all available options and preferences and that negotiators can choose one option over another in accordance with their expected utility. With this clarification of what is rationality, it is easy to recognise that the real world in which we live is far from being rational. In his ‘Treatise of Human Nature’, David Hume was among the first behavioural scholars who, in 1739, recognised that perceptions matter but misconceptions are frequent and often predictable. David Hume argued that “to hate, to love, to think, to feel, to see; all this is nothing than to perceive” (Hume, 1738, Book1, Section V1, p. 67). Nonetheless, Hume’s treatise on human nature was left rather unnoticed for more than two centuries. It was Herbert Simon in 1947 that drew the attention of scholars to the observation that behaviour is subject to ‘bounded rationality’.1 By using the term ‘bounded rationality’, Herbert Simon was trying to point to three important observations: Firstly, people have cognitive limitations. Secondly, people possess imperfect information. Thirdly, time constraints exist that impede rational evaluations. For this reason, Herbert Simon coined the term satisficing, i.e., that decision-makers are satisfied with adequate rather than perfectly rational decisions. Confronted with a complex world, human beings tend to make imperfect and suboptimal decisions. In this way, “human rational behaviour is shaped by scissors whose two blades are the structure of task environments and the computational capabilities of the actor” (Simon, 1990, p. 7). Thus, negotiators have a natural propensity towards reaching a closure. As time goes on, negotiators would tend to settle and reach an agreement with their counterparts. Negotiations within the European Union of 27 member states are complex and important decisions are made by a unanimous vote. Often negotiators representing member states meet in Brussels. They are locked in a meeting room and they keep negotiating until they reach the point of a satisficing, i.e., a satisfied decision albeit not a perfect decision. Usually, negotiators reach this point after midnight and frequently in the early morning hours.

4.2 PRESENT BIAS AND PROCRASTINATION

Negotiators show a present bias when they tend to settle for a smaller reward immediately, instead of waiting longer for a larger reward in the future. This natural tendency may be attributed to an evolutionary development of the human limbic system (system1). Historically, food has not been distributed evenly over time; to survive, humans sought immediate gratification. This historical evolution of nature and human behaviour has created inner psychogenetic propensities.2 Hence, most people would rather have a bird in the hand than two in the bush. Present bias means that humans tend to hyperbolically discount the future as if the future is far distant. The implication of seeking immediate gratification is the procrastination of necessary sacrifices in the present. Research among four-year-old children reveals how difficult it is for children to voluntarily postpone immediate gratification for the sake of later

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It appears that two different brain systems exist: System 1 and system 2 (Kahneman, 2011). Although system 1 and system 2 are often associated with different parts of the brain, they are strictly not physical locations. Instead, the two systems serve as metaphors for different processes in our brain. It is estimated that the majority of human decisions made each day are processed through system 1 which is associated with the older part of the brain, the limbic system. Specifically, system 1 is fast, automatic, impulsive, associative, emotional and rather unconscious. In comparison, system 2 is associated with the neocortex and it is slower, deliberative, analytical, rational and sequential. In sum, negotiators need to be aware of the main differences between these two systems: System 1 is an unconscious autopilot while system 2 is a conscious pilot. While system 2 is based on effortful deliberation and is generally reliable in complex decisions, system 1 is based on the sedimented experience of everyday decisions and thus tends to be prone to error and biases. When negotiators are busy with multiple tasks they tend to negotiate on intuition and usually settle quickly, thus negotiators use system 1. When negotiators are examining carefully all of their available options, they tend to opt for several rounds of negotiations, thus negotiators use system 2. Using system 2 has its price, it is timeconsuming and requires substantial sacrifices and efforts. Let us examine some of the most common errors in the context of strategic negotiations.

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rewards (Mischel, Ebbesen and Raskoff Zeiss, 1972; Mischel, Shoda and Rodriguez, 1989). Postponing immediate gratification appears to be an exercise of self-control. Walter Mischel found that those four-year-old children who delayed gratification developed into more cognitively and socially competent adolescents, achieving higher scholastic performance and coping better with frustration and stress (Mischel, 2014). The so-called marshmallow test is one of the most famous experiments in the history of psychology (Mischel, Ebbesen and Raskoff Zeiss, 1972). Nowadays, present bias and procrastination are evidenced, not only in the behaviour of children but also in the behaviour of adults, corporations and governments who postpone efforts for sustainable development, delay decisions to combat climate change or avoid addressing other serious socioeconomic and technological problems that require sacrifices. Thus, when it comes to strategic negotiations, managers, policymakers, diplomats and organisations tend to overvalue immediate gratification and postpone sacrifices that reduce instant gratification, even if these sacrifices generate long-term value. Balancing the short-term with the long-term is indeed challenging for individuals and organisations. Experienced negotiators may exploit the human propensity to seek immediate gratification and postpone sacrifices. For example, banks may offer a teaser interest rate that is unusually low, e.g., a rate close to 0% for two years. When the introductory rate expires, the interest rate needs to be re-negotiated and customers realise that only a much higher interest rate is offered. There is robust evidence of present bias among businesses in the pursuit of profitability at the cost of long-term growth. The achievement of profitability indicates results for a single period and does not capture the long-term value of the firm. Consider the growth of a firm. A firm’s growth is time-consuming. Therefore, many managers tend to negotiate deals that affect the bottom line of a profit & loss account immediately (Mass, 2005). This might explain the inherent bias towards operational efficiency; and why firms’ managers often neglect the pursuit of market effectiveness (Mouzas, 2006; Mouzas and Bauer, 2022 ). The pursuit of market effectiveness by continuously negotiating business deals that generate and sustain business growth requires time. Consider, for example, firms’ investments in sustainability or investments in intangible assets, such as brands or innovation. In the long term, investments in

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Figure 4.1 Balancing the short-term and long-term

87 Behaviour in negotiations: Biases and errors

y tab ilit rof i ral P he me Ep

Low

Operational Efficiency

High

sustainability might pay off because they enhance the firm’s growth prospects. However, they are immediately cost-effective, reducing the short-term profitability. Similarly, investments in intangible goods are costly and risky since their value in the present is uncertain. In short, intangibles, such as brands or corporate reputations are expensive, difficult to value and have no immediate effect on profits. They might create, nonetheless, long-term competitive advantages and stimulate growth. The intangible nature of assets, such as relationships and corporate reputations, however, makes the prediction of future performance outcomes problematic resulting in underestimating the involved risk and harming current profitability. On the one side, a short-term focus might limit the firms’ ability to recognise and seize business opportunities. Additionally, the focus on efficiency might hollow out firms’ assets and result in ephemeral profitability. In contrast, a longterm focus that includes investments in intangibles might just trigger risks reducing the current profitability of the firm. Hence, the challenge that negotiators face concerning operational efficiency and market effectiveness is to find a balance between the short-term and the longterm. Such a balancing act will enable negotiators to aim at lasting deals that generate a sustainable profitability that is neither ephemeral nor results in unprofitable growth (Figure 4.1).

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Understanding the inherent present bias has significant implications for framing decisions and the psychology of choice (Tversky and Kahneman, 1981). People tend to focus their attention on incremental ‘changes’ such as ‘moves’ rather than the ‘status quo’, for example, aggregated wealth or status, because historically this has provided better chances of survival. Moreover, people tend to perceive incremental changes differently depending on whether the changes are losses or gains. This difference in perception affects negotiators’ behaviour significantly. When it comes to gains, negotiators tend to be risk-averse. In contrast, when it comes to losses, negotiators tend to be risk-takers. For this reason, negotiation parties could exploit this behavioural bias and frame the possible outcomes of their negotiation in different ways. For example, they may frame the outcomes of a negotiation as an incremental gain or an incremental loss. 4.3 CREATE FOCAL POINTS FOR ANCHORING

Thomas Schelling observed that actors achieve much better interaction and co-ordination of their efforts when they are able to rely upon focal points (Schelling, 1960). He defined focal points as a set of mutually perceived expectations, shared appreciations or pre-occupations, obsessions and sensitivities. In a series of experimental studies, Thomas Schelling asked individuals to imagine a situation in which they were unable to communicate but wanted to meet each other in New York. The majority of respondents chose Grand Central Station because at that time this place provided a “focal point for each person’s expectation of what the other expects him to expect to be expected to do” (Schelling, 1960, p. 57). Mehta, Starmer and Sugden (1994) repeated Schelling’s (1960) experimental investigation in a more formal setting with incentives in which they confirmed that actors are more successful at coordination if they rely on a set of prominent and salient points. What is the relevance of focal points to negotiators? Creating focal points is relevant because they create anchoring effects. Anchoring means negotiators’ decisions are influenced subconsciously by the use of focal points, for example, information regarding historic prices, correlations or timing that serve as fixed reference points (i.e., anchors) for making strategic negotiations. In price negotiations, e.g., wage negotiations, anchoring can be a powerful tool. Experienced negotiators know that setting a focal point as an anchor at the outset of a negotiation

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can have a substantial effect on the final negotiation outcome. Setting a focal point as an anchor that is deliberately high can affect the range of all subsequent counter-offers. In this way, anchoring is an irrational bias towards an arbitrary but salient benchmark figure. The focal point skews negotiators’ decision-making. In this way, anchoring can be used to create an advantage in strategic negotiations since setting an initial anchor can influence subsequent favourable negotiations. Usually, negotiators make judgements based upon an initial focal point and then negotiate to adjust upward or downward. In strategic negotiations, anchors tend to have more power when they are supplemented by facts, data and information. Negotiators often include credible third parties, such as specialists or experts to provide objective facts, data or information. For example, an estate agent or a surveyor may provide an analysis and valuation for a property that is up for sale. In business-to-business negotiations, such as mergers & acquisitions, strategic partnerships, alliances or other forms of business collaboration in areas of R&D, launches and re-launches of new products, distribution and marketing, negotiators tend to use investment banks, accountancy firms, law firms and consultants. Focal points demonstrate that in continuing negotiations, the precedent becomes extremely important. The idea of precedent means that if a particular problem of practice X is settled in case C, then the rationale in case C would be applied by later actors to practice X. In other words, case C sets a precedent in relation to practice X. Negotiators attempt to settle their differences to create mutual benefit by drawing on focal points which are ‘prominent’ and ‘salient’ ways of mutually perceived expectations (Schelling, 1960; Sudgen, 1995). Negotiators often articulate these prominent and salient ways as rules that embody behavioural preferences. For example, rules may refer to the process of negotiation or minimum price offering. The power of focal points derives from salience. But salience is not restricted to facts, data or information. Visual cues may be used to create focal points too. As a Visiting Scholar at Harvard Law School, I worked with the Behavioral Science and Regulation Group, a group of fellows and students, committed to promoting the use of behavioural science in federal rule-making. The group of fellows and students was supported by Cass Sunstein.3 Building on behavioural insights, the group prepared a recommendation to the Food and Drug Administration (FDA) regarding ‘Food Labelling’ and

‘Serving Sizes of Foods’ that can reasonably be consumed at one eating occasion. Specifically, the group recommended to the FDA: • Use of visual cues to aid consumer understanding. • Communicate product healthfulness by grouping nutrients and using colour to Highlight healthful ingredients or particularly high or low nutrient levels. • Replace ‘Serving size’ to avoid implicitly endorsing large serving sizes.

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In sum, focal points as salient reference points can create anchoring effects. Negotiators may harvest the power of focal points to establish mutually perceived expectations. 4.4 THE ENDOWMENT EFFECT

The English philosopher and one of the most influential thinkers of the 17th century Enlightenment period, John Locke observed that people develop the right to own resources when they add personal labour to resources they hold. Three centuries later, the economist Richard Thaler built on John Locke’s insight and specified that people value things that are already parts of the resources that they own higher than things that could be added to their ownership but not yet owned. Richard Thaler explicated that this endowment effect has a pronounced influence on people’s behaviour (Thaler, 1980, 2017; Kahneman, Knetsch and Thaler, 1991). The endowment effect prompts people to demand more to give up their entitlement to a resource that is part of their endowment than they would be willing to pay to acquire the same entitlement to resource. The endowment effect is a constant reminder that negotiators need to understand their counterparts’ interests as well as entitlements. Successful car dealers offer potential car buyers the option to take a car for an extensive test drive during a weekend. When potential buyers take the car for a test drive, the endowment effect begins its impact. Similarly, the car rental company AVIS has added a sticker on the car key with a question: “Do you want to purchase this car?” With a market capitalisation of more than 2 trillion U.S. dollars in 2021, Apple Inc. the multinational technology company which specializes in mobile phones, consumer electronics and computers and online services is currently the world’s largest corporation. One of the most successful initiatives of Apple Inc. over the last 15 years was to

4.5 HERD BEHAVIOUR

The term ‘herd behaviour’ is commonly used to describe collective movements of animals, birds or humans, such as mass migrations, panics, large scale demonstrations or riots. These collective movements may involve reactions within a short time frame, but they may also involve long-term trends and popularities. Herd behaviour may be traced back to the evolutionary value of the information. For example, animals, birds and humans will monitor the actions of others as this gives them valuable information about resource availability.

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create around the world, in all major cities, large showrooms in which visitors could come in, touch and use all Apple products without a time limit. Apple’s staff members were told not to actively sell or to exercise any pressure on visitors to leave the showroom. Apple’s showrooms have been open to everyone to support the endowment effect. It appears that people are unwilling to separate from what they have possessed once they have fostered a sense of attachment and belonging. Interestingly, people’s attachment to a resource can happen within a short period of time. The endowment effect indicates a loss aversion and the preference for exchange surplus above and beyond the opportunity cost (Ashworth et al., 2019). In this way, the endowment effect brings a practical application of the prospect theory which states that people value gains and losses differently in reference to what they already have. Negotiators need to be aware of the endowment effect when they prepare an offer to acquire a resource. Negotiators, for example, need to think about the exchange surplus that their counterparts may need in order to give up ownership of the resource they own. The endowment effect forces negotiators to think about the interests as well as entitlements of their counterparts and prompts negotiators to frame negotiation outcomes as win-win solutions. In the antipodes of the endowment effect is the utopian vision of ‘radical markets’ where resources are not private but commonly owned and everything is up for sale (Posner and Weyl, 2017, 2018). The vision of ‘radical markets’ replaces the role of policymaking with a collective action of a libertarian order. Albeit perfectly rational, the vision of radical markets appears to be utopian because it ignores all human prejudices that inhibit the phenomenon of the endowment effect.

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Herd behaviour among humans may reflect a social learning process moderated by emotions and social influences (Baddeley, 2010). There have been many instances in which business leaders and managers have been observed to pursue management fashions leading to common forms of strategic behaviour (Abrahamson, 1996). Examples of these common behaviours include the introduction of new management techniques, such as zero-base budgeting, lean manufacturing, efficient consumer response (ECR) or the plethora of programmatic initiatives that blossom over periods of time in many industries (Mouzas and Araujo, 2000). These examples demonstrate that negotiators may be influenced by general movements or by ‘what everyone is doing’, by industry conventions, institutionalised forms of negotiations such as ‘annual trade negotiations’ or by ‘the right thing to do’. Existing herd behaviour studies (Bikhchandani, Hirshleifer and Welch, 1992; Bogaçhan and Shachar, 2004; Shiller, 1995) explain this propensity to herd-like behaviour as sequential informational cascades in which negotiators disregard their own knowledge as they acquire new information while observing the moves of other negotiators. Existing herd behaviour models focus on direct learning processes and the sequence of transmission of learning effects; they do not consider indirect processes of collective learning. We can understand the influence of indirect processes of transmission of learning effects if we look at cognitive representations and industry conventions as a basis for negotiators’ behaviour. Cognitive representations actively contribute to the process of identity construction leading to ‘network pictures’ that may provide a plausible narrative for past events and current positions (Henneberg et al., 2006, 2010). Previous research has provided us with insights into industry conventions or the so-called ‘constitution of networks’ as customary, expected and self-enforced or externally enforced norms and rules (Mouzas and Ford, 2009). The constitution of networks circumscribes appreciations and expectations about how to behave in business (Mouzas and Ford, 2009). One would expect more stable constitutions and widely held commonality of appreciations and expectations in older and more established networks, although all constitutions are subject to change. What is more relevant for negotiators is that the constitution of networks defines a high order of conventions that transcends any single organisation or dyadic negotiations.

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Consider the problem of information asymmetry. Negotiators are often confronted with the problem of information asymmetry and this has been well documented in the relationships between suppliers and customers (Akerlof, 1970; Sharpe, 1990). For example, customers often know much more about their suppliers’ performance in their particular relationship than suppliers know about their customers. The consequence of information asymmetry is that it leads negotiators to view multiple counterparts in the same way. Examples of information asymmetry can be found in the relationship between a bank manager and a customer when a loan is negotiated or in the insurance markets the relationship between a provider of annuities and a customer. For negotiators, the asymmetry of information is a major challenge. Consider, for example, the information asymmetry in the phenomenon of the securitisation of risk. Through securitisation of risk, the credit risk is passed on from one investor to other investors far away from the originators of an initial credit (Bryan, 1988). When financial institutions negotiate with their client’s various loan contracts, they do not know the originators of an initial credit or group of credits and, therefore, they need to rely on external credit risk models. Contemporary credit risk models operate by assigning average probabilities to future events or contingencies. For example, probabilities of risk management models such as Value at Risk, are often based on a relatively short period of observations. Nonetheless, because of the use of risk models, managers tend to underestimate the chance of low probability and high-impact contingencies; they systematically fail to incorporate new or emerging risks ignoring inter-dependencies between individual contingencies. In this way, negotiating parties often identify a limited number of risks and construe certainty too narrowly; they miss the forest of uncertainty while dealing with a few trees (Sims, 2001; Stulz, 2009). Negotiators may learn directly through observation and interaction with others in their small world, i.e., in their direct networks of relationships. They are also involved in indirect processes of collective learning, experience, folk memory, myths and legends about the big world that surrounds them, either through interaction with particular intermediaries or through the development of a common understanding that is shared and manifested. Collective learning of multiple actors has been investigated in many disciplines such as sociology and economics

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and business studies under various theoretical frames. There is a general acknowledgement that collective learning may lead to shared knowledge that drives continuous and sustained innovation, although the willingness to invest in joint development may also affect individual creativity. Furthermore, negotiating parties are often influenced by general movements, such as fashion or popularity; ‘what everyone is doing’, what comparable companies are doing, the ‘industry view’, the right thing to do. It is these phenomena that we refer to as herd behaviour because negotiating parties may act alike without any co-ordinated direction. Negotiators know their small world quite well: They know what happens and what works. Nonetheless, negotiators do not know the big world and need to rely on intermediaries, such as manifestations of joint understandings. Manifestations of joint understandings are artefacts that objectify (Verdinglichen) and, hence, add credibility and legitimise negotiators’ choices. Common examples are key performance indicators, credit ratings published by rating agencies, base interest rates, credit lines, tax-deductibility schedules or even investment valuations for future cash flows. All these are objectified inscriptions or artefacts that are shared among businesses in formal and informal gatherings, meetings or communications. Telecommunication and mass media make the sharing of these inscriptions not only possible but also instantaneous. Manifestations abbreviate and inscribe a joint understanding among negotiators; they transform it into objectified bearings for negotiated action. Key learning points from herd behaviour • Herd behaviour reflects ‘animal spirits’ and may lead to excesses or ‘irrational exuberance’. • Negotiators may be influenced by general movements (‘what everyone is doing’), and by industry conventions (‘the right thing to do’). • Massive information asymmetries between negotiation parties may exist. • Manifestations of shared understandings matter (objectified artefacts, e.g., audits, reports, valuations, models).

Case study Consider the implications of herd behaviour. The case of the Union Bank of Switzerland (UBS) illustrates the indirect processes of collective learning in networks of financial institutions, as negotiators are influenced by general trends and by industry conventions ( Mouzas and Ford, 2011). UBS is Switzerland’s largest bank. The bank was founded in December 1997, based on the solid performance of its two most significant ancestors, Union Bank of Switzerland and Swiss Bank Corporation. The objective of the merger was to create a basis for a truly global, fully integrated financial institution. Traditionally, UBS was associated with Swiss virtues of prudential stability, discretion and risk aversion in wealth management. Therefore, UBS’s corporate policy reflected its prudent heritage. Bank’s target was to maintain a return equity between 8% and 12% per annum. However, the business landscape started to change dramatically during the decade 1998–2008. UBS’s main competitors started to rapidly expand their business scope and geographical coverage and banking became highly competitive. In a wider context of continuous economic growth, advances in internet and telecommunications and low cost of capital, other international banks, such as Deutsche Bank (DB), JPMorgan Chase (JPM) and Goldman Sachs were delivering consistently an annual return on equity of between 20% and 25% per annum. In comparison, UBS managers understood that their returns were lagging behind their competitors and manifestations of league tables were a constant reminder of this performance gap. The development of new shared understanding amongst UBS managers was a critical factor in the bank’s negotiations with other stakeholders, such as institutional investors and customers during the period 1998–2001: UBS managers learned about their performance gap indirectly through their interaction with rating agencies, independent auditors, consultancies and international investors with which they did have a direct dependence. Specifically, institutional investors that operate globally demanded a higher return on their equity, independent auditors provided comparisons with competitors, investment analysts

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4.6 THE UBS CASE

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questioned managers’ performance targets and consultancy firms highlighted unexplored potentials. Initially, during the period 1998–2001, UBS senior bank managers reacted to these developments with inertia. However, Deutsche Bank’s higher return on equity drew the attention of UBS senior bank managers. The manifestation of Deutsche Bank’s performance was shared among UBS’ managers in social gatherings and formal business interactions. By the turn of the century, UBS managers jointly understood that the high return on equity of Deutsche Bank, JPMorgan and Goldman Sachs were attributed to negotiating investment banking deals. The next critical incident came during the year 2002: Indirectly re-inforced by their competitors’ continuous success, in 2002 senior managers at UBS manifested in an explicit way that the bank now focused on achieving an after-tax return on equity of 15–20%, “designed to ensure that UBS delivers continually improving returns to its shareholders” ( UBS, 2002, p. 55). Negotiating financial deals was slow and complicated as it required a different sort of ‘investment managers’ and a different set of business negotiations. UBS managers from different organisational units, such as retail banking and wealth management, were concerned that exploring new ways of doing business clashed with the tradition of prudent stability, discretion and risk aversion. In this regard, a critical incident came occurred in August 2004, when a task force consisting of the UBS Chief Executive, the Head of Asset Management, the Head of Investment Banking and the Chief Financial Officer prepared and distributed a manifesto with the title Vision 2010. To achieve all four key performance targets, UBS managers concentrated the push for growth on ‘fixed income’ but moved quickly to new high yield areas such as structured credit and commodities. In 2005, UBS negotiated the purchase of a share of the Bank of China for $3.4 billion in order to accelerate its growth in emerging markets. This step was regarded by all stakeholders as a natural development of the long-standing business negotiations between UBS and Bank of China and it reflected the growing economic importance of China. Growth was indeed fast and UBS emphasised revenues at the expense of calculated risk exposure. Bonus systems were geared to revenue growth and managers’ salaries were not affected by any potential loss. In order to boost revenues, UBS managers followed

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their competitors in considering more synthetic products for pension funds: They entered the market of Collateralised Debt Obligations (CDOs) and the market for Credit Default Swaps, which are a form of insurance for securities. Managers at the New York office of UBS concentrated their efforts on riskier ‘mezzanine’ CDOs. By estimating risk and relying on awarded AAA ratings, these managers hedged only 2–4% of many super-senior exposures. In a further effort to follow successful competitive moves, the Head of Investment Banking division, set up an inhouse hedge fund called Dillon Read Capital Management (DRCM) in June 2005. This fund sought incremental yields by taking positions on speculative opportunities. As the cost of capital was low, UBS’ managers presumed the cash liquidity would always be available to finance business deals. With this underlying assumption, UBS’s managers were repeatedly negotiating the following deals: Borrowing shortterm money from wholesale markets (inter-bank lending) at low-interest rates and buying long-term securities at higher interest rates. A lot of these activities were off-balance sheets and, thereby, avoided the capital and regulatory scrutiny that their standard business attracted. Relying on shared manifestations regarding their risk exposure, UBS managers were following a trend that was typical for many other financial institutions. UBS’s performance was reported according to International Financial Reporting Standards (IFRS). The return on equity in 2002 was 13.9%; this result was regarded by UBS managers ‘slightly below target range of 15–20%’ and was attributed to ‘market related declines in earnings’ ( UBS, 2002 p. 55). In 2003 return on equity was up to 20.5% and in 2004 up to 27.7%. These spectacular increases reflected strong revenue growth, the combined impact of share buybacks and dividend payments outpacing retained earnings. Returning previously generated earnings to shareholders in the form of dividends and share buybacks reflected popular trend in the banking industry. In a document entitled sensing risk released to international investors ( UBS, 2004), the senior managers declared risk-taking as UBS’s core competence:

“Taking risks is an inherent part of the financial services industry. For a bank managing risk is, therefore, a prerequisite for achieving

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attractive rates on return to shareholders” ( UBS, 2004, p. 2).

In 2005, return on equity was up to the historically highest level of 39.7%. In August 2006, the Chief Financial Officer released a report to investors (UBS, 2006) stating that UBS’s performance was strong despite the market reversal in the middle of May. He attributed this strong performance to the high levels of invested assets, record underwriting fees, brokerage fees and trading activities. There were, however, a number of small negative signals. Although investment banking revenues continued to rise in all businesses and geographical areas, especially in Asia, UBS recorded for the first time a loss of CHF 30 million related to hedging loan exposures. Total operating costs also rose 25% due to the higher number of personnel which in July 2006 reached 71,882 employees. UBS managers acknowledged that more difficult trading conditions were emerging and there were worries about future growth and inflationary developments worldwide. These signals did not affect existing negotiation practices and UBS managers were reassured by the end of 2006 reporting a return on equity of 28.2%. The Chief Executive Officer summarised UBS’ joint understanding as follows: “When market conditions become difficult, the trust in our advice becomes especially important. We believe this [2007] will be another year of strong results” (UBS, 2006, p. 2).

The relentless focus on manifestations of revenue growth was not challenged by UBS chairman, who was known for his determination to make UBS one of the world’s top three investment banks. In 2007, UBS reported the first-ever loss that brought the return on equity to −11.7%. This tremendous loss was attributed to negative revenues in the fixed income, currency and commodities area of investment banking. It is estimated that the in-house hedge fund (Dillon Read Capital Management) alone accounted for $3.0 billion losses. After these substantial losses in 2007, senior managers were forced to sell the share in the Bank of China, scrap the in-house

4.7 LEARNING FROM THE HERD BEHAVIOUR OF BANKS

The case demonstrates that negotiators may be influenced by general movements in ‘what everyone is doing’, and by industry conventions. Hence, UBS managers initially conducted their negotiations based on a joint understanding regarding prudential stability, discretion and risk aversion. For this reason, up to 2001, UBS did not follow the general trend towards investment banking. Negotiations with investors and customers had been conditioned by the particular Swiss banking culture in which it had operated for so long and which implied prudential stability, discretion and risk aversion. The case illustrates a number of critical issues in the period 1998–2001 and then in 2002 in which UBS started to develop an alternate joint understanding. This joint understanding was shared and manifested in the negotiations with international investors and

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hedge fund and take steps to ensure that lessons were learnt and that these lessons are embedded in UBS’s risk management. In the next annual report (UBS, 2007, p. 4) it was stated that ‘neither trading management market risk controllers foresaw the extreme developments in previously deep and liquid US residential mortgage market, which revealed the tail risks in UBS’s portfolio. With the accompanying drying up of liquidity, the size of UBS’s positions proved excessive relative to the market’. Hence, UBS managers understood the need to control risk by improvement of measurement of basis risk by increasing ‘granularity of risk representation’. UBS managers, however, remained confident that “many parts of UBS’s risk management and control framework were resilient in the face of 2007 stress market conditions” (UBS, 2007, p. 4). In the first half of 2008, it became apparent that the drying up of liquidity was not ephemeral; this was a critical incident as UBS managers were no longer able to borrow in the wholesale markets and the value of collateralised debt obligations plummeted. UBS’s return on equity for 2008 continued to decline to an unprecedented −54.4%, compared with −11.7% in the prior year. As a result, in 2008 UBS needed to write off 38 billion Swiss Francs ($37.3 billion), destroying all corporate profits generated over the previous five years. By the end of 2008, the bank was rescued by the Swiss government in a co-ordinated action with the National Swiss Bank.

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independent auditors who provided comparisons with competitors, with investment analysts who questioned managers’ performance targets and with consultancy firms who highlighted unexplored potentials. Manifestations, such as return on equity and business growth, were shared among UBS managers and highlighted that business performance needed to be improved. After the internet bubble burst in late 2000, the attention in the financial industry shifted from ‘equity trading’ (shares) towards ‘fixed income’ (bonds). Benchmarking performance against peers and against market rates of return on equity magnified financial institutions’ propensity to crowd together in herds. Notwithstanding the initial inertia and early clash with traditional values of prudential stability, discretion and risk aversion during the years 1998–2002, UBS managers intentionally followed the herd of other financial institutions, such as Deutsche Bank, JP Morgan and Goldman Sachs. Building structured investment vehicles off-balance sheet, UBS managers had been borrowing short-term money in the wholesale markets at a low-interest rate and buying long-term ‘fixed income’ securities. It should be noted that this industry convention demonstrates the risk that banks are taking in negotiating deals with investors. Holding long-term assets enables investors, such as companies and households, to hold longterm liabilities; hence, banks absorb companies’ and households’ liquidity risks. The way in which UBS managers coped with that inherent risk when they followed the herd is of fundamental importance, considering the reasons for their downfall. Following the herd created a double mismatch for UBS. Firstly, these off-balance sheet negotiation episodes created a liquidity mismatch because money had to be rolled-over repeatedly in the short term to finance indirect ownership of a long-term asset, for example, a 30-year home loan in the USA. The implications of this liquidity mismatch resulted over time in long-term dependency upon the wholesale markets to obtain liquidity. Secondly, and more seriously, the amount of liabilities (money borrowed) and assets (e.g., collateralised debt obligations) were disproportionally high compared to UBS’s equity capital. Because of the scale of UBS’s operations, the implication of this mismatch was that any significant distortion caused by the market value of their collateralised debt obligations or the rise in the

NOTES 1 See Simon (1947). Administrative behavior. Simon, 1990. Invariants of human behavior. Simon, 1972. Theories of bounded rationality. Simon, 1997. Models of bounded rationality: Empirically grounded economic reason. 2 There are many fiercely contested explanations to the enduring puzzle of nature and nurture. The preponderance of explanations attempted to provide us with ‘outside-in’ perspectives that look at the influence of the outside environment on what we are and how we behave. For example, ‘outside-in’ perspectives look at the wider society, the socioeconomic system, education or even pedagogic upbringing that nurture human behaviour. In contrast, by taking an ‘inside-out’ perspective, the inner psychogenetic propensities explain the historical evolution and human behaviour, see Tsardakis (2020). 3 Cass Sunstein has championed the transfer of behavioural insights into policymaking. See Sunstein (2020). Behavioural science and public policy.

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interest rate premium needed to obtain liquidity in the market could threaten the survival of the bank at any time. The combined effect of this double mismatch revealed the highly damaging effects that may evolve when negotiators follow the herd, particularly when there are major discontinuities of demand or supply in the business landscape. Manifestations of a shared understanding create a feeling of legitimisation that is likely to underestimate the inherent volatility of existing and emerging preferences. Negotiators’ herd behaviour reflects ‘animal spirits’ and may lead to excesses or ‘irrational exuberance’ ( Shiller, 2000; Akerlof and Shiller 2009).

Negotiating contracts

Five

Negotiating contracts

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Overview of relevant themes • • • • • • • •

Negotiating contracts Contracts as a manifestation of agreements The need to negotiate in good faith The duty to disclose Misrepresentation can rescind the contract Contracts are inherently incomplete Relational contracts might not suffice Framework contracts (umbrella agreements) in continuous business relationships

Think about the need for contracts. Why we need to manifest our agreement in a contract? Do need to negotiate contracts in good faith? What are the consequences of misrepresentation? Consider why contracts are inherently incomplete? What are the barriers to drafting complete contracts? How can you use contingency clauses to deal with future uncertainties? Is a relational contract sufficient to address barriers to complete contracts? What are framework contracts (umbrella agreements) and why they are encountered in stable and continuing business relationships? Consider some real-life examples. What is your personal experience of closing a deal with a contract?

5.1 CLOSING A DEAL WITH A CONTRACT

You have negotiated a deal successfully. It appears that you have closed a deal but what is the deal exactly? Is the negotiated deal a legally enforceable contract? These are highly relevant questions when it comes to DOI: 10.4324/9781003001010-5

1. Offer: Is there an offer? 2. Acceptance: Has the offer been accepted? 3. Consideration: What is in return for a benefit conferred? 4. Legal relations: Do parties intend to enter legal relations? Conditions 3 and 4 may become critical. Consider condition 4 and juxtapose social agreements with business agreements. Social agreements are usually not binding in legal terms. We presume that parties to social agreements do not intend to enter legal relations unless they explicitly state that they wish to do so. In contrast, we presume that business agreements are legally binding when business parties intend to enter legal relations, unless they explicitly state the opposite. For example, when parties state explicitly that their agreement is subject to contract, they do not wish their agreement to be legally binding. Now consider the rationale for condition 3. In general, societies want to promote exchange relationships. Therefore, only bargain promises, i.e., promises supported by consideration are legally binding. Gratuitous promises are in principle not binding. Consideration (something in return) needs to be sufficient but not adequate. What this means is that

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closing a deal with a contract. It is widely acknowledged that contracts are important for understanding how the economy operates and how business relationships are governed. Well-designed contracts provide incentives to individuals and organisations to collaborate successfully and perform activities in exchange relationships. A contract is a legally enforceable manifestation of consent. When we look at contracts, we take an objectified view on what has been agreed between contracting parties. This means we adopt an external standard (the manifestation of consent) to promote certainty, calculability and predictability of the agreed exchanges between contracting parties. In the event of a dispute, a neutral judge or arbitrator will decide the case. Hence, a contract is an external standard that provides protection for the reasonable expectations of contracting parties. Reasonable expectations are not the subjective expectations but the joint expectations of the contracting parties, as manifested by the contract. In this way, the contract preserves the substance of what has been agreed between the negotiating parties. When deciding whether or not a business contract has been concluded, courts or arbitrators look at manifestations of agreements to determine four conditions:

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the legal requirement is that contracting parties have provided something of value regardless of whether this value is adequate. For example, in May 2000 BMW and Phoenix signed a contract in which BMW sold Rover Cars for a nominal sum of £10. The sum of £10 was considered sufficient, though not an adequate amount. Contract law has not been particularly friendly to any form of taxonomic work that attempts to map different forms of contracts and explicate legal doctrines in a rigorous and systematic form.1 The lack of taxonomic work, in general, may be attributed to the inherent tension between experience and logic in law.2 Thus, classifications of contracts do not always fit squarely into conceptual boxes. Undoubtedly, there are some criteria which apply only to concluded contracts. Hence, the central concern for negotiators is to look at relevant criteria that could help them to understand different categories of contracts based on their real-life usage. Although there are a number of different and overlapping ways of seeing contracts, we can identify at least seven ways of classifying contracts:3 1) by the subject matter, 2) by the way the contract is made, 3) by the function of contracts, 4) by the time-horizon, 5) by the ability to re-negotiate terms, 6) by the involvement of consumers, 7) by the existence of mutual trust. By closing a deal with a contract, negotiating parties enter a regime of correlative right and duty; hence, the subsequent performance is the content of the duties and rights of the contracting parties.4 The contract that the parties will conclude, will represent a manifestation of consent. Consent is an inter-cognitive achievement between contracting parties and is, ultimately, the moral basis that differentiates between valid and invalid transactions. As a moral basis, consent treats contracting parties as counterparts that bring ‘entitlements’ to an exchange.5 Closing a deal with a contract would therefore require an insight into the significance of entitlements that specify the substance of correlative rights and duties that counterparts may possess, acquire or transfer in their negotiations with others. 5.2 PRE-CONTRACTUAL AGREEMENTS

Pre-contractual agreements, such as the letter of intent, agreement in principle, commitment letter, memoranda of understanding or heads of agreement, are manifestations of consent that contemplate a future contract. Pre-contractual

5.3 OPEN TERMS AGREEMENTS

An open terms agreement defines most of the terms of a business deal.9 Even though the parties to an open term agreement are bound by their agreed terms, they continue their negotiation on those terms which are still open. Therefore, in the case of open terms agreements, the barrier to a final and complete agreement involves further negotiations. Open terms are thus ‘contractual provisions that expressly grant a party substantial, but not completely unfettered discretion in performance- for example, a promise to make best efforts’.10 Consider

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agreements encourage and possibly oblige parties to enter into a future contract. Pre-contractual agreements are commonly used in business negotiations as they serve a practical, workable purpose. For example, pre-contractual agreements are used in circumstances where activity has to be completed before a contract is concluded or where parties cannot enter into a contract because the consent of a third party is required and that cannot be obtained at the time of the pre-contractual agreement. Even though pre-contractual agreements are commonly used in modern transactions, their legal status is uncertain. Unless a pre-contractual agreement is found to be a complete agreement, courts will probably decide that no contract has been concluded between the parties. The view in English law is that the process of contract formation has hard edges (Atiyah, 1995). Although there is no general obligation in English law to negotiate in good faith, parties to a pre-contractual agreement may be liable in tort and may be forced to pay reliance damages for badfaith negotiations. In comparison, US courts are much more willing to accept pre-contractual agreements than are English courts.6 In Germany, a pre-contract (Vorvertrag) is a binding contract, in which it is agreed that the parties to a pre-contract will conclude the main contract (Hauptvertrag).7 Building on the doctrine of culpa in contrahendo, courts and academic scholars contributed to the emergence of the general theory extra legem (gesetzliches Schuldverhältnis), in which parties have an obligation to act in good faith, even if no contract is concluded.8 It must be stressed that pre-contractual agreements raise questions beyond the issue of good faith or legal enforceability. Pre-contractual agreements may also raise substantial questions of intent to be bound, the authority of negotiators, application of statutes and interpretation of clauses.

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the contractual provisions for the procurement of Covid-19 vaccines by the EU Commission on behalf of EU Member States.11 In 2020, the EU Commission negotiated with leading pharmaceutical companies, such as AstraZeneca, Pfizer and Moderna the purchase of a large amount of vaccines to ensure a fair and equal distribution of vaccines to all EU member states. The contracts between the EU and pharmaceuticals included a general agreement on price, quantities and delivery schedule. AstraZeneca failed to deliver the agreed number of vaccine doses to the EU. In 2021 the EU commission in Brussels filed a lawsuit against the pharmaceutical company AstraZeneca for breach of contract. AstraZeneca argued that their contract contained a ‘best effort’ clause regarding the delivery schedule. Best effort clauses are not unusual in commercial transactions under a Common Law jurisdiction. The procurement of Covid-19 vaccines by the EU Commission, however, shows that open terms agreements, such as those that include the promise of ‘best efforts’ are rather problematic in civil law jurisdictions. The lawsuit against AstraZeneca is a reminder for negotiating parties to specify with more certainty the terms of their agreements. If the barrier to a final and complete agreement involves awaiting the occurrence of contextual contingencies, negotiators may consider drafting a contingent contract.12 An issue in drafting contingent contracts, however, is how to deal with the inherent uncertainty. Uncertainty is not the same as risk: Whilst risks can be calculated, uncertainty is an amorphous topology on which we cannot assign any probabilities. Therefore, it is often the case that there is no market to price contingent outcomes and contractual parties might envisage different contingencies. The alternative route is to regulate contractual performance by a definite term that is subject to a contingency under a party’s control. An agreement between a retailer and a manufacturer to take requirements is an example of such a term. In this example, the doctrine of good faith becomes significant as it regulates discretion. It should be noted that open terms agreements such as those found in professional services or commodity business do not imply a ‘reciprocal, on-going relationship’. They simply reduce the ‘parties’ incentive to test or haggle over risks that will have an offsetting impact; thus, open term agreements are attempts to reduce the ‘cost of contracting’.13

General terms and conditions are usually applied to discrete and, often, anonymous transactions. Businesses use also the expression “framework agreement regarding general terms and conditions”.14 General terms and conditions are contract terms that one of the contracting parties has defined in advance with the intention to incorporate them into future transactions. In more complex transactions, businesses use a set of clauses, known as boilerplate clauses.15 General terms and conditions are a demonstration of an on-going rationalisation and adaptation process to the evolving needs of commercial practice.16 General terms and conditions are designed and used by businesses to increase their operational efficiency and to promote economies of scale by replicating similar commercial transactions. It is obvious that general terms and conditions are instrumentalized to pass on risks and liabilities to other contractual parties.17 It is hardly surprising that exclusion or limitation clauses are among the most contentious cornerstones of general terms and conditions. In this way, standard terms may result in a ‘battle of form’ where both contracting parties try to impose their own conditions of trade.18 The Uniform Commercial Code, Article 2-207 represents an attempt to regulate the provision of additional terms in acceptance or confirmation. Accordingly, “A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms”.19 General terms and conditions and particularly exclusion and limitation clauses are now subject to control by legislative and judicial powers.20 Legislative and judicial interventions introduce a new set of objective standards in fair dealings which may even change the allocation of risks because of superior bargaining power or exercise of rights for an improper purpose.21 A good guidance regarding standard terms and conditions is provided by professional institutes, trade associations or tribunals. They usually update and publish standard conditions of contracts.22 5.5 HAS A CONTRACT BEEN CONCLUDED?

Consider the following case Walford v Miles. This case was decided in the UK’s House of Lords.23 Miles, a photo-processing studio, was put up for sale. Walford, a newcomer in the photo-processing business, was

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5.4 GENERAL TERMS AND CONDITIONS

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interested in buying Miles. Miles and Walford completed negotiations for the sale/purchase of the business successfully. Miles agreed to sell the business to Walford, subject to contract. Thus, Walford asked Miles to terminate all third party negotiations (lock-out agreement). Miles agreed to this lock-out agreement, provided that Walford sent them a ‘comfort letter’ from their bank that confirms that Walford had sufficient funds to buy the business. Walford secured the comfort letter the next day. While Miles initially cut off negotiations with third parties, they ultimately decided not to sell the business to Walford. They then sold the business to a third party. Walford sued Miles for breach of the lock-out agreement as they apparently continued negotiations with other parties. Miles argued that there was no binding agreement between Miles and Walford as the lock-out agreement was too uncertain to be enforced. Specifically, the lock-out agreement did not state the period of time that Miles was prohibited from negotiating with third parties. Walford argued that the lock-out agreement implied an obligation to negotiate in good faith for as long as they intended to sell the business. Critical questions

Did the lock-out agreement imply an obligation for Miles to negotiate in good faith? Was the lock-out agreement unenforceable because of uncertainty? Courts’ decision

In the landmark case, Walford v Miles the plaintiffs brought an action against the defendants for breach of a pre-contractual agreement on the grounds that they lost the opportunity to buy a photographic company. It was held by the courts that a) the pre-contractual agreement which contained a lock-out clause – no further negotiation with third parties – was not enforceable because it did not specify a fixed point of time at which it comes to an end; b) the duty to negotiate in good faith was ‘inherently repugnant to the adversarial position of the two parties involved in negotiations’; c) the plaintiffs ought to recover damages of £ 700 because of the misrepresentation made by the defendants. Clearly, the House of Lords in the United Kingdom decided in favour of the Miles. The lock-out agreement was considered uncertain

5.6 ETHICAL CONSIDERATIONS

Have you ever experienced that your negotiating counterparty is trying to take unfair advantage by conducting fake negotiations to gain privileged information or to obtain an offer to be used as leverage in other negotiations? Negotiating in good faith

Negotiating in good faith means that parties negotiate in accordance with a set of reasonable commercial standards of fair dealing. The threshold requirement of good faith is that each party must negotiate and perform the contract honestly. Historically, this reasonable commercial standard is known as Culpa in Contrahendo meaning “fault in conclusion of a contract”.24 Negotiating in good faith is an important concept for many civil law countries, which recognise a clear duty to

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because it did not specify how long it should last. Thus, this case is often cited as an authority for agreements, such as ‘an agreement to negotiate’, ‘an agreement to agree’ and ‘an agreement to negotiate in good faith’ as insufficiently certain to be enforceable in English law. Moreover, the case is a reminder that such agreements are often inconsistent with the adversarial positions of counterparts negotiating contracts. Negotiating parties should be able to pursue their own interests and walk away from negotiations at any time; this is known as ‘freedom of contract’. Often negotiators use the term subject to contract when there is an agreement between parties but this agreement is not a final, legally binding contract. The term helps negotiating parties to recognise that there is no binding contract and that they are still negotiating. The term ‘subject to contract’ rebuts the presumption of intention to enter legal relations (the fourth condition for ascertaining whether a contract has been concluded). Nonetheless, considering whether an agreement is legally binding, courts will assess all the facts and ask whether a reasonable person would regard it as subject to contract. In the 2020 case Joanne Properties Ltd v Moneything Capital Ltd, the Court of Appeal confirmed that where negotiations are ‘subject to contract’, there will be no legally binding agreement unless: (1) a formal contract is entered into, or (2) the facts show that the parties clearly intended to remove the ‘subject to contract’ qualification.

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negotiate with care and an obligation not to lead a negotiating partner to his detriment before a contract has been concluded. For example, in the German Civil Code, § 242 negotiating parties need to conclude and perform contracts truthfully and in good faith (im Treue und Glauben). In contrast, common law jurisdictions, such as the English law, remain resolutely sceptical to any incorporation of good faith principles. It has been argued by judges that a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the negotiating parties (see the case Walford v Miles). In U.S. contract law, the idea of negotiating in good faith can be traced back to the mid-19th century concept of ‘implied covenant of good faith and fair dealing’ that protected negotiating parties from taking advantage of one another. Later in 1933, the New York Court of Appeals ruled that every contract contains an ‘implied covenant that neither party shall do anything, which will have the effect of destroying or injuring the right of the other party, to receive the fruits of the contract’. This implied covenant of negotiating in good faith is nowadays incorporated into the Uniform Commercial Code and codified by the American Law Institute. The duty to disclose

Let us suppose that M&S and Baird negotiate a contract for the supply of textile products for subsequent sale at M&S department stores. Baird knows a material fact concerning the commodity, and M&S does not know the fact. Should Baird be required to disclose this fact to M&S? Similarly, M&S knows a fact about the market and Baird does not know it. Should M&S be required to disclose this fact to Baird? How should negotiating parties behave if they are involved in continuous and trusting business relationships? Ethical considerations and efficiency reasons would support a duty of disclosure. Often the mere silence will not support an action for deceit. It is a generally accepted practice that it is the onus of the seller or the agent to disclose any defects in the products or services on sale. Common law, in general, does not recognise the duty to disclose material facts known to one party but not to others. However, active attempts to conceal a defect can be regarded as a misrepresentation by conduct. For example, consider insurance contracts. Under the Insurance Act 2015, there is a legal requirement to fair representation and a duty to disclose to insurers all information, facts and circumstances which are known or ought to be known, and which

are material to the risk. Therefore, when parties negotiate an insurance policy, both the insurer and the insured must disclose all the facts.

Why misrepresentation matters

A negotiating party who has been induced to enter a contract by misrepresentation can set aside the contract, i.e., rescind the contract. Rescission for misrepresentation unwinds the concluded contract both retrospectively and prospectively. We need to bear in mind that terminating a contract, e.g., due to a breach of contract, discharges the contract only prospectively, not retrospectively. If misrepresentation is discovered, the contract can be declared void and the affected party may claim damages. Consider for example negotiations for the sale of a property or car. The seller of a house might misrepresent material facts concerning the size and age of the house to speed up the conclusion of the contract. Similarly, the seller of a car might misrepresent the mileage of the car to enhance the attractiveness of the offer. If the buyer of the house or the car later finds out that misrepresentation was made to him or her, they can file a suit against the seller to rescind the contract and depending on circumstances claim damages for the loss suffered.

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Misrepresentation

When parties enter negotiations, they will usually make representations to one another. If these representations are false or misleading and result in enticing the counterparty to enter a contract, this is known as misrepresentation. Thus, misrepresentation occurs when one party (the claimant) is induced to enter a contract on the basis of a false statement of fact made during negotiations. The claimant must establish that a misrepresentation has been made. A false statement of material facts must be unambiguous and must be evidenced, e.g., minutes of meetings, reports, letters etc. We can differentiate between three types of misrepresentation. Firstly, innocent misrepresentation, when one party was not aware that the statement was untrue at the time when the contract was signed. The remedy in this situation is usually the cancellation of the contract. Secondly, negligent misrepresentation is when one party did not take reasonable care to verify the truthfulness of material facts. Thirdly, fraudulent misrepresentation is when one party recklessly made a false statement to induce the other party to enter a contract.

What negotiators need to know • Misrepresentation is false statements of truth which induces the negotiating counterparty to enter a contract. • Misrepresentation applies only to statements of fact, not to opinions or predictions. • Types of misrepresentation: Innocent Misrepresentation, Negligent Misrepresentation, Fraudulent Misrepresentation. All these types of misrepresentation have varying remedies. • Misrepresentation can rescind the contract, i.e., the contract is then void. • The affected counterparty may seek damages. • Three types of misrepresentations – innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation – all of which have varying remedies.

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5.7 THE PROBLEM OF CONTRACT INCOMPLETENESS

Experienced negotiators know that it is virtually impossible to agree to all terms of a complete contract because negotiating parties are unable to foresee and assess all eventualities, as well as observe and verify contract performance. Negotiating deals, concluding contracts and developing relationships with other counterparts always carries the risk that these relationships may become dysfunctional, if conditions change. Adversities and showery weather in a relationship may occur either because of changes in market conditions, or the requirements of the company or the actions of the counterpart. External circumstances such as strikes, wars or flooding, may interrupt the continuation of business performance. Companies may receive new competitive offers from other companies or may need to reconsider the exclusivity of their supply or their subcontracting policies. Negotiators may also need to substantially re-negotiate their agreements because of new assignments or requests from counterparts, or because of the transfer of property rights, the adjustment of volumes and prices as well as necessary changes in terms of payment. A new agreement may not be possible because of irreconcilable differences and a company may even decide to terminate an existing business.

Barriers to concluding complete contracts

We can group barriers to concluding complete contracts into three relevant categories: (1) bounded rationality, (2) bounded observability and (3) bounded verifiability. Bounded rationality: Cognitive limitations make it virtually impossible

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The problem that negotiators face is that contracts are inherently incomplete. Incomplete contract theory provides us with rich theoretical insights on barriers to complete contracts, such as the multiplicity of contextual contingencies, information asymmetries, drafting costs, performance observability, performance verifiability, enforcement costs and re-negotiation requirements. The contribution of previous research work on the nature of contract incompleteness has been widely recognised.25 Negotiators conclude a contract when they buy, sell or rent a property or service. A contract is a manifestation of legally enforceable consent to a transaction between negotiating parties. Indeed, the formality of a contract preserves and specifies the substance of what has been agreed. A brief inspection of business relationships in a diversity of industries, such as manufacturing, services, technology, internet, airlines or telecommunications shows that businesses manifest their consent regarding partnerships, strategic alliances and other business relationships by drafting formal contracts. This formalisation enables a shared understanding between contracting parties by “(1) focusing participants’ attention; (2) provoking articulation, deliberation and reflection; (3) instigating and maintaining interaction; and (4) reducing judgement errors and individual biases, and diminishing the incompleteness and inconsistency of cognitive representations” (Vlaar, Bosch and Volberda, 2006, p. 1617). The formality of contracts incorporates an element of futurity which means that contracting parties need to anticipate future performance at the time that the contract is signed. Yet it is often impossible for negotiating parties to predict all future eventualities, observe and verify future performance. Building on this ground-breaking insight, incomplete contract theory argues that contracting parties are unable to specify all terms of their agreement into a complete contract. Barriers to concluding complete contracts are regarded by economists as transaction costs.26 Transaction costs are the costs of running ‘market transactions’ or the ‘costs of using the price mechanism’ (Coase, 1988, p. 7) akin to the friction in physical systems (Langlois, 2006). They include the cost of negotiating agreements, resolving disputes and enforcing contracts.

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for contracting parties to process all available information and define in advance all contractual terms with certainty. Thus, counterparts have a constrained ability to make decisions that maximise their utility, i.e., the perceived benefits minus perceived sacrifices. Notwithstanding the significance of bounded rationality, negotiators often overestimate their ability to rationally foresee and assess all future eventualities and incorporate them into fully into complete contracts. Bounded observability: Bounded observability implies that parties to a contract cannot obtain complete information about all possible contingencies that could affect contractual performance. Therefore, information asymmetry exists among contracting parties regarding preferences as well as available options. In practical terms, contracting parties have a limited ability to obtain perfect information because the information is costly or not available when is needed Bounded verifiability: The ability of contracting parties to verify contractual performance appears limited. Verifiability rests on the ability to access evidence of contractual performance. Evidence is relevant to ascertain and enforce a contract. In the case of a dispute, verifiable evidence (such as agreed terms, prices, costs and benefits, obligations and payments) becomes critical, as external parties (particularly authorities or courts of justice) rely on evidence that is verifiable. 5.8 THE USE OF RELATIONAL CONTRACTS

Scholarly work has attempted to address the problem of contract incompleteness by advocating the use of relational contracts. Relational contracts include informal agreements based upon unwritten codes of conduct, norms and conventions (Campbell, Mulcahy and Wheeler, 2017; Macneil, 1985). The idea of relational contracts embodies a school of thought that is most strongly associated with the work of Macneil (1975, 1983) and Macaulay (1963, 2003). Macneil (1975) was inspired by the seminal work of Macaulay (1963), who drew our attention to non-contractual business relationships. Building on the empirical work of Macaulay in 1963, Macneil (1975, 1980) was the first to champion the elaboration of relational norms, which determine “the behavior that occurs in relations, must occur if relations are to continue, and hence ought to occur so long as their continuance is valued” (Macneil, 1980, p. 64). The existence of relational contracts questions the manner in which contracts are concluded in business relationships and draws our

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attention to the relevance of relational norms. Indeed, the empirical evidence hitherto points to: “how parties to certain types of contract do not see the contract to which they are party as a conclusive list of fixed rights and obligations, but rather as a starting point for re-negotiation and adjustment” (Kimel, 2007, p. 250). Consider relational norms that guide re-negotiation. Relational contracts point out the inherent re-negotiation and adjustment of contracts that is guided by established norms within specific industries, such as farming, automotive or banking. Building on these relational norms, extant contract research has approached relational contracts as a governance mechanism (Williamson, 2002); a governance mechanism that involves long-term, relationship-specific investments, fostering inter-firm trust (Gibbons and Henderson, 2012) and broadening the scope of business (Argyres, Bercovitz and Zanarone, 2020). Notwithstanding the attractiveness of the use of relational contracts, the question remains whether relational contracts are sufficient to address the problem of contract incompleteness. Relational contracts are flexible, informal agreements based on mutual trust and norms that exist in specific industries and markets. Nonetheless, relational contracts may create indeterminate situations because of the lack of sufficient certainty of what has been agreed within relationships. Business research demonstrates that even a long-term relationship does not imply a contract, as it is impossible to ascertain what contracting parties have agreed in detail. Thus, it cannot be established how the relational elements of counterparts’ consent should be interpreted with certainty in the case of a dispute. If there is a dispute, courts would argue that it is not the onus of the courts to make a contract between the parties.27 While formal contracts are safeguarded through the legal enforceability of contractual provisions, relational contracts rely on norms and the expectation of continuity of business or the expectation of broadening the scope of business. Without a formality that manifests what has been agreed, the legal enforceability of relational contracts appears to be weak. Consider the landmark High Court decision in the United Kingdom, in which judges decided the 30-year business relationship between M&S and Baird does not constitute an implied contract.28 Thus, it is the onus of contracting parties to manifest their consent of how they wish to relate to each other (Barnett, 1986; Mouzas and Ford, 2018). While relational and formal contracts may not function as substitutes but operate as complements (Argyres, Bercovitz and Zanarone, 2020; Lewis and Roehrich, 2009; Poppo and Zenger, 2002), formal contracts are per se relational because

they establish a relation of recognition and respect among contracting parties, who were decided to do so (Markovits, 2004).

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5.9 THE USE OF FRAMEWORK CONTRACTS

Many companies attempt to solve the problem of contract incompleteness by using framework contracts, known in international business practice as umbrella agreements (Crone, 1993; Mouzas, 2006, Mouzas and Ford, 2012). Framework contracts attempt to balance the need of negotiating parties to remain flexible to adjust to new business opportunities with the need to ensure calculability and certainty of all agreed exchanges. Imagine you are an executive of a clothing retailer, such as Marks & Spencer (M&S) and your market research team detects a new consumer trend that M&S is well-positioned to address. But your agreements with your suppliers prevent you from moving quickly. Or imagine you are an executive in the automotive industry and you are excited by a new technology of lithium batteries that you could easily build into your latest model but existing contracts with suppliers make such an innovation an impossibility this year, and maybe even next year. In industry after industry, business negotiators set themselves up for regrets and, sometimes, money-wasting conflicts when they form business relationships with suppliers and dealers. They get locked into detailed contracts that turn out to be poorly aligned with their aspirations and that provide no room for innovation when market conditions change. Framework contracts could provide a solution. More and more multinational corporations are experimenting with creating framework contracts that spell out their aspirations. In studying business agreements over the past two decades, I have found that framework contracts or as they are often called umbrella agreements represent a radical advance from business as usual. Framework contracts address the problem of contract incompleteness, allowing the parties to understand one another’s values and restructure their ongoing negotiation in real-time. In so doing, they provide room for joint development of innovative ideas in response to new circumstances and opportunities. There is a lot of variety in how these framework contracts are structured and implemented. Unfortunately, many contracts are inadequate, either because they contain unenforceable rules formulated by vague and unwieldy language or because they are still too inflexible.

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This inadequacy might be attributed to misunderstandings about the nature of framework contracts. A common misunderstanding concerns the clarity about the function of framework contracts. A framework contract between related parties is not concerned with immediate contractual decisions. Instead, a framework contract is a joint consent between negotiating parties which explicitly spells out a framework of principles with the aim of providing flexible guidance for future contractual decisions. In order to be effective, framework contracts must articulate companies’ values and their expectations in language that is binding and enforceable, while providing mechanisms for revisiting aims and tasks. Another misunderstanding concerns the clarity about time horizon of framework contracts. Framework contracts are not simply pre-contractual arrangements or contingent contracts. In a rapidly changing business landscape, the boundaries between different forms of agreements between negotiating parties are fluid. Therefore, we need to draw a line between framework contracts and pre-contractual agreements and contingent contracts. Pre-contractual agreements, such as a letter of intent, commitment letter or memorandum of understandings encourage and often oblige parties to enter into further future contracts. Often some terms of the agreements cannot be decided at the point the contract is signed. If a complete agreement involves waiting for the occurrence of specific contingencies, businesses may consider drafting a contingent contract (Bazerman and Gillespie, 1999). For this reason, it is not the content or the time horizon but the function of the arrangement that determines whether an agreement is a framework contract or not. The function of a framework contract is to regulate all crucial aspects of business relationship. Framework contracts mirror the reality of business relationships today. They are not concerned with immediate contractual decisions. Instead, they provide an explicit framework of norms within which contractual decisions can be made. Many contemporary business practices evolved over time due to implicit norms in common usage. Framework contracts agreements between businesses transform implicit norms which are embedded in customs and commercial practices into explicit, basic norms for ongoing negotiation. Thus, framework contracts provide a framework of reasonable expectations for the involved parties: They regulate continuing interaction between parties and translate the consequences of

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fulfilling or breaching exchange promises. In this way, framework contracts provide an array of options for the choices of a company and those of its suppliers and customers. A framework contract represents a coping strategy in a complex and uncertain business world. By seeking to balance certainty and calculability of exchanges with the need to remain flexible, negotiators are confronted with three discrete problems. Firstly, negotiators realise that they are embedded in evolving business relationships. They recognise that each negotiation does not take place in isolation. Each negotiation is often part of a complex and continuing relationship between the parties, and each relationship affects and is affected by the other relationships. Recurrent practices in these relationships such as, for example, annual trade negotiations or regular business reviews, indicate that the time within negotiations shall not be understood as a linear process but as recursive practice. Furthermore, certain negotiation practices, such as coercion or contract formalities, have a significant effect on the relationship between parties. As a result, the negotiation problem is not analogous to a single decision-making problem. Instead, negotiation takes the form of an ongoing interaction in which one’s ability to learn what works best is dependent upon one’s ability to monitor what is being done. Secondly, negotiators must resolve the problem of simultaneously creating and claiming value although they do not know with certainty the potential gains at the outset of the negotiation. If negotiators are genuinely open, their behaviour will facilitate the exchange of information that is necessary to move the process of value creation forward; but this openness might be exploited by negotiators who are more concerned with value-claiming. Conversely, if negotiators are competitive in claiming value, they might limit or prevent the achievement of joint gains through give-and-take processes. The preponderance of research evidence suggests that negotiators tend to assess their counterparts as more competitive and less trustworthy than they really are; as a result, they systematically ignore opportunities for value creation (Bazerman, Baron and Shonk, 2001). Thirdly, negotiators need to deduce the nature of the negotiation problem and its perceived constellation. This includes consideration of all aspects and contingencies, such as consideration of the involved parties, the agenda as well as the issues perceived. Negotiators do not usually know with certainty all issues relevant to their counterparts, let

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alone the counterparts’ options and possibilities. One way to deal with this problem is to build on the experience of previous negotiations and proactively restructure existing constellations by breaking deadlocks and facilitating the negotiators’ willingness to reach agreements. But restructuring the negotiation generates the need to create a framework for the give-and-take processes of negotiation, particularly if the parties conduct complex, multilateral exchanges that involve electronic data interchange, multiple products and items, joint research and development or joint promotion and communication activities. A framework for such multilateral give-and-take processes must be articulated and shared by the involved negotiators. Implicit perceptions must be transformed into explicit understandings that guide and clarify the process. Theoretical concepts such as the best alternative to a negotiation agreement (BATNA), zone of possible agreements (ZOPA), interests, issues, positions or wise trades are useful constructs through which negotiators can analyse a negotiation, but it is questionable whether these concepts provide a framework for continuous interaction. What are the elements that constitute a framework for give-and-take processes, and what is the role of framework contracts? What can we learn from the practice of the use of framework contracts in strategic negotiations? Political, legal and business negotiations have evolved over time due to implicit rules and principles in common usage. People, businesses and governments and courts rely on these rules on the basis of a sedimented experience; they also rely on principles that operate as optimisation commands. The challenge of many political, legal and business negotiations is to transform these implicit rules and principles which are embedded in customs and commercial practices into explicit, framework contracts that provide people with structure and guidance to conduct further negotiations. Therefore, a framework contract appears as the constitution of contracts that regulate the ongoing negotiation between actors and translate the consequences of fulfilling or breaching promises (Mouzas and Furmston, 2008). Three conceptual dimensions could help negotiating parties to develop framework contracts. These are a) multilateral exchanges, b) manifold rationality and c) recursive time. Understanding 1) multilateral exchange, 2) manifold rationality and 3) recursive time can help negotiators to articulate a framework for

conducting future negotiations. Negotiators’ framework contracts may include ‘hard elements’ which are measurable in terms of tangible deliverables or key performance indicators, unique methods, practices or procedures, as well as ‘soft elements’ such as mutual learning, data interchange and joint innovation endeavours. Both hard and soft elements transcend the task-specific knowledge base of negotiators’ individual cognitions and allow a journey of exploration and mobilisation of inherent potentials which are often hidden or are not given transparency to the negotiating parties.

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Manifold rationality

Negotiators’ logic is manifold, in the sense that it emphasises certain aspects that are important for individual managers and diverts attention from other facets that might be important for other negotiators. Consider the failed negotiations for a merger between the Deutsche Bank and Dresdner Bank to form the largest bank in the world. Barely one month after announcing a merger of equals, Deutsche Bank highhandedly argued that Dresdner’s division of investment banking DKB needed to be sold in parts or in its entirety. Dresdner’s immediate response was that the integration of process in investment banking activities should be an essential part of the entire agreement to create a leading bank. Deutsche Bank accused Dresdner Bank of inflexibility. Both parties had to acknowledge that they were far from one another; the negotiations for a merger were called off as the two parties applied different rationalities on how the deal should work in practice. While the two parties agreed to proceed to an integration of their businesses, they neglected to articulate and manifest their shared understanding of the ‘spirit of deal’ (Fortgang, Lax and Sebenius 2003). Furthermore, individual negotiators, for example, the heads of certain divisions, might have personal reasons for doing things over and above what is ‘right’ for their organisation. A manifestation of manifold rationality can be found in the distinction between instrumental rationality (Zweckrationalität) and value rationality (Wertrationalität) as described by the sociologist Max Weber. Value rationality is guided by its consequences or end, whereas instrumental rationality is guided by means. Understanding and tolerating other negotiators’ underlying logic appears essential in the process of effective give-and-take negotiation.

Strategic negotiations are not a collection of isolated, non-related episodes of interactions. Instead, strategic negotiations take place within continuing relationships where current interaction is affected by the perceptions of the participants of their previous interactions and by their expectations of the future. For example, relationships between companies are frequently long-term. But even in this case, ‘relationship time’ does not appear as a linear process but as recursive practice. Habits and institutionalised forms of inter-firm interactions are manifestations of recursive time. Examples include periodic business or task reviews, annual negotiations between manufacturers and retailers or between manufacturers and suppliers, as well as business contracts among companies. Consider, for example, the annual negotiations between industry and trade that take place during September and December or periodic business reviews which are usually scheduled quarterly during the year. Similarly, the companies’ reported first-quarter results are for the operation of financial markets very important. Another aspect of recursive time is that the time perspectives of different companies are often not aligned. Each negotiating party may have a quite different view of the actual or desirable evolution or progress of their relationship, despite extensive interactions between them. The significant differences in the time perspectives of actors during a give-and-take process is illustrated by Snook (2000) in his analysis of different time expectations for deliberative processes between fighter pilots, AWACS flight controllers and ground controllers. Similarly, negotiators need to understand the characteristics and the importance of time for other actors as well as the recurrent practice itself. Institutionalised patterns of negotiation, such as periodic business reviews, summits, periodic task reviews and different time perspectives question our view of time as a linear process. They invite us to understand time as recursive practice and to look at the achievement of joint consent among negotiators as an indeterminate outcome of these recurrent practices. Multilateral exchange

The achievement of consensus is an amalgamated outcome of heedful give-and-take processes at numerous differing levels. A typical give-andtake process of negotiation will comprise several exchanges at regional as well as at headquarter levels, plus a plethora of related information-

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Recursive time

gathering activities, often with third parties such as professional communities and public bodies. Consider for instance the multiple exchanges between two companies in the areas of product and service delivery, stock replenishment, price management and promotions, trade conditions and allowances, as well as communication and information systems for order processing and billing. Multilateral exchanges invariably introduce complexity and lack of transparency into the negotiation process. Furthermore, exchanges could be task-specific as well as non-task specific. Negotiators’ openness to move beyond existing taskspecific exchanges and engage in heedful interactions is crucial for their ability to embrace new possibilities and develop alternative perspectives of their surrounding networks. A framework that links exchanges between levels and encourages co-ordination will increase the ‘heed’ of these multilateral exchanges.

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Examples of contract clauses

Each year between September and December, grocery retailers and manufacturers of laundry and cleaning products enter into annual negotiations to structure a framework that spell out their aspirations and values as well as specific rules with regard to how the counterparts wish to work together. Retailers and manufacturers specify how they intend to create value by addressing consumer needs and how value will be distributed between them, while leaving details such as prices and volumes to be agreed upon later. Framework contracts might include some the following clauses: Both parties have the right obtain competitive offers at any time. The agreement can be re-negotiated annually if one party wishes. The manufacturer and retailer will share industry knowledge with each other. Mutual notification is needed for all future capital investment and R&D. Subcontracting is permissible, but only with the other party’s consent. The parties agree to implement continuous stock replenishment based on electronic data interchange. Wholesale prices are determined unilaterally by the manufacturer, and retail prices are determined unilaterally by the retailer. Payment must be made in 30 days and delivery costs are paid by the supplier. Invalidation of one or more clauses will not have any effect on the framework contract as a whole (unless the clause is of major importance).

The advantage of framework contracts

Negotiators representing countries, organisations, commercial companies, financial institutions and investors embrace framework contracts because they simplify and facilitate the complex process of on-going negotiations. Commercial companies, for example, retreat from inflexible contractual arrangements and arrange framework contracts (umbrella agreements) to achieve improved interaction with each other. Countries may negotiate with each other an umbrella agreement for the conclusion of trade deals. The parties to a framework contract or umbrella agreement are better able to maximise their joint gains by creating a framework for on-going negotiation and exchange. Developing framework contracts delivers some distinct advantages: Firstly, framework contracts between parties transform implicit norms, which are embedded in customs and business practices into explicit, basic norms for interaction. In this way, framework contracts are manifestations that codify the parties’ knowledge about efficient ways to interact and, hence, become knowledge repositories. Nonetheless, negotiating parties need to draft their framework contracts in such a way that their expectations are manifested with certainty and predictability and that they include mechanisms for re-negotiation. One route for determining the appropriate

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Table 5.1 presents an example of a framework contract. The included contract clauses deal with sensitive issues such as exclusivity, information flow, confidentiality, subcontracting, warranties, property rights and termination. They also emphasise the importance of thinking about re-negotiation and governance of the deal. Moreover, framework contracts may deal with extreme contextual contingencies in the form of force majeure clauses, which protect parties from liability if forces beyond their control, such as political unrest, strikes, lock-outs, governmental interventions and natural disaster prevent fulfilment of their contractual obligations. A closer examination of negotiated framework contracts between manufacturers and retailers reveals significant variations. The main variations relate to the existence of a diversity of accepted rules and principles, as well as the diversity of possible focal points. Manufacturers and retailers make various business assumptions, have their own sensitivities, and define their own priorities. Some of the contracting parties are concerned with the transfer of property rights or confidentiality, while other contracting parties are more concerned with risks, warranties or the inclusion of force majeure clauses.

Table 5.1 An example of a framework contract Framework of focal points

Contract clauses

Product range/services Exclusivity

Laundry and cleaning products Both parties have the right to obtain competitive offers at any time Parties defined three performance indicators. Mutual notification regarding all future capital investment and R&D Notification regarding product damages need to be made within two weeks Subcontracting is only possible upon consent All requests need to be made in writingVerbal requests need to be confirmed in writing To be agreed/Continuous Stock ReplenishmentUnilateral price determination Unless otherwise agreed, on a monthly basisPayment in 30 days. Delivery cost is paid by the supplier (Delivered Duty Paid) Annual re-negotiation/business reviews quarterlyAny controversy shall be finally settled by Arbitration (International Chapter of Commerce) Parties bear no liability for damages occurred as a result of war, political unrest, strikes, lock-outs and governmental interventions The retailer reserves the right to demand the elimination of deficiencies or to allow the return of products within twenty days at suppliers’ cost The obligation to remedy deficiencies apply also to services obtained from subcontractors All information exchanged is confidential and shall not to be available to third parties without written consent of the other party No transfer of property rights. Supplier ensures that no third person has obtained property rights Unless it is of major importance, invalidity of one or more clauses will not have any effect on the umbrella agreement as a whole London/United Kingdom The supplier has the obligation to revoke any orders in writing which she does not wish to accept Need to be made in writing Indefinite agreement/annual re-negotiation Each party has the right to terminate the agreement immediately with regard to a particular type of services

Information Notification Subcontracting Assignment Volume/price Invoicing

Re-negotiation

Force Majeure

Guarantee

Liability Secrecy

Property rights Saving clause

Legal venue Amendments Additions Duration Termination

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terms of a framework contract to apply a form of backward recursion (Schwartz, 1992). Companies need to hypothesise a re-negotiation stage and then ask how the initial terms will impact on re-negotiation. Then they need to return to their framework contract and draft terms which are ‘renegotiation proof’. Hypothesised re-negotiation is, in fact, an interaction process by which negotiating parties, with different backgrounds and different interests, seek to do better through a jointly agreed exchange. Failure to interact in this way may replicate the managerial experience that was gained in the case of Baird vs. Marks and Spencer discussed previously. Secondly, the contracts made by companies may limit their ability to change. Framework contracts counter this by ensuring a balance between stability and change. Framework contracts solve the inherent conflict between conducting exchanges with certainty and retaining the ability to embrace business opportunities that may arise. Framework contracts resolve the tension between certainty and flexibility by the operation of rules, such as the inclusion of open terms regarding volume and prices as well as the inclusion of re-negotiation, arbitration and regular business reviews. Framework contracts lead to the essential question of how companies wish to interact with each other. Negotiating parties achieve much better co-ordination when they are able to rely upon focal points which express a framework of mutually perceived expectations and shared appreciations. This co-ordination is particularly necessary for ordering products or services regularly from a particular supplier or sold regularly to a particular customer. Negotiating parties’ decision to draft a framework contract is a function of the complexity and intensity of business interaction; the cost in terms of time and effort to select, handle and monitor a series of single contracts; the effectiveness of alternative arrangements such as implicit contracts, commitment letters or incomplete contracts. Framework contracts may serve to simplify negotiations in a complex setting. This simplification is likely to be of particular value to the stronger companies in asymmetrical relationships because they can dictate the inclusion of open terms and re-negotiation processes. A stronger company in an asymmetrical relationship can dictate unilateral price-determination or automatic stock replenishment according to a rolling forecast and can impose restrictions of certain rights or duties. Many framework contracts are often self-enforcing because the stronger party is able to create efficient non-legal sanctions for dealing with problems in such a way that they do not have to rely on legal enforcement. The economic inter-dependence in these agreements

creates the need for continuing business interaction. Thus, framework contracts are often encountered in stable relationships, e.g., manufacturer retailer relationships, manufacturer supplier relationships, as well as in business-to-business co-operations, strategic partnerships and strategic alliances. 5.10 LEGAL AND NON-LEGAL ENFORCEMENT OF NEGOTIATED

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CONTRACTS

Contracts are manifestations of legally enforceable agreements (Beale, Bishop and Furmston, 2005; Beatson, 2002; Furmston, 2001; McKendrick, 2003). Therefore, law, in general, is concerned with the enforcement of negotiated agreements in order to protect the reasonable expectations of the related parties, as expressed or implied by the concluded contract. In the event of a dispute, a neutral court should decide the case and the prediction of what a court will decide is what we call the law (Holmes, 1897). The evolution of this judicial thinking derives from Aristotle’s conception of ‘corrective justice’. Aristotle juxtaposed ‘distributive justice’ and ‘corrective justice’. Accordingly, ‘distributive justice’ secures a fair allocation of resources among people while ‘corrective justice’ preserves the existing allocation. The idea of corrective justice is often epitomised by the statute of justice as a blindfolded goddess; it is an idea of justice without regard to the personal qualities of the contracting parties. Corrective justice seeks to redress a pre-existing equilibrium and not to change it. In the event of a dispute, a neutral court would not use the case to ‘enrich or impoverish’ the wrongdoer or victim. In this way, the remedies for breach of contract are not given by way of punishment of the wrongdoer; they are given by way of compensating the victim for loss suffered. Hence, corrective justice implies placing the victim of the breach in as good a position as he would have been in if the breaching party had performed. This reminds us of the importance of the indifference principle. Under the indifference principle, a remedy should make a promisee indifferent between performance and legal relief. Nevertheless, the indifference principle does not provide a straightforward answer to the question – when a contract is broken and action is brought upon a breach of contract – how to assess the size of remedy that the victim is entitled to recover. One way to arrive at the amount of damages which the claimant (victim) is entitled is to use the ‘expectation measure’ – the amount that the claimant would have received has the contract been performed and not breached. The alternative is to use the reliance measure, which is the

• Measurable • Reasonable • Time-bound Firstly, a negotiated agreement could be regarded as void because of the lack of certainty. Unless the negotiated agreement is expressed in a sufficiently certain form, courts will not be able to enforce it. Secondly, parties to a negotiated agreement might not have the intention to enter into a legally binding contract. For example, an informal agreement that is drafted to help in planning and prioritising joint activities may not be legally binding. Thirdly, the requirement of consideration is an additional barrier to recognising the legal enforcement of a negotiated agreement. Courts are usually not permitted to use evidence of pre-contractual negotiations of parties or their subsequent conduct in aid of the construction of written contracts. Nonetheless, evidence of pre-contractual negotiations may be used for establishing whether misrepresentation was made to induce a party to enter a contract. In many civil law jurisdictions, courts will recognise a framework contract as a legally binding contract. In Germany, for example, courts will enforce the reasonable expectations of the parties, as expressed or implied by a

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amount that the claimant has lost in preparing to perform or in partly performing according to the contract. It is often the case that a breach of contract is more efficient than its performance. “Breaching is more efficient than performing when the costs of performing exceed the benefits to all parties” (Cooter and Ulen, 1996, p. 215). In this case, the courts usually do not compel adherence to a contract but let the involved parties decide whether they want to proceed to performance or compensate their counterparts for injuries incurred by non-performance (Posner, 1992). Often contracting parties make provisions for damages to be paid when the contract is breached. Such provisions of ‘penalties’ are only enforced if they represent a ‘genuine’ pre-estimate of ‘liquidated damages’. It has always been a central question in disputes and conflicts to determine the circumstances in which a contract is legally binding. Disputes about the meaning of contracts are one of the largest sources of contractual litigation. The primary task of a judge or an arbitrator is to ascertain the meaning of the language of the contract. Specifically, courts will look whether the terms defined in the contract are certain. Certainty of terms means that contract terms are:

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framework contract (Rahmenvertrag) unless it is against the law. Framework contracts, however, do not constitute an obligation to conclude future contracts. They are regarded as a ‘continuous obligation’ (Dauerschuldverhältnis) in which the denial of future contracts may be seen as a positive breach of the contract. As such the legal enforceability of framework contracts differs substantially from other pre-contractual agreements. Moreover, a framework contract takes precedence over general terms and conditions while a framework contract with dynamic, changing or open general terms are in general not legally enforceable. Legal enforcement, in both common law and civil traditions, is, nonetheless, practically unnecessary. Framework contracts are not like open terms agreements that define most of the terms of a contractual decision. The contractual performance is neither regulated by a definite term that is subject to a contingency under a party’s control nor by the fact that a particular contractual term is deliberately left to be agreed. Instead, contractual performance may not even take place. If there is a subsequent exchange among parties, it needs to be in accordance to the predefined terms of the framework contract. In this case, it is the agreed exchange that is enforceable and not the framework contract. Nowadays businesses rely increasingly on ‘non-legal’ sanctions to enforce their commitments. Non-legal sanctions may take three different forms. Firstly, non-legal sanctions may involve the loss of relationshipspecific assets, such as the partial or complete loss of future business. Retail chains, for example, often impose on consumer goods manufacturers the non-legal sanction of brand de-listing. As contracts are reviewed periodically, a de-listing of products or partial loss of business is often a rather ephemeral non-legal sanction. Secondly, non-legal sanctions may involve reputation costs. The problem with reputation costs is that information is not evenly distributed among all actors of a business sector. Thus, reputations are likely to be ineffective in heterogeneous and large business sectors. Thirdly, non-legal sanctions may also involve the loss of access to business networks and strategic alliances or the sacrifice of status privileges. Such a sacrifice is the loss of a ‘preferred supplier’ status or ‘category captain’ status, which are reserved for the exceptional contractual partners. A study of 137 litigated cases between 1998 and 2002 published in 2003 finds that businesses are indifferent to legal enforcement because they are able to create efficient non-legal mechanisms to enforce their commitments, and that the ‘observed preference for reciprocal fairness offers the best solution to the puzzle of deliberately incomplete agreements’ (Scott, 2003 p. 1645).

Case study This case Baird v Marks and Spencer was decided in the Court of Appeal in the United Kingdom. 29 A 30 year, exclusive, collaboration between Marks and Spencer, a retailer of department stores, and Baird a textile supplier had existed. M&S and Baird had no written contract. This was M&S’ standard practice with their suppliers at the time. M&S preferred to deal with suppliers with no written contract in order to keep relationships with suppliers flexible. The relationship between M&S and Baird was successful, indeed. They had been working together for more than three decades and Baird built three factories producing exclusively for M&S. By the turn of the century and with the start of the new millennium, competition in the retail business intensified. Marks and Spencer was not competitive in the marketplace and needed to cut prices to attract customers. Due to price competition in the retail sector, M&S’ financial performance deteriorated. M&S experienced a drastic decline in M&S’s operating profits and needed to restructure its sourcing policy. In practical terms, this means sourcing textiles from China. Marks and Spencer informed its textile supplier Baird that orders due for delivery will be the last and the business relationship will terminate at that point. Baird was surprised as their managers held expectations for the continuity of the business relationship. Baird’s managers estimated that the cost of closing several production sites and providing redundancy payments was ca £50 million. Baird litigates against M&S

As no written contract was concluded between the parties, Baird argued that a 30-year business relationship constitutes an implied ongoing contract and hence a reasonable notice was necessary to terminate the relationship. Terminating the contract without reasonable notice was therefore a breach of contract. Furthermore, Baird argued that M&S was estopped from terminating the contract without reasonable notice. In Baird’s view, a reasonable notice period of three years was appropriate. M&S responded that there was no ongoing contract between the parties. Each of their orders were

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5.11 BAIRD V MARKS AND SPENCER

individual contracts which terminated after completion. M&S, therefore, contended they were under no obligation to keep making orders. Courts’ decision

The Court of Appeal decided in favour of M&S. An implied ongoing contract, as proposed by Baird, was legally not enforceable because of the lack of certainty. There was a lack of certainty because it was to determine what the parties had agreed in terms of the quantity or prices of the products. This suggests that M&S and Baird did not have a legally binding contract. The Court of Appeal held that Baird needed to establish that M&S was bound to keep acquiring clothing from them in the future.

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5.12 LEARNING FROM BAIRD V MARKS AND SPENCER

It is clear that Marks and Spencer chose as a matter of policy not to have any contract governing continuous business relationships with their suppliers. Between Marks and Spencer and Baird were only individual contracts for the supply of garments ordinarily ordered twice a year. On the other hand, Marks and Spencer took a very active interest in Baird’s business. Marks and Spencer effectively controlled all of Baird’s supplies, discouraged Baird from dealing with other retailers, and required Baird to obtain their consent before they took over other companies. It is clear that this business relationship was asymmetric as Marks and Spencer was very much the senior partner although Baird itself was a substantial company with multiple production sites. In 1998, it supplied about £205 m of goods to Marks and Spencer, whose business represented between 30% and 40% of its total turnover. Companies may choose to become dependent on other strong companies because of the benefits that derive from their relationships, even if these relationships are asymmetric. 30 The benefits may include securing substantial business size, cost advantages or rationalisation of production and supply, simplification of business process and business reliance. The case raises the question why Marks and Spencer deliberately chose not to have an explicitly stated contract. It would seem that the most plausible answer is that the nature of the textile business required flexibility. Flexibility was required not just in

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volume, but also in the detailed breakdown of the goods supplied. Such flexibility could be obtained at low because Baird was extremely unlikely to go elsewhere. The unlikelihood of Baird going elsewhere arose from the second part of the Marks and Spencer negotiation strategy – the inculcation of the belief that the relationship would last forever. Baird presented extensive evidence in the courts, including statements from former senior directors of Marks and Spencer, that Marks and Spencer repeatedly affirmed that the relationship would be a continuing business relationship. There seems to be clear evidence that Baird relied on these undertakings and behaved in a way that they would not have behaved if they had thought the next order might be their last. On the other hand, Marks and Spencer’s affirmation created circumstances that were convenient for Baird. Baird did not have to develop new business and negotiate with other retailers. Why then was it that Baird was left without a remedy? As far as the contract is concerned, the answer is that it was not possible to ascertain what the contract between Baird and Marks and Spencer was. Baird has been getting about 15% of Marks and Spencer orders but no one suggested that they could complain if they only get 10% in the next cycle or even 5%. The flexibility was so great that by English standards, there was no contract. One can of course imagine a system of contract law that would reach a different result, particularly one which made extensive use of the concept of good faith. The case makes clear that Baird undertook very substantial expenditure in the belief that the relationship would continue. The facts were reminiscent of the famous American case of Hoffman v Red Owl Stores Inc. 31 where Hoffman was encouraged by Red Owl to sell his existing business, move house and buy a new site for a new store in the expectation that he would get a Red Owl franchise. The Wisconsin Court held that whilst there was no contract, Hoffman could recover his reliance loss by relying on promissory estoppel ( Mouzas and Furmston, 2008). Where does this case leave the negotiation of contracts? Marks and Spenser could have moved to a framework contract with Baird. There is nothing in the case that would prevent most clauses in framework contracts from being treated as legally binding provided that the obligations of both parties are defined with

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certainty. If Marks and Spencer had chosen in 1969, 30 years before the case went to the courts, to incorporate their deal with Baird in a legally enforceable contract, it seems very unlikely that the contract would have survived without amendment or renegotiation for thirty years. Contracts are inherently incomplete because it is impossible to foresee and assess all future eventualities at the time the contract is signed. What is the relevant key learning for negotiators? The Baird v Marks and Spencer case questions whether or not a relationship in the business landscape is a ‘social construction of reality’. 32 The case demonstrates that having a relationship does not necessarily imply that a contract has been concluded. A contract can only be implied by conduct if the negotiated contract terms are sufficiently certain. The parties’ rights and obligations must be manifested and explicitly stated so that in the case of a dispute an arbitrator or judge can ascertain what has been agreed. Vague terms may imply that negotiating parties do not intend to be legally bound by those terms. Furthermore, the case leads to the essential question of how negotiating parties wish to relate to one another. Negotiators nowadays need to recognise that negotiating contracts is becoming a dynamic and flexible process; and it is not a snapshot taken at the moment the exchange was agreed. 33

NOTES 1 This critique is discussed in detail by Simpson (1981). The Rise and Fall of the Legal Treatise: Legal Principles and Forms of Legal Literature, 48 U.C.R. 632, at p. 679. 2 See Holmes (1897). The Path of the Law 3 See Mouzas and Furmston (2013). A proposed taxonomy of contracts. 4 See Weinrib (2012). The Idea of Private Law 5 See Barnett (1986). A consent theory of contract 6 For a comparative analysis see R.B. Lake and U. Draetta, Letters of intent and other precontractual agreements. A Comparative analysis and forms (New Hampshire: Butterworth Legal Publishers 1989) 7 F.J. Säcker in Münchener Kommentar zum Bürgerlichen Gesetzbuch (München: C.H. Beck 2001) Band 1, 1474–1470; R. Bork in J. v. Studingers, Kommentar zum Bürgelichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen (Berlin: Sellier –deGruyter 2003) Buch 1, 567. 8 Kessler and Fine, ‘Culpa in Contrahendo, Bargaining in Good Faith and Freedom of Contract: A Comparative Study’ (1964), 77 Harvard Law Review 404. 9 Farnsworth regards agreements with ‘open terms’ and ‘agreements to negotiate’ as preliminary agreements, in other words as a way station between negotiation and

11 12 13 14 15 16

17 18

19 20

21

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10

agreement, see A. Farnsworth, A. ‘Precontractual liability and preliminary agreements: Fair dealings and failed negotiations’ (1987) 87 Columbia Law Review 217. M. P. Gergen, ‘The use of open terms in contract’ (1992) 92 Columbia Law Review 997 at p. 998. E. Schanze, Best Efforts in the Taxonomy of Obligation – The Case of the EU Vaccine Contracts (2021). 22 German Law Journal 1133. See Bazerman and Gillespie (1999). Betting on the future: The virtues of contingent contracts. See Gergen (1992). The use of open terms in contract. This expression is in accordance with regulations in civil law countries, see BGB § 305 Abs. 3. See Christou (2002). Boilerplate Clauses: Practical Issues. The impetus for the increasing use of general terms and conditions during the second half of the 19th century came from the massive industrialisation and rapid expansion of services, particularly in the financial, insurance and transportation sectors. The significant publication of Raiser’s monograph in 1935 instigated a discussion of the importance of general terms and conditions and the need for an effective control by administrative authorities and courts, see L. Raiser, Das Recht der Allgemeinen Geschäftsbedingungen (1935). Despite Raiser’s enormous influence among academic scholars, legislative powers in Europe needed more than forty years to react with an actual drafting of statutes. See e.g. Unfair Contract Terms Act 1977 and AGB-Gesetz 1976. See also J. Adams and R. Brownsword, ‘The Unfair Contract Terms Act: A Decade of Discretion’ (1988) 104 L.Q.R. 94; S. Bright, ‘Winning the Battle Against Unfair Contract Terms’ (2000) 20 Legal Studies 331. See, Macaulay (1974). The standardised contracts of United States automobile manufacturers. The impact of large-scale business enterprise upon contract. One possible solution to problem of the battle of forms is the ‘first shot’ approach. However, in the leading case Buttler Mashine Tool Co.Ltd. v Ex-Cell–O Corporation (England) Ltd. [1979] 1 All ER 965, [1979] 1 WLR 401, the court of Appeal held that sellers contract on buyers’ terms if they return an acknowledgement slip to buyers stating ‘we accept your order on the terms and condition thereon’. The golden rule is those cases is that there is a need for mirror between offer and acceptance, otherwise there is no contract, at least until the goods are delivered and accepted by the buyer, see Sauter Automation v. HC Goodman (Mechanical Services) [1986] 2 FTLR 239, 34 BLR 81. See § 2-207: Additional Terms in Acceptance or Confirmation, UCC, Legal Information Institute. These provisions are now in the process of being revised. Courts in civil law traditions adopt a doctrinal approach by making references to the rules contra-proferentem, venire contra factum proprium, contra bonos mores and use the provisions of civil code. For example, the civil code in Germany which incorporated the regulations of general terms and conditions act provides that every debtor (promisor) is bound to perform his obligations as good faith (Treu und Glauben) and common usage require. See Stoffels (2003). AGB-Recht.

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22 See, for example, the Framework Agreement Guide (2005) and Framework Agreement Non-Binding (2005) both published by JCT (Sweet and Maxwell). Also see ICE Conditions of Contracts, 7th Edition (1999), Standard Form of Building Contract (1998) Private with Quantities and Standard Building Contract without Quantities (2005) published by JCT (Sweet and Maxwell). 23 See Walford v Miles [1992] 2 AC 128; [1992] 2 WLR 174; [1992] 1 All ER 453; (1992) 64 P & CR 166; [1992] 1 EGLR 207; [1992] 11 EG 115; [1992] NPC 4 24 The idea goes back to the work of Rudolf von Jhering published in 1861 as “Culpa in contrahendo: oder Schadensersatz bei nichtigen oder nicht zur Perfection gelangten Verträgen. See Kessler and Fine (1964) and Zimmermann and Whittaker (2000). 25 See Hart (2017). Incomplete Contracts and Control. 26 The term ‘transaction costs’ was coined by Roland Coase, see Coase, 1937. The Nature of the Firm. Oliver Williamson was among the first economists who recognised the relevance of transaction costs for the analysis of interorganizational relationships and governance structures, see Williamson (1979). Transaction-cost economics: the governance of contractual relations; Williamson (2002). The theory of the firm as governance structure: From choice to contract. 27 See Schwartz (1992). Relational contracts in courts: An analysis of incomplete agreements and judicial strategies; McKendrick (1995). The Regulation of Longterm Contracts in English law 28 See Harrison (2004). Is a Long-Term Business Relationship an Implied Contract? Two Views of Relationship Disengagement. 29 Baird v Marks and Spencer [2001] EWCA Civ 274; [2002] 1 All ER (Comm) 737; [2001] CLC 999; [2001] CLY 931. 30 See Rindt and Mouzas (2015). Exercising power in asymmetric relationships: The use of private rules. See also Mouzas and Ford (2007). Contracts in asymmetric relationships. 31 133 NW2d267 (1967). 32 See Blois (2003). B2B ‘Relationships’ - A Social Construction of Reality?: A Study of Marks and Spencer and one of its Major Suppliers. 33 See Eisenberg (2000). The Emergence of Dynamic Contract Law. For a discussion of framework contracts (umbrella agreements), see Mouzas and Furmston, (2008). From Contract to Umbrella Agreement.

Managerial implications: Looking ahead

Six

Managerial implications: Looking ahead

• • • • • • • •

Unintended consequences of strategic negotiations A new shared understanding in the making Learning from manufacturer-retailer negotiations Brand loyalty vs. store loyalty Managerial skills Mindful negotiator Objectifying and evidence-based argumentation Resilient negotiation

While negotiators finalise business deals in networks of interconnected business relationships, negotiators’ behaviour might result in unintended consequences. Think about the negotiations between manufacturers and retailers to advance brand loyalty or store loyalty. What can we learn from manufacturer-retailer negotiations? What are the managerial skills that negotiators need in today’s inter-connected business landscape? Why do we need to be mindful of the spatiotemporal context in which we are embedded? Being mindful of our environment, others and ourselves can be practised. Think about how pre-conceptions and prejudices may affect strategic negotiations. How can we develop an evidence-based argumentation? Consider your own negotiation style. How resilient are you? Envision the world in terms of potentials. Think about strategic negotiations as a method to discover what is possible. Consider real-life examples. What is your personal experience in strategic negotiations?

DOI: 10.4324/9781003001010-6

135 Managerial implications: Looking ahead

Overview of relevant themes

6.1 THE UNINTENDED CONSEQUENCES OF STRATEGIC

136 Managerial implications: Looking ahead

NEGOTIATIONS

The aim of this chapter is for the reader to explore the consequences of strategic negotiations. Elaborating on the consequences of strategic negotiations, we will discuss the negotiating skills that managers need today as well as personal development issues. The consequences of strategic negotiations may emanate from: 1) the challenges that businesses face, 2) the process of negotiation, 3) the behaviour in negotiations, e.g., negotiators’ behavioural biases and cognitive errors and 4) the negotiation of contracts (Figure 6.1). Negotiators might be aware of their own actions but they are not always aware of the consequences of their negotiation behaviour. Some consequences of negotiation behaviour are unintended and they may result in multiple network effects akin to the domino effect in interconnected business relationships. As the 26th COP (Conference of the Parties) in 2021 goes ahead and parties from 197 states negotiate how to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change, the world is experiencing a series of unintended consequences. The Global Energy Review indicates a rebound of global CO2 emissions by 4.8% due to worldwide demand for coal, oil and gas, environmental degradation through the overconsumption of natural resources, the destruction of environments and the eradication of wildlife, as well as growing social inequalities. Some of the unintended consequences and their subsequent domino

Challenges that negotiators face

Negotiating Contracts

Consequences

Negotiation Process

Behaviour in Negotiations: Biases and Errors

Figure 6.1 The consequences of strategic negotiations

137 Managerial implications: Looking ahead

effects are now palpable in frequent natural disasters, devastating fires and global pandemics. As strategic negotiations progress, the diversity of different interests and entitlements among parties become apparent. The dynamic interplay between interests and entitlements is time-consuming and the word the world is witnessing a lack of a sense of urgency and a failure to mobilise sustainable solutions. Nonetheless, the world is witnessing the emergence of a new shared understanding in the making. The new shared understanding that emerges is the need for individuals and organisations to negotiate lasting business deals that generate a triple bottom line impact on: 1) planet, 2) people and 3) profits. Entrepreneurs, commercial and governmental organisations are recognising the need to pursue environmental, social and economic sustainability simultaneously. Firstly, they understand that they need to take a more active role to combat environmental degradation and protect our common pool resources. Secondly, they need to address growing inequalities and concerns about inclusiveness, fairness and justice. Thirdly, they need to develop a more complete view of corporate purpose, creating long-term value that better serves everyone, including investors, employees, communities, suppliers and customers. Consider the Business Roundtable, an association of business leaders in the USA. In 2019 the Business Roundtable redefined the purpose of a corporation for the benefit of all stakeholders: Customers, employees, suppliers, communities and shareholders. Unambiguously, 181 business leaders of world-class organisations specified that “major employers are investing in their workers and communities because they know it is the only way to be successful over the long term” (Business Roundtable, 2019). As perceptions are changing worldwide, explicit rules and implicit conventions are changing too. Individuals, managers, policymakers, producers, retailers, service providers and states are compelled to negotiate agreements that require far-reaching transformations. Currently, procurement in the public sector is being transformed to incorporate resources and activities that are environmentally, socially and economically sustainable. Similarly, individuals and organisations in the private sector are concerned with innovative transformations that create sustainable value. By 2023 most corporations, financial institutions and pension funds will have to set out detailed public plans for how they voluntarily move towards a net-zero emissions target. Net-zero is achieved when an

138 Managerial implications: Looking ahead

organisation achieves an equilibrium between the amount of greenhouse gases it is emitting and the emissions it is removing from the atmosphere. Already, 450 large corporations, financial institutions and pension funds controlling 40% of global financial assets, equivalent to $130 trillion have aligned themselves to achieving a net-zero target in the future. Organisations and individuals are left free to decide how they will pursue a sustainable finance that incorporates environmental, social and economic considerations. Environmental considerations include climate change mitigation and adaptation, as well as protecting the natural environment, e.g., preserving biodiversity, preventing pollution and promoting a circular economy. Social considerations include tackling inequality, inclusiveness, labour relations, investing in human capital and communities, as well as protecting human rights. Economic considerations include the time-horizon of investment, capital assets, return on investments, interest rates, discount rates for investment valuations, dividend policy, taxation, carbon pricing, incentives and executive remuneration. The challenge for negotiators will be to accommodate the multiplicity of diverse interests and entitlements among different stakeholders to instigate a distributed innovation.1 Strategic negotiations for sustainable value are now needed more than ever to discover new possibilities. For this purpose, negotiators need a mind-set that questions existing intertemporal trade-offs and encourages investments in innovation and longterm capital goods. Negotiating for sustainable value, individuals and organisations need to think about how they can differentiate their offering not only in terms of tangible products or services. Increasingly in all sectors and industries, firms negotiate with multiple stakeholders to develop their intangible assets, e.g., research and development, innovation, software, databases, designs, branding, as well as artistic creations and processes. Haskel and Westlake’s (2018) study of firms’ large investments in intangible assets explains the difference of intangible assets from other resources in terms of scalability, sunkenness, spillovers and synergies. Scalability implies ‘non-rivalry’ because one person can use an intangible asset without depriving others from its use.2 Sunkenness means that intangible assets may have limited or no market value; their value is an integrative part of their owner’s business, but not to others. Sunkenness implies that investment in intangible goods such as knowledge-based resources is very risky. Spillovers means that many benefits of an investment may

Producers

Producers’ competitive advantage derives from their efforts to differentiate the goods they produce, i.e., producers’ efforts to innovate their product offering. Therefore, manufacturers of consumer products or producers of industrial goods are concerned with promoting innovation when they negotiate with other stakeholders, such as suppliers, R&D labs, specialist agencies and retailers. For producers, innovation is not restricted to product innovation, e.g., the shift from combustion engines to electric cars or the shift from plastic to natural and biodegradable materials. Innovation includes service innovation and process innovation that improves cost-efficiency, e.g., reducing energy consumption or improving delivery systems. Thus, for producers, innovation means cutting-edge research and development of new products and services that enhance the firm’s competitiveness in the marketplace. To do so, producers dedicate a significant share of their assets and revenues to market research, new product development, market tests, as well as launches and re-launches. Specifically, consumer goods manufacturers protect their distinct differentiation through branding, patents and intellectual property rights to secure entitlements and ensure that a competitive advantage cannot be easily copied by others. Producers are generally concerned with the availability of their branded products and services through multiple channels of

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accrue to others who have not contributed to the investment. For this reason, individuals and organisations would try to protect their intellectual assets as property rights by copywriting, patenting or by keeping them codified or secret.3 The antipodes of spillovers can be found in synergies. Synergies imply incremental benefits from partnerships and co-operations to develop sustainable offerings. Therefore, the creation of synergies reshuffles business networks and reshapes markets for goods and services. Empirical evidence suggests a continuous increase of the relevance of intangible assets compared to tangible assets covered by the firms’ balance sheet. The tangible assets of S&P 500 firms in 2015 represented only 16% of their market capitalisation, compared to 83% in 1975 (Haskel and Westlake, 2018). The laundry & cleaning case discussed earlier in this book reveals some of the organisations’ endeavours to transform their offerings in more sustainable ways and negotiate lasting business deals that strengthen their competitiveness. Let us examine the specific managerial implications for producers, as well as for retailers of products and services.

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distribution. For this reason, producers need to negotiate lasting business deals with wholesalers, dealers and distributors to ensure that their brands are widely available to final customers. In addition to online business, examples of alternative routes to customers include petrol stations, hotels, restaurants, cafes, railway stations, airports, festivals and events. Producers tend to have good capabilities in market research and thus they tend to have a robust customer insight when it comes to their products and offering. What producers need to develop is a shopper insight which is the unique knowledge about their customers as shoppers at the point of sale. Negotiators need to be aware of these particular concerns when they negotiate lasting deals with producers. For example, if you are a supplier of raw materials, you need to think about ways that might help producers innovate and differentiate their offering in the marketplace. Retailers

Historically, retailers invested heavily to increase their floor space, e.g., increase the number of outlets to improve their national and international coverage. More recently, retailers have started to move investments from ‘floor space’ to ‘mind space’. For example, grocery retailers invest nowadays heavily in creating an image profile among consumers. By doing so, retailers aim to enhance store loyalty. An important instrument in achieving store loyalty is the development and launching of private labels. But retailers lack resources and capabilities in two areas: 1) research and development and 2) manufacturing. For this reason, retailers need to negotiate with manufacturers and conclude lasting deals that enable them to introduce and market private labels. This endeavour might cause a friction with manufacturers of strong consumer brands who are rather reluctant to engage in private labels. A critical aspect in negotiating private labels concerns entitlements, e.g., private labels’ intellectual property rights. Usually, retailers claim all intellectual property rights for their private labels but this claim reduces the role of manufacturers to the role of mere producers and subcontractors. Hence, by engaging in the production of private labels, manufacturers become asymmetrically dependent on retailers. Developing ‘mind space’ necessitates retailers to invest more in the recruiting and developing of people. Despite retailers’ recognition of the importance of people in developing an image profile among consumers, retailers’ efforts to invest in long-term intangible assets including human resources, are restricted by the thin operating margins that are

6.2 STRATEGIC NEGOTIATIONS TO BUILD RESILIENCE

Strategic negotiations can be used by individuals and organisations to build resilience. Resilience is the ability of negotiators to withstand adversities and bounce back. Adversities may be natural catastrophes, pandemics and economic crises, geo-political tensions or other discontinuities or failures. Adversities may affect individuals’ and organisations’ capacity to meet their commitments to stakeholders, such as investors, banks, customers, suppliers, as well as employees. Some of the future adversities might be predictable surprises arising out of negotiators’ failure to recognise a threat, prioritise needs and mobilise action (Watkins and Bazerman, 2003). Specifically, negotiators may aim to a) detect adversities, b) assess the probability of disruption and c) estimate the consequences. Negotiators often see these events unfolding as domino effects, i.e., events that affect other events. Some negotiators try to assign probabilities to future adversities. This is a common practice in a number of industries such as the insurance business and it is a good practice when access to big data is available. While negotiators may be able to assign probabilities to future adversities, they are not always able to predict all adversities. Uncertainty is often a faceless topology, in which negotiators cannot assign probabilities to unknown events. What can negotiators do to cope with uncertainty? What negotiators can do is to reduce the

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prevalent in the retail sector. With the exception of grocery retailers, high street retailers have been severely affected by lockdowns due to the Covid-19 pandemic. Many retailers have attempted to move a great part of their businesses online with varying degrees of success. In June 2021, the US San Francisco-based fashion retailer Gap Inc announced that the retailer is closing all 81 outlets in the United Kingdom and Ireland which results in a loss of more than 1,000 jobs. Gap’s decision is the result of a strategic review of the San Francisco-based firm’s European operations. The US retailer intends to build on its global brand name and expand its online business worldwide. The fundamental problem that retailers face is that they operate under very slim trade margins. Most retailers do not own their outlets but need to pay rent. In periods of recession and during lockdowns, the cost of maintaining retail jobs and continuing to pay the rent can easily force retailers into bankruptcy. Negotiators need to be aware of these structural particularities, if they wish to negotiate with retailers lasting business deals for sustainable value.

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vulnerability of their business, if adversities kick in. In this way, resilience is about the ability to reduce vulnerability and bounce back. Research evidence supports two concepts that could help us understand resilience goals.4 The first concept relates to ‘redundant resources’ and the second concept refers to ‘flexibility’. Firstly, access to redundant and liquid resources, which can be redeployed in case adversities, is critical. Consider, for example, assets such as cash liquidity, safety stocks, IT backup, equipment, talents and staff and intangible assets, such as alliances, partnerships, reputations and skills. Secondly, flexibility to adapt and reconfigure resources to address new needs will be decisive. Flexibility refers to the ability to detect and gauge adversities early on, to adjust interdependencies, as well as to respond to the potential disruptions by mobilising firms’ resources. For example, negotiators may aim to retain critical firm activities within the organisation or add incremental local suppliers in addition to overseas suppliers to enhance flexibility. Research in this area demonstrates that negotiators aim to develop real options. For example, R&D or new product development gives firms the right, but not the obligation to take a particular course of action at some time in the future. The financial crisis in 2008 has taught us that financial institutions needed a much bigger buffer in the form of equity capital than they usually plan (Admati et al., 2018; Fraisse, Lé and Thesmar, 2020). Similarly, the lesson that the Covid-19 pandemic has taught us is that firms need a much bigger buffer of redundant resources and much higher flexibility to adapt to evolving customer needs. The reason for this is solvency, i.e., the firms’ capacity to meet long-term commitments to other stakeholders, such as investors, banks, suppliers, as well as employees. Solvency measures the degree by which the firm’s assets exceed the firms’ liabilities. While liquidity measures the firm’s capacity to meet short-term obligations such as paying its suppliers, a firm’s solvency captures the firm’s capacity to meet long-term commitments, such as paying back debt. Solvency matters because adverse events, catastrophes, epidemics and economic crises can cause a disruption in profitability and growth outcomes. Empirical evidence indicates that businesses exposed to high levels of debt in relation to their equity have limited flexibility to negotiate necessary adaptations to adverse events, hence they are particularly vulnerable, and often fail to survive (Thornhill and Amit, 2003). For example, firms such as Woolworths, BHS, Thomas Cook, Flybe, Carillion, Comet, Poundworld, Blockbuster, Debenhams and Laura Ashley filed for bankruptcy because they were not able to serve their debt when

6.3 THE SKILLS OF GREAT NEGOTIATORS

One way to look at negotiation skills is to consider the achievements and skills that great negotiators have developed over long periods of time. The Program on Negotiation (PON) at Harvard Law School established in 2000 the Great Negotiator Award. This is an international award for life-time achievements of world-leading personalities that excelled with their exceptional negotiation skills making a significant impact on society. This international award underlines the relevance of negotiation skills as a means for a peaceful resolution of highly complex disputes among countries, organisations, groups and individuals both in the public as well as the private sector. Recipients of the Great Negotiator Award include: 2017 Great Negotiator Award: Juan Manuel Santos. Former President of Colombia and recipient of the 2016 Nobel Peace Prize recognized for his contribution in ending Colombia’s civil war through a peace agreement between the government and the Revolutionary Armed Forces of Colombia.

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adversities occurred. Globally operating institutional investors may put firms under pressure to maximise the return on equity through leverage. For example, investment analysts may question firms’ outcome targets and consultancy firms may highlight unexplored financial transactions such as stripping real estate property, and independent auditors provide comparisons with competitors. Nonetheless, not all firms use leverage to optimise return on equity. An example of a company with low debt in relation to equity capital, while simultaneously enhanced flexibility to negotiate with other stakeholders is Johnson & Johnson (Mouzas & Bauer, 2022). Johnson & Johnson specialises in medical devices, pharmaceutical and consumer packaged goods. Contrary to other firms that needed to proceed to cost reductions after the outbreak of the Covid-19 pandemic, Johnson & Johnson invested heavily in R&D of a new vaccine. The market reacted positively and the market value of the firm increased in the last 15 years from $178 Billion on 15th May 2006 to $445 Billion on 5th July 2020. Negotiators could follow the example of Johnson & Johnson and use strategic negotiations with their suppliers, customers and other partners to invest in innovation and thus to develop real options that make them less vulnerable when adversities come into effect.

2014 Great Negotiator Award: Tommy Koh. Former UN Representative for Singapore and Ambassador to US. Tommy Koh was recognized for concluding the first Free Trade Agreement between the United States and an Asian country, for resolving territorial and humanitarian disputes in the Baltics and Asia, and for his success in chairing the Rio Earth Summit. 2012 Great Negotiator Award: James A. Baker. Former U.S. Secretary of State for President George H.W. Bush recognized for his contribution of effective international diplomacy and particularly his contribution to a peaceful reunification of Germany in 1990. 2010 Great Negotiator Award: Martti Ahtisaari. Former President of Finland and recipient of the 2008 Nobel Peace recognized for his

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contribution to promote peace in Indonesia, Kosovo, and Namibia. 2008

Great

Negotiator

Award:

Christo

and

Jeanne-Claude.

Environmental artists, known for the wrapping of the Reichstag in Berlin. Christo and Jeanne-Claude were recognized for conducting difficult and relentless negotiations with governments, cities, communities, businesses and multiple other stakeholders around the world to promote innovative artistic ideas. 2007 Great Negotiator Award: Bruce Wasserstein. Bruce Wasserstein is a US investment banker known for his negotiations skills in closing complex high-stakes investment deals, such as mergers & acquisitions. 2005 Great Negotiator Award: Sadako Ogata. Sadako Ogata is Japan’ s Delegate to the United Nations and minister on the Permanent Mission of Japan to the UN. Sadako Ogata was recognized for her skilled negotiations at UN to protect refugees. 2004 Great Negotiator Award: Richard Holbrooke. Richard Holbrook is a US Diplomat known for his skilful diplomacy in peaceful international conflict resolution. Richard Holbrooke was recognized the chief architect of the Dayton Peace Accord in 1995 which ended the war in Bosnia. 2003 Great Negotiator Award: Stuart Eizenstat. Stuart Eizenstat is former U.S. Ambassador to the European Union. Stuart Eizenstat was recognized for negotiating with Swiss, Germans, Austrian and other European governments the Holocaust Restitution and compensation to heirs of victims of the Nazi Holocaust. 2002 Great Negotiator Award: Lakhdar Brahimi. Lakhdar Brahimi is Algerian United Nations Diplomat and foreign minister of Algeria. Lakhdar Brahimi was recognized for his reconstruction efforts in the Middle East and Afghanistan.

2001 Great Negotiator Award: Charlene Barshefsky. Charlene Barshefsky is U.S. Trade Representative and expert in U.S. and international trade laws and public procurement recognized for skilful global trade negotiations. 2000 Great Negotiator Award: George Mitchell. George Mitchell is former U.S. Senator from Maine recognized internationally for his ability to build a coalition between the parties in Northern Ireland and the governments of United Kingdom and the Republic of Ireland leading to 1998 Good Friday Agreement.

1. Interactive communication. Great negotiators are good listeners and relentlessly aim to establish heedful interaction that integrates the diversity of different perspectives. 2. Global leadership. Great negotiators operate globally and take a leading role in concluding trade deals, promoting peace, and reconciliation. 3. Business-minded. Great negotiators are business-minded people that aim to create value through exchange relationships. 4. Conceptual strength. Great negotiators use conceptual tools and frames that reduce the complexity of the real world in a small, manageable number of variables and parameters and proceed into inter-action with others with conceptual clarity. 5. Entrepreneurial spirit. Great negotiators engage in entrepreneurial trials that demonstrate strategic vision and creativity; they are able to learn from errors and failures. 6. Problem-solving. Great negotiators are able to remove obstacles and proceed to negotiate pragmatic solutions. 7. Cultural empathy. Great negotiators gain in-depth understanding of the local cultural context and empathise with the emotions and aspirations of their counterparts. 8. Networking skills. Great negotiators are able to mobilise their networks and they maintain internal (within their organisation) and external (outside their organisation) networks of relationships. 9. Industry & market knowledge. Great negotiators have in-depth knowledge of the multiplicity of stakeholders in the industry and

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Great negotiators demonstrate a number of distinct negotiation skills. The following list epitomises ten specific skills:

market that their organisation operates, such as customers, suppliers, partners, competitors, authorities and third parties. 10. Forward thinkers. Great negotiators do not reside in the past; instead, they look ahead and negotiate lasting business deals for sustainable value. 6.4 BECOMING A MINDFUL NEGOTIATOR

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Becoming mindful means being attentive. Mindful negotiators focus their attention consciously on three different layers: 1) the natural, socioeconomic and cultural environment, 2) the needs and aspirations of others and 3) themselves. Let us look closer what it takes to become mindful of your environment, others and yourself. Becoming mindful of your environment

Becoming mindful of your surrounding environment requires the ability to move beyond the boundaries of completing specific tasks. It requires that negotiators expand their horizon and that they are mentally prepared to embrace new activities and resources. The most significant barrier to becoming mindful is being ‘busy’. Busy people tend to be focused on their specific tasks which prevent them from being open to engage with others in embracing new or emerging developments. Imagine you are in the business of ‘square wheels’ and a business counterpart wants to introduce you to ‘round wheel’ business. You might understand the concept of ‘round wheels’ but you haven’t seen these ‘round wheels’ in practice. You might have seen others entering the ‘round wheel’ business but there is no compelling evidence of the benefits of ‘round wheels’ and you are really busy to engage with the ‘round wheel’ chap. To be able to engage with the ‘round wheel’ chap, you need a time surplus that could be invested in looking at new opportunities outside the ‘square wheels’ business. The anthropologist Jared Diamond observed that hunter-gatherer societies did not produce enough food surplus to support the idea of moving beyond task-specific activities (Diamond, 2013). They were simply too busy performing their specific tasks. Hunter-gatherer societies had very limited resources and thus their productivity was low. Research evidence published in the world-leading scientific journal Science indicates some surprising effects of having too little (Shah, Mullainathan and Shafir, 2012). It appears that scarcity (e.g., scarcity in time, money or social capital) may not

Becoming mindful of others

Becoming mindful of others requires the ability to put yourself in the shoes of others and consider their existent and latent needs. It requires that negotiators enter heedful interactions with the purpose of active listening. Remember that it is not enough to discuss what your negotiation partners want. You need to find out why they want something

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simply be attributed to environmental factors but may stem from being busy in specific tasks. Scarcity changes the way negotiators allocate attention: It leads negotiators to engage more deeply in some specific problems, while neglecting other problems. Scarcity of resources creates a shift in negotiators’ attention which explains behaviours, such as the rush to wrap up a business deal and over-borrowing to finance a contract. It appears that scarcity of resources prompts negotiators to spend a lot of attention, energy and emotion on a specific task, meaning that there is little brain power left to focus on other tasks, in other words, scarcity taxes negotiators’ cognitive bandwidth (Mullainathan and Shafir, 2013). How can negotiators become more mindful of their environment? Here are a number of heuristics that can help you to become mindful of your environment. Firstly, ensure you generate a surplus through your activities beyond and above the opportunity cost and reinvest part of your surplus wisely in acquiring long-term capital goods. Capital goods differ from consumer goods as they provide sustained benefits beyond a period of six months. For example, innovation, technology, people, financial assets and investments in intangible assets will make you more productive in future tasks, and hence, will reduce the taxes on your cognitive bandwidth. Mindful negotiators enduringly follow this heuristic rule with discipline. Secondly, take a network perspective on your environment and consider the inherent interconnectivity among actors, resources and activities. Taking a network perspective on your environment will enable you to elevate at a higher aggregation level and explore how different actors, resources and activities are linked together. Thirdly, think wisely about inter-temporal trade-offs between current benefits and future benefits, between current negotiations and future negotiations. Consider negotiations as a way of life. You meet again with your counterparts, even if negotiations are concluded and the contract is signed. Consider the possibility of re-negotiation, dispute resolution or new negotiations with the same counterparts in different contexts.

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and what they are trying to accomplish. Be mindful of others’ emotions. You could start exploring others’ emotions by using the model of five core concerns (Fisher and Shapiro, 2006). In this way you become mindful of others’ 1) appreciation, 2) affiliation, 3) autonomy, 4) status and 5) role and thus you already know something about others, even before the start of negotiations. Identify the aspirations of others and think carefully about how you could help them become more successful. Voluntary giving could mean a lot to others in need. Being mindful of others means being mindful of others’ interests as well as mindful of others’ entitlements. The interests of others will determine the scope of value creation. Therefore, negotiators need to extend the boundaries of their own knowledge of others’ interests and unearth others’ hidden or concealed interests. Simultaneously, negotiators need to be mindful of the entitlements of others as entitlements will determine the extent and limits of value appropriation. Being mindful of others’ entitlements means that negotiators need to consider the whole bundle of others’ rights, including property rights, inalienable rights, privileges, powers and immunities. Entitlements are the currency that negotiators bring into their exchange relationships. Being mindful of others means seeking an informed and voluntary consent of others. Consent is thus the moral and instrumental component that mediates a transfer of entitlements in an exchange relationship. Consent refers to the agreement among negotiating parties. Consent occurs when a negotiating party agrees voluntarily to a proposal made by the counterpart. For this reason, informed and voluntary consent matters in several contexts, such as in business, law, research, medicine, diplomacy as well as personal relationships. Consent plays an important role in strategic negotiations because it energises the interaction between negotiating parties, and economises subsequent activities, resources and actors (Mouzas and Ford, 2018). Negotiators who are mindful of others, engage heedfully in an interactive practice with others. Through this interactive practice, multiple consents are sought, modified and given between negotiating parties. Being mindful of others complements and re-directs the idea of individual choice away from discrete and independent decision-making towards the idea of choice being part of an evolutionary discursive practice of consent among negotiating parties. The limitation of the idea of individual choice becomes apparent when we consider the dynamic co-evolution that takes place

between the wills of individual negotiators who need to co-exist and whose co-existence and development is inter-twined. Becoming mindful of yourself

1. γνῶθι σε αυτόν (know thyself ) 2. μηδὲν ἄγαν (nothing in excess) 3. Ἐγγύα πάρα δ’ἄτη (make a pledge and mischief is nigh) The first maxim ‘know thyself’ epitomises the need for negotiators to know first and foremost themselves. Negotiators need to be acutely aware of their own idiosyncratic character and they need to know what they are capable of doing. The second maxim reminds negotiators of the importance of moderation, while the third maxim is a warning that negotiators should be careful what they promise. Negotiators need to be mindful that their own rationality is bounded. This implies that the negotiator’s ability to make sense of the world in logical, observable and verifiable ways is limited. Negotiators should not overestimate their ability to obtain complete information about all available options and preferences and thus they should not overestimate their ability to choose one option over another consistently in accordance with an expected utility. The implication of bounded rationality is that negotiators are prone to cognitive errors and behavioural biases. Negotiators could use system 1 and system 2 (Kahneman, 2011) as metaphors for different brain processes. In this way, negotiators should be mindful that everyday decisions are processed through system 1 which is associated with the older part of the brain, the limbic; and hence decisions in system 1 tend to be fast, automatic, impulsive, associative, emotional and rather unconscious. In contrast, negotiators should be mindful that complex decisions are processed through system 2, which is associated with the neocortex; and hence, making these decisions tends to be slower, deliberative, analytical, rational and sequential.

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Nestled in the embrace of Mount Parnassus, Delphi is one of the most sacred sites of the ancient world. It was believed to be the omphalos, i.e., the navel of the earth, the centre of wisdom and spirituality. Delphi is an ancient sanctuary dedicated to the Greek god Apollo and the archpriestess Pythia was consulted before all major undertakings to forecast the future. Into the Temple of Apollo at Delphi, three maxims were carved:

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Negotiators need to be acutely aware of their own behavioural biases and propensities. For example, negotiators need to be aware that humans exhibit a number of animal spirits, such as present bias. They tend to procrastinate sacrifices and seek immediate gratification, thus there is an inherent propensity to hyperbolically discount the future as if the future is far away. But awareness of biases and propensities alone might not suffice. The psychologist Walter Mischel proved that the ability to delay gratification is decisive for a successful and fulfilling life (Mischel, Shoda and Rodriguez, 1989, Mischel, 2014). Self-control appears to predict higher marks in school, better professional development, better social and cognitive functioning and a greater sense of self-worth. Furthermore, self-control may help us manage stress and pursue goals effectively, such as pursuing healthy life, overcoming illness or making investment decisions. Moreover, negotiators need to be mindful of the impact of focal points in creating anchoring effects as well as the human propensity to follow the crowd. On the other hand, negotiators can use proactively their awareness of behavioural biases when they frame choices for jointly decided actions. An excellent opportunity for negotiators is to capitalise on prospect theory and frame choices as a loss or gain in reference to a focal point. For example, negotiators may attempt to frame contract choices as incremental gains or incremental losses in reference to the status quo before the deal or in reference to the base line such as the revenues. Becoming mindful of the environment, others and yourself crystalizes a pragmatic understanding of strategic negotiations. Consequently, strategic negotiations between relationally embedded organisations involve 1) actors operating in webs of interdependent relationships, 2) patterns of recursive and often institutionalised interactions and 3) constellations of heterogeneously and unevenly distributed resources and capabilities. The outcomes of negotiators’ choices are contingent upon the consent of their counterparts and this consent is not an instantaneous event with hard edges of yes and no. The opportunities that individuals and organisations will discover through strategic negotiations are idiosyncratic in their particular relational space and their pursuit over time is conditioned by an interactive and reciprocal practice of consent in which actors, inter-actions and resources will co-evolve over time. Because of the complexity of the opaque processes of strategic negotiations, it is possible that managers, policymakers, lawyers, diplomats and organisations may

A final Task Reflect on your own experience from past and current negotiations that you have been involved. Write down on a piece of paper the specific concepts or ideas that are best related to your own negotiation experience and then answer the following questions: 1. What has been for you personally the three most important learnings from this book? 2. What are your strengths/weaknesses when you negotiate with others? 3. How will you change your approach to negotiation from now on?

NOTES 1 See Lakhani and Panetta (2007). The principles of distributed innovation. See also Baldwin (2012). Organization design for business ecosystems. 2 See Cornes and Sandler (1996). The theory of externalities, public goods, and club goods. 3 See Mouzas and Ford (2012). Leveraging knowledge-based resources: The role of contracts. 4 See Sheffi (2015). The power of resilience. How the best companies manage the unexpected; Sheffi and Rice (2005). A supply chain view of the resilient enterprise; Coutu (2002). How resilience works.

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underestimate the interactive and time-consuming nature of strategic negotiations. This book makes it clear that conducting negotiations is not simply a tactic that negotiators develop and choose to apply. The success of strategic negotiations is triggered only in conducive circumstances and depends upon the consent of our counterparts. Successful strategic negotiations provide the rationales and resources to other negotiators to react in compatible directions and seize contingent opportunities. Hence, strategic negotiations rest on some form of wholeness and coherence. Strategic negotiations that generate sustainable value require the integration of contextual potentials and internal capabilities, the synchronisation of short-term and long-term considerations, the co-existence of cooperation and competition, the harmonisation of the general and the specific, and the symbiosis of the past and the future.

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166 Acknowledgements

Acknowledgements

I was fortunate to begin my research on strategic negotiations having worked in multinational corporations interacting with a multiplicity of stakeholders, such as customers, suppliers, competitors, policymakers and non-governmental organisations. This professional experience and my subsequent involvement in the IMP Group, helped me to recognise the importance of understanding the complexity of negotiations between individually important buyers and sellers in continuing relationships. I am particularly grateful to David Ford, Geoff Easton, Luis Araujo, Katy Mason, Hakan Håkansson, Lars-Erik Gadde, Ivan Snehota, Bernard Cova, Alexandra Walusewski, Debbie Harrison, Stephan Henneberg, Pete Naudé, Christina Öberg, Keith Blois, Bernd Guenther, Zsofia Toth, Hans Kjellberg, Per Andersson, and Maria Holmlund and Lars-Gunnar Mattson for their invaluable support in developing research on how interaction evolves within business networks. I am grateful to the Mistra Center for Sustainable Markets at Stockholm School of Economics, and in particular to Lars-Gunnar Mattson for his kindness and support in investigating the role of innovation and investments in sustainable markets. My research work at the Program on Negotiation (PON), a university consortium dedicated to developing the theory and practice of negotiation and dispute resolution based at Harvard Law School, reinforced my approach to strategic negotiations and enabled me to interact with worldleading scholars, educators, and great negotiators. I am grateful to PON and in particular to Susan Hackley, James Kerwin, Bob Mnookin, Guhan Subramanian, Larry Susskind, James Sebenius, Max Bazerman, Jared Curhan, Jeswald Salacuse, Bob McKersie, David Lax, Bruce Patton, William Ury, Samuel Dinnar, Daniel Shapiro, Bruno Verdini, and Michael Wheeler. PON’s pragmatic application of negotiation theory to real-world problems prompted me to move beyond negotiation tactics and examine strategic negotiations for sustainable value. Furthermore, I would like to thank Cass Sunstein from the Program on Behavioral Economics and Public Policy at Harvard Law School, and the late Michael Furmston from

167 Acknowledgements

the University of Bristol Law School for inspirising me to study behavioural science and contracts. It is with gratitude that I acknowledge the comments and suggestions made by my colleagues at Lancaster University Management School and particularly the comments made by Jekaterina Rindt, Emre Tarim and Florian Bauer. I offer my greatest thanks to Deborah Lisa Yates for reading the manuscript and making invaluable suggestions and comments. Furthermore, I would like to acknowledge my distinct appreciation to Sophia Levine, Senior Editor at Routledge for approaching me at Lancaster University and encouraging me to write on strategic negotiations for sustainable value, and Emmie Shand, Senior Editorial Assistant for her support and patience in preparing the publication of this book.

168 About the author

About the author

Stefanos Mouzas is Professor of Marketing and Strategy at Lancaster University Management School. Stefanos Mouzas studied Economics (BSc), Law (LL.M) and Marketing (PhD) and has developed worldleading research on negotiations in business networks. He was a Visiting Scholar at the Program on Negotiation (PON) at Harvard Law School, a Fellow at Mistra Center for Sustainable Markets at Stockholm School of Economics, and visiting Professor at Vienna University of Business and Economics, the University of Düsseldorf and the Bocconi University. Professor Mouzas has served as an Academic Lead of the Policy School in the Cabinet Office in London, co-ordinating projects on tackling problems of social inequalities and climate change. Professor Mouzas has extensive experience working collaboratively with organisations. During the Covid-19 pandemic in 2020 and 2021, he has been delivering through Lancaster University interactive programmes helping companies to build business resilience and achieve a sustainable recovery. His research was quoted by the media and published in international journals.

Index

personal 59 awareness of behavioural biases 150 B bargaining power, negotiator’s 67 BATNA (Best Alternative to the Negotiated Agreement) 45, 61–63, 69, 119 BATNA counterparty’s 62 party’s 62 side’s 62 strong 62 BATNA in strategic negotiations 45 Best Alternative to the Negotiated Agreement. See BATNA bounded rationality 6, 83–84, 101, 113–14, 149 breach of contract 111, 126–27, 129 business agreements 103, 116 buyers 60–61, 90, 111 C capturing value 13, 21, 23–24 claiming value 24–25, 64, 118 climate negotiations 71, 78–80 complete contracts 102, 112–14 Conference of the Parties. See COP consent 20–21, 66, 103–5, 113, 115, 130, 148, 150 consequences of strategic negotiations 136 consumers 27–39, 42–43, 50, 70, 104, 140, 143 conscious 30–31, 36–37

169 Index

A ability of negotiators 141 ability of negotiators to withstand adversities 141 acceptance 103, 107 additional terms in 107 action plan 41–42 actions agreed 17, 53, 60, 69 collective 91 subsequent 58 actions in response to unexpected market developments 63 adjustment of volumes and prices 21, 112 adversaries 45, 59, 67 adversities gauge 142 unexpected 69 withstand 141 Adversities and showery weather 112 affiliation 59, 148 agencies advertising 38 specialist 139 agriculture 26, 74, 76 alliances 12, 76, 89, 142 announcement, public 67 arbitrator 103, 127 artificial intelligence 53 artistic creations 138 asymmetric information immanent 20 auction 61 auction elements 20 autonomy 59, 148

contingent contracts 106, 117 contract incompleteness 112–16 contracting parties 103–4, 107, 113–16, 123, 126–27 contracts 43, 59, 102–17, 119, 125–31, 136, 147, 167 binding 105, 109, 127, 130 business 63, 103, 121 individual 130 written 127, 129 contractual decisions 117, 128 immediate 117 COP (Conference of the Parties) 29, 72–73, 75–78, 136 Court of Justice 65–66, 114

170 Index

D delegates 72–73, 75–77, 144 detergents 30–37 developing countries 71–74, 78 E EIT parties 73 entitlements 20, 23–26, 46–48, 55, 59, 63–64, 79–80, 90–91, 104, 137–40, 148 environment of negotiations 6, 9, 15–16 equity 95–100, 142–43 European single market 65–66 exchange processes 22, 54, 64 exchange relationships 19, 27, 54–56, 103, 148 existing customers 49, 51

give-and-take processes 45, 66, 118–19, 121 good faith 102, 105–6, 108–10, 131 Great Negotiator Award 143 H herd behaviour 83, 91–92, 94–95 households 17–18, 27–28, 31, 56, 100 I individual negotiators 6, 15–16, 19, 53–54, 120, 149 individuals and organisations 2–3, 9, 12, 14, 26, 46, 55, 60, 137–39, 141, 150 interactions, heedful 54–55, 57–58, 60, 122, 147 interconnected relationships 9, 15–17 interests 16, 23–24, 45–46, 52–54, 63–64, 80, 90–91, 109, 119, 125, 148 interests and entitlements 23, 47–48, 55, 63–64, 80, 137–38 J joint understandings 94, 98–99 jurisdictions, civil law 106 justice 2, 25, 65–66, 114, 126, 137 corrective 126 K key performance indicators 94, 120 knowledge company-centred 58 extant 53 incomplete 55 objectified 58 share industry 122 specialised 56–57 know thyself epitomises 149

F Figure 6–8, 15, 27–28, 38–39, 52, 61, 64, 87, 136 focal points 5, 19, 83, 88–90, 125, 150 Ford 6, 8, 18–25, 92, 95, 115–16, 148 formal contracts 109, 115 framework contracts 19, 102, 116–19, 122–28

L laundry 27–28, 32–33, 36–39, 41, 122, 139 Lax and Sebenius 5, 18, 20, 69, 120

G general terms 21, 107, 128 general terms and conditions 107, 128

M manufacturer Alpha 27, 30–33, 35–37 Manufacturer Beta 27, 30, 32–34, 36, 41

N negotiated agreement 15, 22, 60, 66, 69, 126–27 Negotiating contracts 102, 136 Negotiating for sustainable value 1, 3, 138 negotiating in good faith 109–10 negotiating parties 5, 18–20, 22–23, 51, 54, 61–66, 93–94, 103–4, 106, 109–13, 116–17, 120–21, 123, 125, 148 negotiating teams 41–42, 57 negotiation analysis 15 negotiation process 23, 45, 48–49, 58, 61–62, 80, 122 negotiations manufacturer-retailer 135 pre-contractual 127 Negotiator Award 143–44 negotiators, effective 48 negotiators to deal 13–14 negotiators use system 85 network pictures 53–54, 92 networks of interconnected relationships 9, 15–17 NGOs (non-governmental organisations) 74–75, 166 NIMBY problems 51

non-governmental organisations (NGOs) 74–75, 166 O OECD (Organization for Economic Cooperation and Development) 73–74 ongoing contract, implied 129–30 open terms agreements 105–6, 128 Organization for Economic Cooperation and Development (OECD) 73–74 P Paris Agreement 29, 71, 73, 75–77, 79, 136 participants 75–76, 113, 121 parties 21–22, 24–25, 49, 51, 60, 62–63, 66–68, 72–78, 80, 103–5, 108–11, 114–18, 120, 122–30, 136–37 contractual 106–7 included 73–74 performance, contractual 106, 114, 128 PON (Program on Negotiation) 143, 166, 168 private labels 8–9, 27–28, 36–38, 42, 50, 140 producers 137, 139–40 production subcontractors 36–37 Program on Negotiation. See PON provisions, contractual 105–6, 115 Q quality, environmental 30 questions central 127 important 60 R References relational contracts 102, 114–15 re-negotiation 9, 37, 66, 115, 123–25, 147 retailer Amecon 8–9 retailer brands 28, 36–38 Retailer Econ 9, 27, 36–37, 41 Retailer Engel 27–28, 31–32, 34–38 retailers 8–9, 21–22, 27–30, 32, 34,

171 Index

manufacturer Morningstar 9 manufacturer-retailer networks 8, 21, 27–28, 37 manufacturers 6, 8–9, 22, 27–31, 34, 37–39, 42, 106, 121–23, 139–40 manufacturers and retailers 16, 21, 27, 29–30, 37–39, 121, 123, 135 market effectiveness 3, 86–87 market shares 13, 28, 30, 34–35 misrepresentation 102, 108, 110–12, 127 Mnookin 22, 66–68 Mouzas 2–3, 21–22, 54, 56, 86, 92, 116, 119, 168 Mouzas and Ford 8, 18–20, 25, 92, 95, 115–16, 148 multilateral exchanges 119, 121–22

36–39, 42–43, 70, 121–23, 129–31, 135, 137, 139–41 return on equity 97–98, 100, 143 risks 4, 13, 18, 29, 33–34, 46, 87, 93, 100, 106–7, 111–12 S Schelling 5, 19, 67, 88–89 Sebenius 5, 15, 18, 20, 69, 120 spencer 125, 129–31 strategic negotiations for sustainable value 2–3, 79, 138, 166–67 Subcontracting 122–24 system 18, 22, 77, 83, 85, 131, 149

172 Index

T tasks 14, 41–43, 55, 60, 67, 117, 146–47 Tesco’s managers 70 theory, incomplete contract 113 third parties 12, 22, 54, 105, 108, 122, 124, 146 time, recursive 119, 121

transaction costs 19, 113 U UBS (Union Bank of Switzerland) 95–100 UBS managers 95–100 umbrella agreements 102, 116, 123–24 understanding strategic negotiations 1 Union Bank of Switzerland. See UBS use of framework contracts 116, 119 V value, central 19 value creation 5, 20, 45, 118, 148 W Walford 107–8, 110 Z zone of possible agreements. See ZOPA ZOPA (Zone of Possible Agreements) 45, 60–61, 119