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1、Chapter 6 Elmtree HouseThe following case study is mostly make-believe; one might speak of it as an armchair case. It involves a professor of business - well call him Steve - who was quite knowledgeable about finance but not a practitioner of the art and science of negotiation. Well use the case to
2、get a handle on the distributive part of negotiation-to build vocabulary and analytic concepts and maybe come to a few prescriptive conclusions. I (HR) have used this as a teaching example for quite a while. At critical junctures I stop and ask the students what advice they could give the protagonis
3、ts. Well ask you the same questions. Problem and the OpportunitySteve was on the governing board of Elmtree House, a halfway house for young men and women aged eighteen to twenty-five who needed professional guidance and the support of a sympathetic group to ease their transition from mental institu
4、tions back to society. Many in the house had had nervous breakdowns, or were borderline schizophrenics, or were recovering from unfortunate experiences with drugs. Located on the outskirts of Boston in the industrial city of Somerville, Elmtree House accommodated about twenty residents. The neighbor
5、hood was in a transitional stage; some said that it would deteriorate further, others that it was on the wav up. In any case, it did not provide an ideal recuperative setting because of its noise and disrepair. Although the house was small and quite run down, the lot itself was extensive, consisting
6、 of a full acre of ground. Its stand of elm trees, once magnificent, had succumbed to disease. The governing board, through a subcommittee, had earlier investigated the possibility of moving Elmtree from Somerville to a quieter, semi-residential I community. Other suitable houses were located in the
7、 nearby cities of Brookline, Medford, and Allston, but the costs were prohibitive and the idea of moving was reluctantly dropped. Some months later, a Mr. Wilson approached Elmtrees director, Mrs. Peters, who lived in the house with her husband and child. Wilson indicated that his firm, a combined a
8、rchitectural and developmental contractor, might be interested in buying the Elmtree property. This was out of the blue. No public announcement had ever been made that Elmtree House was interested in a move. Mrs. Peters responded that the thought had never occurred to her, but that if the price were
9、 right, the governing board might consider it. Wilson gave Mrs. Peters his card and said that he would like to pursue the topic further if there were a chance for a deal. Even simple-looking decisions can be deceptively complex. For example, should Mrs. Peters let on that Elmtree might welcome the o
10、pportunity to move? On the one hand, she would like to affect Wilsons aspiration level (which is positively correlated with his distributive outcome, and thus negatively correlated with Elmtrees), implying that hell have to pay a high price. On the other hand, she would also like to develop a positi
11、ve relationship with him, if only for the duration of this negotiation. Revealing her sides desires, especially when it may be against her interest, might inspire trust and raise his degree of concern over the outcome for Elmtree. There is also the risk that Wilson is a more casual buyer, and might
12、easily walk away if discouraged. What would you do? The governing board asked Steve to follow up on this promising lead. The other board members included local clergy and prominent individuals in clinical psychology, medicine, and vocational guidance; none besides Steve had any feeling for business
13、negotiations of this kind. Since they fully trusted Steve, they essentially gave him carte blanche to negotiate. Of course, no legal transaction could be consummated without the boards formal approval. What advice would you give Steve? Steve sought my advice on how he should approach Mr. Wilson, and
14、 we decided that an informal phone call was in order. In the course of the call, Steve accepted an invitation to discuss possibilities over cocktails at a nearby hotel. He decided not to talk about any money matters at that first meeting - just to sound out Wilson and find out what he might have in
15、mind. He insisted, I think rightly, on paying his own bill. I assured him that he also did rightly in not even hinting to Wilson that the governing board was looking for other locations. On the basis of that first meeting and some outside probing into Wilsons business affiliations, Steve ascertained
16、 that Wilson was a legitimate businessman of decent reputation. Steve thought that Wilsons company wanted the Elmtree property as a possible site for a condominium project. Wilson wished to talk money matters right away, but Steve needed a couple of weeks to prepare for negotiations. He used the exc
17、use that he needed the approval of the governing board before he could proceed to serious negotiations. Are such strategic misrepresentations of the truth an acceptable mode of behavior? Given that Steve has two weeks to prepare (about fifteen working hours), what should he do? Students are surprisi
18、ngly tough in their responses to this case study. They generally suggest that Steve invent all sorts of stories, because such misrepresentations would seem to be in the interests of a good cause and because the students identify with the housing plight of the residents of Elmtree House. This setting
19、 was purposely chosen for the case study to stir these emotional feelings. Preparing for NegotiationsWhat kind of information should Steve look for in advance of negotiations?Gathering InformationDuring the next twelve days, Steve did a number of things. First, he tried to ascertain Elmtrees reserva
20、tion, or walk-away, price (RP)-that is, the minimum price that Elmtree House, the seller, could accept. The reservation price was difficult to determine, because it depended on the availability of alternative sites to relocate. Steve learned that of the other sites that had previously been located,
21、the one in Brookline was no longer available, but the other two, in Medford and in Allston, were still possibilities - for the right price. Steve talked with the owners of those sites and found out that the Medford property could be had for about $175,000 and the Allston property for about $235,000.
22、1 Steve decided that Elmtree House would need at least $220,000 before a move to Medford could be undertaken and that it would need $275,000 to justify move to Allston. These figures took into account the cost of moving, minor repairs, insurance, and a small sum for risk aversion. The Allston site (
23、needing $275,000) was much better than the Medford site (needing $220,000), which in turn was better than the site at Elmtree. So Steve decided that his reservation price would be $220,000. He would take nothing less, and hope to get more possibly enough more to justify the Allston alternative. This
24、 bit of research took about six hours, or a couple of evenings work. 1. These were not firm figures, but Steves assessed distributions of these amounts were tightly distributed about these central values; each judgmental distribution had a standard deviation of about $15,000 This means that roughly
25、Steve would give 2-to-l odds that the actual selling price of the Medford property would be within $15,000 of $175,000 and 19-to-1 odds that the actual selling price would be within $30,000 of $175,000, Analogously for Allston. These are 1975 figures. Meanwhile Steves wife, Mary, contacted several r
26、ealtors in the hope of finding other locations Elmtree could consider. There were a few nibbles, but nothing definite turned up. Steve next investigated what Elmtree House would bring if sold on the open market. By examining the sale prices of houses in the vicinity and by talking to local realtors
27、and real estate experts, he learned that the Elmtree property was probably worth only about $125,000. He felt that if sold without Wilson in the picture, the house would go for between $110,000 and $145,000 (with the mean of the distribution halfway in between), and it was just as likely to go below
28、 $110,000 as above $145,000. How disappointing! This took another four hours of research time. What was the story from Wilsons perspective? It was difficult for us to make judgments about the buyers reservation price - that is, the maximum price that Wilson would be willing to offer before he defini
29、tely would break off negotiations, not temporarily for strategic purposes, but permanently. Neither Stee nor I had any expertise in the matter. We went for advice to a number of real estate experts and also queried two contractors in the Boston area, Our experts did not agree with one another, but t
30、hey all took our question about reservation price seriously; we were convinced that they understood our problem. A lot, we were told, depended on the intention of the developers. How high a structure would they be permitted to build on the site? Were they buying up other land as well? Steve found ou
31、t that the answer to the latter question was yes. The matter turned out to be much more involved than Steve or I had imagined it would be. After ten hours of his time and five hours of my time, we decided that we were hopelessly vague about our assessment of Wilsons reservation price. Figure 6.1 sho
32、ws Steves assessed probability density function (that is, all the possible values, and the relative likelihood of each)-all things considered-of Wilsons RP. As of two days before the start of real negotiations, Steve would have bet even money that Wilsons RP lay in the interval from $250,000 (the lo
33、wer quartile) to $475,000 (the upper quartile).How should Steve conduct the talks? Where should he hold them? Preparing a StrategyAfter all this preparation, Steve and I discussed his negotiation strategy. It had already been decided that the meeting would be at a hotel suite to which Wilsons compan
34、y had access. Steve and I had no objection to this venue; the dining 2. One expert thought that there was a reasonable (over 25 percent) probability that Wilson would go as high as $600,OOO; another thought that the chances of this were minuscule (less than I percent). T00 bad we couldnt have had th
35、em bet with each other and taken a brokerage fee for our entrepreneurial efforts. Figure 6.1 Steves probability assessment of Wilsons reservation price for Elmtree Houseroom of Elmtree House would have been too hectic, and his own university office inappropriate. Who should come? Feeling that he nee
36、ded someone at the discussions to advise him on legal details, Steve decided to invite Harry Jones, a Boston lawyer and former member of Elmtree Houses governing board. Jones agreed to participate, and Steve reserved two hours to brief him prior to the meeting. We also thought it might be a good ide
37、a for Steve to bring along Mrs. Peters. She was the person who was most knowledgeable about Elmtree House, and perhaps an appeal to Wilsons social conscience might help. It was agreed that Steve alone would talk about money matters. Mrs. Peters would talk about the important social role of halfway h
38、ouses and to argue that it did not make sense for Elmtree House to move unless a substantial improvement in the surrounding amenities would result: You know how hard it is on kids to move from one neighborhood to another. Just think how severe the effects will be on the young residents of Elmtree Ho
39、use. Mrs. Peters actually did have conflicting feelings about moving, and it would be easy for her to marshal arguments against a move. What should his opening tactics be? Who should start the bidding first? If Wilson insisted that Steve make the first offer, what should that be? If Wilson opened wi
40、th X thousand dollars, what3. One colleague of mine suggested that bringing a lawyer to the initial negotiations might have hurt Steves cause it indicated too much of a desire to do business and to settle details should Steves counteroffer be? How far could this be planned in advance? Were there any
41、 obvious traps to be avoided? Steve and I felt that our probabilistic assessment of Wilsons RP was so broad that it would be easy to make a mistake by having our first offer fall below his true reservation price. But if we started with a wildly high request like $900,000 -way over what we would sett
42、le for- it might sour the atmosphere, Steve decided to try to get Wilson to move first; if that did not work and if he was forced to make the first offer, he would use the round figure of $750,000, but he would try to make that offer appear en flexible and soft. Steve thought about opening with an o
43、ffer of $400,000 and holding firm for a while, but we felt there vas a 40 percent chance that this amount would be below Wilsons RP, If Wilson moved first, Steve would not allow him to dwell on his offer but would quickly try to get away from that psychologically low anchor point by promptly retorti
44、ng with a counteroffer of, say, $750,000, I told Steve that once two offers are on the table-one for each party-the final point of agreement can reasonably be predicted to fall somewhere close to midway between those two extremes. So if Wilson offered $200,000 and if Steve came back with $400,000, a
45、 reasonable bet would be a settlement of $300,000 provided, of course, that that midway figure fell within the zone of possible agreement (ZOPA), the range between Steves (the sellers) true RP and Wilsons (the buyers) true RP, For starters, Steve thought that it would be nice if he could get $ 350,0
46、00 from Wilson, but of course Steve realized that his own RP was still $220,000, We talked about the role of time; what if Wilsons most recent offer was above $220,000? Should Steve be willing to bluff and make a show of walking away from the bargaining table even though the offer is better than his
47、 reservation value? If Wilson didnt call back with a better offer, Steve could say that the Elmtree board had reconsidered; I reminded Steve that there is no objective formula for this. He would be confronted with a standard decision problem under uncertainty, and his assessment of Wilsons RP could
48、be better evaluated after sounding out Wilson than it could be with present information, The danger in breaking off negotiations-and a lot depends on how theyre broken off- was that Wilson might have other opportunities to pursue at the same time. Opening GambitsAs it turned out, the first round of
49、negotiations was, in Steves view, a disaster, and afterward he wasnt even sure that there would be a second round, Mrs. Peters played her part admirably, but to no avail; it seemed unlikely that Wilson would raise his offer to Elmtrees reservation price. After preliminary pleasantries and some posturing, Wilson said, Tell me the bare minimum you would accep
