The concept of the "Negotiation Pie"

The pie approach in negotiation focuses on dividing the incremental value generated through collaboration, rather than distributing the entirety of a given resource like a pizza. This strategy streamlines the process of reaching a mutually beneficial agreement.

For instance, in a scenario where Alice and Bob are offered a 12-slice pizza to divide, various negotiation strategies can be applied:

1. "Power perspective": This approach allocates slices based on each party's fallback options, assuming that the party with more initial slices holds greater power. However, it fails to consider the potential gain from reaching an agreement and overlooks the importance of equitable outcomes.
2. "Fairness perspective": This strategy assigns an equal number of slices to each party, regardless of their respective fallback positions. However, it may lead to rejection if one party's fallback option significantly outweighs the other's.
3. Pie approach: This method equalizes power dynamics by focusing on the incremental value gained through collaboration. By dividing the negotiation pie, both parties share in the additional slices obtained from reaching an agreement, ensuring fairness and mutual benefit.

Ensure fairness in pie division regardless of context.

Parties generate a "pie" in a mutually beneficial agreement, where both contributions are necessary for added value, equalizing power dynamics. While a proportional split may appear fair, its fairness can vary, justifying pie division.

For instance, siblings Anju and Bharat are considering investing in a one-year CD. Bharat's $20,000 yields a 2% return of $400, while Anju's $5,000 generates 1%, totaling $50. Combining for a $25,000 CD earns them 3%, totaling $750. Initially, Bharat proposes a 3% split, meaning $150 for Anju and $600 for himself. However, Anju sees a joint investment pie worth $300 in additional earnings. She suggests a $200-$550 split, incorporating her $50 return plus half of the pie, totaling $150. Anju illustrates that even at 2% interest, pooling resources would still yield an extra $50. Bharat acknowledges the fairness and accepts it.

In negotiation, the agreement forms the pie, surpassing each party's BATNA. The pie's value is calculated as:

Pie = Total value with agreement - (Value of Party A's BATNA + Value of Party B's BATNA)

In Pie Talks, Fair Shares Trump Alternatives.

Negotiation experts often stress the importance of a strong BATNA. However, the pie approach challenges this idea by asserting equal power relative to the pie, regardless of BATNA. For instance, in Alice and Bob's pizza negotiation, Alice's stronger BATNA doesn't guarantee an advantage. Both suffer if no agreement is reached. While a higher BATNA may lead to greater gains, it's not from the pie itself but other factors. For example, if Alice's BATNA is five slices, she may have less incentive to negotiate. Still, she wins if she and Bob divide the remaining slices. Augmenting one's BATNA can lead to larger gains, and reducing the other party's BATNA can be advantageous. Increasing the pie's total value makes the deal more appealing to all involved parties.

In a negotiation between Coca-Cola and Honest Tea, Coca-Cola aimed to reduce Honest Tea's bottle cost from 19 cents to 11 cents, anticipating a $20 million saving over three years. With Coca-Cola's annual sales volume at $40 billion compared to Honest Tea's $20 million, the ratio stood at 2,000:1.Initially, a proportional split would leave Coca-Cola with $19,990,000 and Honest Tea with only $10,000. Recognizing this disparity, Coca-Cola adjusted its offer to $1 million. However, Honest Tea proposed an equal split of the $20 million savings, suggesting $10 million each. Eventually, Coca-Cola opted to acquire Honest Tea, diverting attention from the pie division.

Set Rules and Principles Upfront for Smooth Negotiations.

Arturo, seeking a mortgage for a Brooklyn brownstone, discovered lower recording tax rates for mortgages under $500,000. Initially planning a $1 million mortgage, he found the tax to be $19,250. However, with a CEMA, assuming the seller's $600,000 mortgage and obtaining a $400,000 one, he could save $12,050 in tax. Additionally, the seller would save $2,400 in transfer taxes, totaling over $14,450 in combined savings.

Deciding whether to inform the seller and split the pie is subjective but highlights two negotiation lessons: the importance of thorough research and avoiding deals that induce discomfort or future criticism.

Establishing ground rules upfront is key. Emphasize fairness and equal power dynamics, and take note if the other party rejects these principles, showing a pattern of unilateral demands, unfair leverage, or threats.

Effective in negotiating costs and asymmetrical desire for a deal.

Two airlines negotiate the cost allocation for a runway. Airline A needs a $5 million, 1 km runway, while Airline B requires a $10 million, 2 km runway. Failing to agree would mean each building their own, saving $5 million collectively. Under proportional sharing, Airline B would pay $6.67 million, but splitting the $5 million pie evenly has Airline A contribute $2.5 million and Airline B $7.5 million.

In situations of unequal urgency, the traditional assumption is that the needier party should concede more, but this contradicts the pie approach to negotiation. For example, Alice and Bob are stranded in a desert; Bob urgently needs water while Alice is hydrated. Ideally, Bob should pay Alice $500,005 for a fair split, but this isn't feasible. They negotiate to split the water itself. Bob gets 75% of what he needs, and Alice gets 75% of the total water available.

Similarly, in a negotiation between a start-up and an investor, where the start-up's survival depends on funding, the investor may assert superiority. However, this can be challenged by questioning their pursuit if they were genuinely indifferent.

Negotiation Challenges.

Negotiations can be difficult when the value of the "pie" is unknown, causing uncertainty. In such cases, negotiating the pie division retroactively is advisable. Parties agree to split it equally once its value is known. Alternatively, a "contingent split" can be negotiated if one party knows the pie's value while the other doesn't, based on its future value rather than its present worth.

Choosing an ex-post split reduces the risk of uneven distribution if the actual value differs from expectations. Information asymmetry, where one party values the pie higher due to personal reasons, can lead to imbalance. For example, a flea market seller offering a $5 teacup may miss out if the buyer values it at $300 to complete a set.

Transparency, multiple parties, and forecasting BATNAs:

Transparency in salaries could empower women to negotiate fair compensation, but it might also lead to reduced salaries overall if employers resist individual adjustments for consistency.

In negotiations involving multiple parties, unclear BATNAs make pie calculation challenging. When a three-party negotiation fails, two parties often form a deal. Forecasting outcomes help calculate potential BATNAs and identify likely two-party arrangements. This ensures backup plans and highlights prominent alliances.

For example, in a runway negotiation with a third airline needing a 3 km runway, forecasting scenarios aid in anticipating outcomes without a three-way agreement.

Granting the other party's desires can be advantageous in negotiation.

Encouraging the finalization of deals often involves presenting enticing offers. Understanding the other party's needs ensures your proposal resonates. Similarly, sharing your requirements is crucial for a balanced negotiation. Instead of focusing solely on price, consider fulfilling the seller's post-transaction plans, like aiding in a world tour. By conceding desired terms alongside monetary considerations, a larger pie is created, especially if their needs outweigh yours. Conversely, if the opposing party offers something vital to you, be prepared to reciprocate.

For instance, a buyer and seller, unable to agree on a house price, found common ground when the buyer suggested advancing the closing date"an action highly valued by the seller. By assigning a monetary value to this concession, they successfully closed the deal.

Advocating for the other side's position can also be beneficial. Articulating their viewpoint validates their priorities and promotes understanding, even if you prioritize different factors or disagree with their stance.

Encourage an allocentric perspective to encourage Pie Splitting.

Collaborative pie expansion offers benefits to all parties, though initial resistance may require addressing. Start by highlighting advantages for the other party and anticipate objections. Carefully consider their perspective and strategize for potential challenges.

Transparency is crucial in negotiations, although withholding information is common. However, in certain circumstances, like urgent financial situations, disclosing relevant details is vital. Focus on pertinent information and omit irrelevant details.

While concealing a weak BATNA is conventional, selectively revealing or inferring it can be advantageous. For instance, disclosing a lower offer while aiming for a midpoint can sway negotiations in your favor, even if the other party overestimates your BATNA.