Category Archives: Decision Making,

BATNA – The Tool to Improve Your Negotiating Leverage

“Rajeev, we have been given a mandate by our management. Due to the Covid-19 crisis leading to a steep fall in customer demand, you are expected to reduce the price of your cutting tools by 50%,” said Mr. Padmanabhan, (the purchase manager of Shockproof, a shock absorber manufacturing company from Delhi) adding a veiled threat, “else we have no choice but to switch over to the competition.” Rajeev is a technocrat running ‘Techno Enterprises,’ a MSME manufacturing cutting tools enterprise with a turnover of around Rs. 10 crores. When asked about the customer details, he shared that ‘Shockproof’ is a major supplier of shock absorbers with a turnover of ₹ 1000 crores catering mainly for the two wheeler industry.

One of the questions often asked in our training and consulting assignments is ‘how does one deal with such arm-twisting tactics, especially when the customer is too big compared to the supplier?’

One important concept in Negotiation theory is BATNA, which stands for the Best Alternative To a Negotiated Agreement, a term coined by Roger Fisher and William Ury of the Harvard Program on Negotiation. BATNA is an important tool while preparing for negotiation. Both parties have their BATNA independent of each other. The party having a stronger BATNA has a stronger negotiating leverage. In case the parties are not able to conclude the negotiation, the best option each one has can be called as their BATNA. In the above example, if the negotiations fail, the BATNA for the customer and vendor can be improved as follows:

Customer: Look for other vendors who can give a similar product at the desired price.

Vendor: Develop alternate customers who can provide the requisite amount of volumes at the desired price.

It is not as simple as it looks above. Does the customer have a vendor who can provide deliveries just in time to meet his production targets? Alternatively, does the vendor have alternate customers where his current inventory can be offloaded? Now you will appreciate that BATNA is not only decided by the number of options but also the feasibility and attractiveness of those options.

Whose BATNA is stronger? The conventional answer favours that of the buyer who is much bigger in size. Some points to ponder:

  1. Identify your BATNA: The tool required for cutting/drilling is made with precision which requires tungsten carbide or diamond as the raw material. It also requires a great deal of R&D to develop a tool for a specific application. The vendor has been supplying the tools for the last 15 years. With considerable technical expertise, the production department found the tool useful. The rejection rate was less than 1% and the cost-per-component was low.
  2. Identify the weakness in the other party’s BATNA: The seller knows that the buyer has the option of other vendor but also has the critical information that the rejection rate of the competition’s tool is close to 50%. Also, the shop floor people do not appreciate the tools supplied by the competition.
  3. Spot the customer’s bluff: Even though the Indian two-wheeler volumes fell by 15% in FY 20, the impact on Shockproof was much lesser at around 8.4%. The customer was able to absorb the shock (pun not intended) as it focussed more on improving the content per vehicle. As per a newspaper report, Shockproof had notched up a top-line of ₹ 5000 crores and its EBIDTA rose by 4% to Rs. 800 crores. (Remember the excuse of the Covid -19 crisis the purchase manager articulated earlier?)
  4. Do Proper Homework: Rajeev shared that the customer’s turnover was ₹ 1000 crores, whereas in reality it was 5 times. This can be perceived two ways: conventionally it may produce a feeling of helplessness. Alternatively the helplessness could be transformed into strength as in the end result of a David vs. Goliath fight. The vendor could feel that a supply of ₹ 1 Crore of material is insignificant from the customer’s perspective and there need not be any need for the customer to be so aggressive in reducing the price. Can David stand his ground?
  5. Improve your BATNA: Let us take a different example where both the customer and the vendor are equally strong. For its Power PC, Apple had developed its microprocessor in collaboration with Motorola and IBM. In 2005, Steve Jobs took a call to switch over to Intel, which apart from being a market leader in microprocessors was offering a cutting edge technology in computing. Developing microprocessors needs a huge investment and also technical expertise. Intel had both and was the only vendor for such a high-technology product. With a single vendor, the vulnerability was high for Apple.

Three years later, Apple bought over a 150-employee start-up in chip design called PA semi. Most of the team members had worked earlier at Intel, including Johny Srouji who now reports directly to Apple CEO Tim Cook. In 2020 Apple announced that it will use its in-house microprocessors for the new range of Macs.*

  1. Risk Mitigation: Apple was giving a business worth $3.4 Billion of microprocessors for Macs to Intel every year according to C.J. Muse an Evercore analyst. For Intel it was like losing a major account which was powering around 20 million Macs shipped by Apple annually. The impact of such a Key Account leaving Intel can be minimized when the figure is perceived not in absolute numbers but by the percentile share. Apple was contributing to 5% of Intel’s annual business and the total no of PCs sold annually are 260 million.

While understanding one’s BATNA, apart from the actual value an account produces, the share of the total business also needs to be considered. It is better not to keep too many eggs in too few baskets. An important tool in risk mitigation is the sales funnel which can help in improving your BATNA.

  1. Guard against Pitfalls while analyzing one’s BATNA: There are two mistakes people make while going in for negotiations. Either they are too optimistic or too pessimistic.

Being too Optimistic: There is a tendency to aggregate all the options and assume it to be The BATNA. Consider for example, Rajesh, an unemployed engineer in Bangalore who has applied for a job in IT and feels that he deserves a salary of Rs. 10 lakhs as he has the following options:

  1. Has applied for similar jobs in Mumbai and Delhi.
  2. Has plans of a start-up in 3-D printing.
  3. Is exploring further studies in the US by answering GRE and TOEFL.
  4. Is pursuing MBA by giving CAT.
  5. Joining the family’s 2-decade old fabrication business which is running well.

It is risky to assume the sum total of all these options as the best alternative because at any moment Rajesh can select only the best one. Contrast this with Gautam who already has a job with a ₹8 lakhs CTC. You will appreciate that Gautam has a better BATNA than Rajesh as a bird in hand is worth two in the bush!

Being excessively Pessimistic: The other mistake in negotiation is being too pessimistic when one is too committed to reaching an agreement without any preparation. There is an assumption that agreeing to all of the customers’ demands will make him happy, giving rise to a long-term business and relationship.

In the cutting tool example, the vendor though small in size vis-à-vis the customer, had a better product quality, a low rejection rate, a lower component cost and a shorter delivery period vis-à-vis the competition, which meant him having a better BATNA than the customer. Does it mean that he should rest on his laurels? Competition will be always trying to catch up with him, which necessitates him having to improve his BATNA all the time so as to keep the competition at bay.

Thus, negotiating strength, rather than being decided by the absolute size of a party or the size of the deal (as in Apple vs. Intel) or the number of back-up options, is decided by your BATNA.

Whether you are a buyer or a seller, starting a new venture or looking out for a new job opportunity, please spend time in identifying and developing your BATNA.

Remember, in life, you do not get what you deserve, but what you negotiate and that is decided by your BATNA, the Best Alternative to a Negotiated Agreement!

(* International Herald Tribune, Don Clark and Jack Nicas – After 15 years Apple prepares to break up with Intel DH – June 23, 2020)

Webinar on How To Acquire New Customers,Tuesday 14th July,

Relevance of Ambiguous Thinking in Challenging Times

In one of my webinars I posed the following questions:

To swim to and fro across the banks of a river; it takes a swimmer half an hour. What is the maximum number of rounds can he complete  in an 8 hour schedule by diving  into the same river?  Most of the participants responded with the answer as 16. Some considering the fatigue of the swimmer provided answers which ranged from 4-12. When it was pointed out that by the time the swimmer dives for the second time, a lot of water has already flown; and the river is no more the same. The swimmer can dive into the same river only once. After this explanation when the same question was asked once again, everyone responded the correct answer to be ONE.  (How obsessed we are with the correct answer!)  Then it was pointed out that it need not be one as it depends  on the frame of reference and the answers can vary from 1-16.

Welcome to the world of ambiguity which is defined as the quality of being open to more than one interpretation which is going to play an important role in the current situation.

Our education system does not encourage ambiguity and the intelligence of the students is correlated with the ability to give the right answers. This worked in a world which was relatively stable. In uncertain   times, there are no right answers but a range of operands which needs to be tried and tested. Whether the answer is right or wrong is not decided by the technique but by the result. Like in theory it is said that theory and practice are the same but in reality they are different.

The concept of Operant  Conditioning which was proposed by B.F.Skinner. When faced with a problematic situation, an organism retrieves a solution which has worked in the past. It is also called as a trial and error method.  When the problem becomes novel and complex, he tries a hierarchy of potential solutions, each becoming increasingly improbable. In the absence of complete solutions, he recombines potentially relevant operants to find a solution.

Pigeons and rats were made to acquire new behaviours by a phenomenon termed as operant conditioning. The hungry subjects were rewarded by food pellets  by pecking a disk or pressing a specific lever. By  working on a number of combinations, the subject could realize that the specific behaviour has resulted in a reward, which when repeated got reinforced and the subjects learnt a way of getting results.

In short, operant conditioning is nothing but a trial and error method where one does not have THE RIGHT ANSWER but goes on figuring out the approximately workable answer by incorporating ambiguity.

A simple exercise in developing ambiguity is to take a thought and a contrary one and ponder over the feasibility of both.

e.g. Life is not bad as you think. & Life is as bad as you think. Can you be comfortable with them both at the same time?

Which is the most fundamental of all the relationships? Is it of husband and wife? If so which is the most superficial one? Just think it over.

Multi- tasking helps improve your efficiency. Can you juxtapose this with multi- tasking may not help you do any work which needs deep thinking and focussed attention?

One needs to be comfortable with paradox of life called as the yin and the yang of Tao. Logical thinking, language are a part of life. But life is beyond them.

Ambiguous thinking is also associated with childhood upbringing. Some  parents feel that their children should not be exposed even to minor problems in life which in hindsight may prevent developing ambiguous thinking in future.

e.g. This incident happened in one of the upmarket gated communities.  It was around 8 am; father and his 10 year old son were walking towards the main gate. The father, a Vice President in a MNC was carrying his son’s school bag on his shoulder and adjusting a tie knot around his neck. Son was following his dad playing on his mobile lost in his own thoughts. As they approached the main gate, the father took out the tie and put it on his son. Both of them got into a chauffeur driven car.

There is only one thing worse than unhappy childhood and that is having a too-happy childhood – Poet Dylan Thomas

Dean Simonton ( Distinguished Professor of Psychology at University of California) in his book Origins of Genius states that children from too-happy childhood  have role models as their parents, elders and the teachers. Thus they become well adjusted to the system. They may become successful in terms of qualification, job, designation, material success etc but may not walk the road less travelled in becoming original thinkers. However children from deprived childhood have to look out much beyond the above repository. They have to figure out life on a daily basis thus increasing the number of role models which may include an adverse situation, kindness shown by a stranger, a book, or even a newspaper article. This act of figuring out in life, working by trial and error is what makes one comfortable with ambiguity which leads to creativity.

Janus is a Roman God which had two heads looking in opposite directions. Albert Rothenberg coined a term called as Janusian thinking which is similar of being comfortable with ambiguity.

Albert Einstein in one of his thought experiment said that if a man were to jump from a house rooftop and dropping an object simultaneously the object would be stationery in reference to the man but will be perceived  by an observer on ground as accelerating downwards by the gravitational pull.  Both the view points look contradictory; what matters is the point of reference.

Louis Pasteur was able to arrive at the principles of immunology in a similar manner. In one of his experiments some chicken were able to survive bacillus cholera. He injected  a new virulent culture in healthy chicken as well as the one survived. The healthy chicken died whereas the infected chicken survived. Pasteur came to the conclusion that chicken was diseased and non-diseased at the same time.

In 1801,Thomas Young demonstrated a revolutionary theory with a relatively simple experiment. Called as a double-slit experiment, he focussed a laser beam on a plate which had two parallel slits and the light passing through the slits was observed on a screen behind the plate. Alternate dark and bright bands were seen but it was also found to be observed individual particles at discrete points of the screen. Light can be both a particle as well as a wave as in quantum mechanics can be another example of ambiguous thinking.

This paradox is quite crucial in the current times. Physical  hygiene is very crucial and one should wash hands and face regularly. But can it negate the fact that number of bacteria on a square inch of human skin far outnumber the cells? Scientists have come to a conclusion that the human body is nothing but the agglomeration of billions of bacteria.

The theory of relativity, the wave-particle behaviour of light, or the immunology principle are an outcome of ambiguous thinking on the lines of swimmer jumping in the river with both answers of 1 and 16 being true at the same time.

Someone has defined a genius as the one who can hold two  contradictory thoughts in one’s mind at the same time and still be comfortable with them!

Rajan Parulekar ,  98450 14098

Putting your best foot forward- Does it work all the time?

As a startup founder, if you were to make a presentation to your potential investors, with an opening slide: Few Reasons why you should NOT Invest in our Company, what would be the outcome? You would sum it up as nothing but a disaster!

Rufus Groscom and Alisa Volkman started a company in the US called Babble which was an online magazine with blog network. The company had positioned on the new paradigm of parenting by  challenging  the dominant parental clichés. In 2009 when they approached for the Venture Capital (VC) funding, their first slide was:  Five reasons why not to invest in Babble. They received a $3.3 Mn funding.

Looks a bit counterintuitive! Isn’t it? Normally the convention is to highlight your strengths which works well when your target audience is either neutral or has a positive disposition towards your offerings. But does a typical investor look upon you in a similar way?

Just imagine when you say that you have a ‘killer idea’ and that you will reach your breakeven in the first year and  will scale up to 20x revenue in the next two years what must be going on in the investors’ mind? Rather than getting impressed, a conventional sales pitch is normally looked down with scepticism. The investor is also operating from a position of strength which is due to the funds at his disposal as well as the number of ‘killer ideas’ he has encountered in the past.  Psychologically he is tuned to find out the follies in your sales pitch. What happens when you take a counterintuitive approach of focussing on your weaknesses?

  1. You create Trust: When you put your cards on the table you look vulnerable which makes you look trustworthy. Your investor feels that if you are speaking about something wrong, there might be a lot of things you may be doing right. You are perceived with a positive intent. In the conventional sales pitch, the intent is perceived as getting the funding by hook or by crook! (for details refer Trust: The Difference that Creates the Difference, from Contextual Selling)
  2. You look smart: You may speak about your strengths but if they are hyped the investor may feel you are beating your own trumpets. However, when you critique yourself, you may be perceived as smart.

Teresa Amabile, professor of Business administration at the Harvard Business School conducted an experiment on how a writer is perceived by her audiences. A sample of a New York Times book review was taken. The book review which was primarily of a complimentary nature was modified with a critical tone; major part of the content remaining the same. Minor modifications were made from inspiring to uninspiring, tremendous impact to negligible impact etc.

People rated the ‘critical’ reviewer 14% more intelligent and having 16% greater literary expertise vis-à-vis the ‘complimentary’ reviewer. After all an amateur can appreciate art but only a professional can critique it!

  1. Objections are Pre-empted: There are two groups who have been given a task of identifying reasons for being happy.  Group A has to list three reasons whereas group B has to list for 12 reasons. Which group according to you should be happier between the two? Most of us would opt for group B.

Norbert Schwarz (Professor, Department of Psychology, University of California) in his article Ease of retrieval as information has given an interesting example on Availability Heuristics.  Also called as availability bias, it refers to the mental short cuts that come to people’s mind while evaluating and solving a problem. Group A may think the reasons of happiness can be attributed to spouse, children and the career. The available answers which were quick to find makes them happy. Group B may explore possibilities beyond the first three which may include vacation, hobbies etc. but may find it hard to reach the magical number of 12 and they start questioning themselves whether they are happy in the first place or not. So, the counterintuitive answer is A.

Looking at the Startup founder’s admission about his challenges the investor now has to struggle hard to find out new problems (as those have been already pre-empted in the first slide) and he concludes that the startup’ s problems are not that significant!

Coming back to the Babble story, a few years later Rufus and Alisa approached Disney for a takeover. The opening slide was:  Why you should NOT buy Babble? And the reasons included

  1. Poor user engagement,
  2. Only 3-page views per visit
  3. despite being a parenting website 40% of posts were from celebrities etc…

Disney bought Babble for $40 Mn.

A note of caution: Aspects like technology model, IP, revenue stream, scaling, breakeven, competition, manpower cost, future disruption etc are going to be equally important and the presenter needs to be focusing on the strengths too. The article only wishes to point out that speaking about the negatives may be also relevant at appropriate times!

Rajan Parulekar,

Winning a Jackpot: How do you decide?

Situation: Imagine you are participating in a game show and after going through qualifying and elimination rounds, you have reached the finals.  The game-show host presents you three options A, B & C and you have to select one of the options which are the respective doors. One of the doors leads to a jackpot (say a Mercedes) and the other doors to an insignificant prize, say a tennis ball through each door. Now let us say you have selected option A. You are curious and excited to see if you have hit the jackpot. The host asks you to be patient, opens the door C and what you see is a tennis ball. Now he asks you whether you would still stick with option A or switch to option B? What would you choose and why?

When this question was put on different platforms like linkedin, what’sapp it was observed that 95% of the respondents voted for A. Now read on:

Analysis: Generally people tend to stick to option A, the reason being they would not like to regret their decision. If A is selected leading to a jackpot, then he would be happy; however if otherwise, then he  blames  the circumstances or his fate. But at least he has the consolation that he was firm in his decision. However if he were to choose B, and were to lose; he would regret his decision and also for not being firm in his decision making process.

Let us see how this situation can be seen from a statistical probability basis. Generally people make decisions through their self-interest and do not look at a situation objectively. For example we tend to discount the impact of the environment on our decisions. When a person selects option A, the  probability of success is 1 in 3. However when door C has been opened with a tennis ball, the probability of B has increased to 50%. Assume instead of 3 options you were given 100 options. And now 98 doors are opened without any jackpot. Would you still bat for A? Now you will appreciate that at the beginning of the game the probability of winning A was 1% but after the events have unfolded B has risen to 50%. So in a single event even though A and B has equal chances, over the long term it makes sense to switch over considering the environmental factors.

What happens if the game of ABC is played 100 times. or 100 people play this game simultaneously? Now you will understand that the human mind is not programmed to think in a statistical manner. During most of programs our clients ask us to train their executives to think out-of the box. But sadly they  are hardwired to think otherwise.

Most people tend to overestimate fatalities and death in aeroplane crashes more than car accidents even though statistically air travel is much safer than car travel. One of the main reasons people tend to assign higher risk to air travel is due to wide publicity in media to such rare events.

A survey was carried out in the US after the 9/11 disaster. More people died in the three months  on  roads than those killed in the aircrafts during  the twin tower tragedy.  People tend to fear dread risk of low-occurrence and high consequence events such as the twin tower attack. ( Dread Risk : September 11 and fatal traffic accidents, by G. Gigerenzer) .There are two types of risks,  actual risk and dread risk, the latter is more out of anxiety quite often overestimated than the actual risk. This in part may answer why people would still go on playing option A.

Another reason for dread risk is an illusion of control. A person driving a car feels more in control of the situation than while flying in an aircraft driven by someone else. Most of our unconscious processes control our thoughts and behaviour, which in turn creates an illusion of self- I or the soul. It also makes us feel that I exist, I am in control and thus I can make my own decisions. But the truth is otherwise. Most of the events in life are beyond our control; there is no self.  And to create that illusion we tell stories, we fabricate them saying how intelligent we are.

The above problem is called as a Monty Hall problem ascribed to the presenter of the famous game show in USA,  Let’s Make a Deal. Monty Hall Problem states that there are two errors people make while taking decisions:

  1. They ignore the influence the external environment makes on their decision making and
  2. How their perceptions are shaped by the external environment. In fact we feel we are making decisions in a neutral environment and our decision making is rational. We feel we are safe when we are in control of our destiny. Rituals and routine give us more control of the situation. However truth is otherwise, Dan Ariely, author of Upside of Irrationality says we are poor in risk analysis and are irrational animals.

Rajan Parulekar||98450 14098