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Professor Nalebuff discusses the importance of negotiating and understanding what's actually at stake.
In this latest Harvard Business School Healthcare Alumni Association Q&A, Professor Barry Nalebuff of the Yale School of Management explains what is really at stake in any negotiation and ensures you get your half—so you can focus on growing the pie.
Wong: While bio-pharmaceutical firms often point to planned collaborations with each other as well as with start-ups and academia to create value, failed negotiations derail many of these aspirations. Based upon your 30+ years teaching at Yale as well as business experiences, what negotiation advice would you share?
Dr. Nalebuff: Co-opetition, the mix of competition and cooperation was relatively rare back in the mid-1990s, but it is quite common today across not only biopharma but also other verticals such as Apple, Samsung, Ford, and GM.1 Based upon my research and personal experiences, what I have learned is that people often do not know what it is that they are negotiating over. By not having this understanding, it is hard to know if you have ended up with a poor deal, an equitable one, or a great one. My advice is to learn about the negotiation pie concept, namely the potential extra value negotiators create by coming together.
Let’s take a simple concept of pizza slices. Suppose we have a 12-slice pizza that you and I can enjoy if we can agree on how to divide it. If we don’t reach an agreement, I’ll get four slices and you’ll get two. With this framework, many of your readers might think that I am twice as strong as you. Therefore, I should receive twice as much—an eight to four division. Still, others might think that fairness means you take the twelve slices and divide it ‘6:6’. My view is neither of these positions are correct. If we can’t reach an agreement, we only get six slices (four for me and two for you). If we can reach an agreement, we receive twelve. So, the point of the negotiation is to go from 6 to 12 slices, and to secure these extra six, both you and I are equally needed. Therefore, under this negotiation framework, we should divide it up the six extra slices three and three, which means I get 4 + 3 or 7 slices while you receive 2 + 3, which is 5 slices.2
With this logic in mind, prior assumptions that the Big-Pharma company always has leverage over the smaller organization isn’t quite right. Recognize what each party brings to the table when both are required to engage to grow the overall pie.
Finally, think about creating new paradigms for capturing value. Split the pie as it is being created. For instance, one large pharma firm’s high-cholesterol medication is often positioned as a drug of last resort given its relatively higher price versus brands that have gone off patent, but do not have the same efficacy. This firm should consider how to negotiate with the insurers such that the brand is positioned as first-line treatment. The key insight is that the pie is the improved performance. Thus, the payment should be based on the level of improved performance on a patient-by-patient basis. The price would be the same as the generic when the response is the same. But when the response is superior, the value of the superior response is split between the drugmaker and the insurer.
Wong: As most people are not comfortable with negotiating, what three recommendations would you provide to them?
Nalebuff: First, emphasize logic versus emotion. Many people are uncomfortable with negotiation given the emotions that often arise. A simple but effective beginning step is to discuss “how” we will negotiate. As mentioned earlier, a key theme of this dialogue will be around how a successful negotiation will create a much larger pie, versus a failed one where we both walk away. When we sold Honest Tea, a company which I co-founded with one of my students, we agreed upfront with the buyer (Coca-Cola) that we would split the pie we create. Here, that meant the sales we could create together compared to what we could do on our own. While the sales we would create together is something that we would observe, what we could do on our own is just a forecast. We converted the negotiation into a data exercise.
Second, even if you might consider the other party to be a competitor, study the many reasons for cooperation. For example, it can be a way to save costs and avoid duplication of efforts. When my mom was negotiating a real estate purchase, she and the seller agreed to hire an independent lawyer and thereby save duplication of lawyer fees.
Finally, when you start the conversation around how the other party and you will negotiate, remember that this is an opportunity to see how the other side engages. Hopefully, you can encourage a logical and trustful approach. While your goals are important, consider the other party’s needs. If they can get what they want, they will be more willing to give you what you want. By doing so, you will have a better chance to expand and split the pie.3
Barry Nalebuff is Milton Steinbach Professor at the Yale School of Management, where for thirty years he has taught negotiation, innovation, strategy, and game theory.Dr. Nalebuff cofounded Honest Tea. He advised the NBA in their prior negotiations with the National Basketball Players Association and served on the board of Nationwide Insurance. A graduate of MIT, a Rhodes Scholar, and a Junior Fellow at Harvard’s Society of Fellows, Professor Nalebuff earned his doctorate at Oxford University.
Michael Wong is an emeritus board member of the Harvard Business School Healthcare Alumni Association.