How good is your BATNA?

Almost every time I went to the vegetable and fruit market in my younger days, my mother’s refrain went like this, “Don’t buy from the very first shops near the main road; keep checking the prices as you move deeper” and the finishing line went, “only when you know for sure today’s price and fresh arrivals do you venture to buy”. As I learnt about Batna much later, her age-old wisdom impressed me evermore.

Among the learning opportunities that businesses have, competition offers the best package.  Be it a product, technology, merchandising, packaging or even strategy, it is the competition that serves as an eye-opener and opens the realm of possibilities.  Neighborhood Kirana outlets using cubic space, desi brands’ packaging and presentation, our odd-looking bikes for the youth, the upgraded motels, Patanjali noodles are examples of us learning from competition. Products such as IKEA Home Mandir, McDonald’s Rice Bowl, Lever Ayush stand testimony that the world’s giants pick up from their Indian competition in good time. Walt Disney, the great entertainer said, “I have been up against tough competition all my life. I would not know how to get along without it.”  Faced with tough competition, we realize that to win, we must raise our own game

Talking of raising our game, imagine appearing for an Interview with 2 good offers already in the pocket: or negotiating for a house having shortlisted a few other workable options. The ability to identify our best alternative to a negotiated agreement is called BATNA. The interviewee and the home customer have shored up their respective Batnas as they begin to negotiate.

Clearly assessing one’s Batna is among the important tasks in the hands of a negotiator.  Going into a negotiation, having a good Batna means to lower one’s stakes in case of an adverse result. Batna gives that important lever for the negotiator and provides a workable course in case of a failed negotiation; it improves her chances of arriving at a fair deal.  

In large organizations, end-users while requisitioning service/input specify the preferred manufacturer. When users specify a single manufacturer from whom to buy, the buyers must contend with Hobson’s choice (no Batna). This tends to weaken buying efficiency and gets accentuated if it can be picked up by the chosen supplier. Hence when qualifying, it is prudent for users to specify at least two sources even if the user has a justified preference for one of them. The buyers on their part, can elicit offers from comparable competition irrespective. This tactic, when used responsibly, strengthens their negotiating position and though not really a Batna, serves as a good reason why Batna is important for the negotiator and his organization alike. It is my experience that a deal within the ZOPA gets a shot in the arm when a credible Batna exists for the negotiator than otherwise.

We were evaluating sources for outsourcing a certain in-house semi-finished stage and zeroed-in on a strategic supplier. The supplier approval process involved several steps; the switching costs proved significant and process was unique to the industry. The shortlisted sole supplier, getting wind of our must-do position quoted and secured an unrealistically high price.  While our strategic objective was met, the deal was not well-benchmarked. I set out to work. In my discussions with another potential supplier, I sensed their keen interest to enter this segment and compete hard. We expressed our interest, subject to approval and agreed on a mutually realistic, fair, and competitive arrangement. Grabbing my offer with both hands, they came through in good time. I had my Batna ready.  In my annual source appraisal, I re-opened the negotiation with the original partner. I ran the market appraisal, value chain competitiveness and finally requested re-opening of the present deal in view of the evolving market situation. The counterpart was nonplussed. We discussed consequences in case of a no-deal situation. The supplier reluctantly though agreed to re-open the terms. Tell me now, is there a better reality check than competition? Heartless as it sounds, businesses and individuals grow and evolve when they see the possibilities that exist. While the typical initial reaction is one of despair and a sense of betrayal, once reality sinks in, understanding develops followed by improvement action. 

Is a strong BATNA the panacea for all situations? What if I do not have a good BATNA? Do I stand a fair chance? These questions call for a little deeper discussion.  

The relationship that exists between the negotiators is the key. The negotiator should seek to answer the question, “What do I want of this relationship?” 

For a residential builder, the relationship with a cement supplier or a paint supplier is deep and strategic whereas, the relationship with a guardrails supplier for a given building site is one-off and transactional. In case of strategic partners, the discussion is more around benchmarks, market orientation and remaining competitive. Batnas are understood and articulated more as subtle reference and as a competitiveness benchmark. It is advisable to use the credible choice with care and sensitivity. In a transactional relationship, Batna is used as a key negotiation tool. Without strong Batnas, transactional relationships can lead to misplaced trust and whimsical pricing.    

If it is the strategic relationship that is delivering, then it takes precedence and negotiator must be sensitive to this reality. In transactional ones, Batna is often critical to drive results. An extreme example of one-off transactional arrangement is the large projects that are awarded via competitive bidding. The bidders are extremely conscious of competition (read Batna) when they submit their Commercial bid. The best deal is explored here primarily by introducing credible competition.

A good negotiator should be able to fathom his counterpart’s Batna. A strong and attractive Batna with the other can easily take on all our preparatory work and carefully craft negotiation strategies. We added a large customer to our flagship product and my team was asked to source inputs at substantial quantities. An important supplier related to this product was presented with this higher demand at the same price point and to our surprise, declined the offer! In my meeting to resolve this issue, they cited capacity constraints as the primary reason.  It did not take much time to figure out that he had other business for the same input for which he realized much higher revenue. We figured out that they were using our steady business as their baseline and supplied leftover capacity at opportunistic prices. So, while the capacity constraint was true, if they accepted our offer to increase volumes, it was reducing their profits.  We then structured the contract in such a way that they earned an incentive for the additional volumes in order to address their loss of margin and addressed our scaled-up requirements

If this is not knowing your Batna, then what is? This also answers the question – what happens if we have not worked out a good Batna beforehand!   

  • Batna or not, the dyadic (two-sided) nature of negotiation means that it remains dynamic and unpredictable. Hence, Batna does not mean automatic success.
  • Not having a Batna exposes us to striking sub-optimal and unfavorable deals. This is because when I am well informed, I ask the right questions and when I back them up with facts, then I have the desired effect in the minds of my counterpart.
  • We are generally forced to explore, the “deal below which they are not interested” – this approach means pushing our opposition to the wall and forcing them to take a defensive position which is basically unwelcome. At those points, anything happens!

In conclusion, assessing your Batna and factoring it into the overall negotiation strategy is a key preparation activity for a winning negotiator. However, when presenting the Batna to the counterparty, they should take into consideration the relationship aspects.  And none could have really factored it better than Franklin D Roosevelt thus,

Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off.

True today and every day!