What It Is · Key Takeaways · Do's and Don'ts · Pair With · Things to Explore
On 1 February 2008 Microsoft offered $31 a share for Yahoo, valuing it at $44.6 billion. Yahoo's board turned the offer down as substantially undervaluing the company. The refusal was rational: Yahoo had an alternative, an advertising partnership with Google. Microsoft walked away on 13 June. On 5 November the Justice Department communicated it would file to block the Yahoo/Google partnership. The companies dropped the plan the same day. Thirteen days later Yahoo closed at $11.82. Yahoo had an alternative. Just not a robust one.
What It Is
Relative Advantage is the decision logic by which multiple options end up as one deal: which of the available options is preferable, compared to what each side could do instead. It is the second pattern of Rationality, where Logos meets Substance. (If you haven’t seen the introduction to the entire Negotiation Pattern Language map yet, this primer will be more useful to you if you check it out here.) Ground Truth establishes what is actually true; Relative Advantage processes those facts into ranked outcomes; Structural Integrity examines whether the preferred deal can withstand unforeseen conditions. Think of the three patterns in this cell as real-world logic, decision logic, and deal logic. The reference point for the ranking is the BATNA, the best alternative to a negotiated agreement (what you will do if the negotiation fails). If a proposal doesn’t beat the BATNA, logic dictates it is rejected. Relative means relative to your own alternatives, not to the other side. The deal’s favorability to the counterparty has no relation to its desirability to you.
The BATNA puts a floor under the deal and leaves the ceiling open. It sets the minimum hurdle to clear, but says nothing about where the deal should land above that hurdle. Professional negotiators close badly if they treat their floor as the outcome as soon as it is secured, and stop working towards a better deal from a range of available alternatives.
Evaluating alternatives comes in three varieties: this counterparty compared to third parties, this deal structure compared to other deal structures, and closing now compared to closing later. The third one is not always managed deliberately, but three things can happen while you wait. The counterparty’s position may harden as their alternatives improve, up to and including walking away while what’s on the table is acceptable to you. Your own alternatives may decay. And if you were trying to leverage a threat or competing offer and it doesn’t work out, your choices are now to be seen as a bluffer and lose credibility, or execute on an alternative you no longer prefer.
Alternatives rarely present themselves fully formed. They are created and cultivated, developed and degraded, concealed or revealed, on both sides of the table. The majority of the work happens before the negotiation opens. Where no good alternative exists, one can be built. A company with little leverage against a dominant supplier can run a make-versus-buy study, fund a marginal second source into viability with tooling, knowledge and volume guarantees, or redesign the specification to reduce the dependency. None of this is automatically visible to the counterparty. Making your alternatives known, and making them believed, is part of the effort.
Key Takeaways
I. Your floor is a zone, not a line
The standard advice is to establish your walk-away before you start, and stick to it. That beats having no walk-away at all, but it ignores what a negotiation is for: you do not know everything at the outset, and you will gain information at the table. Treat your floor as an anticipated minimum with blurred edges. In the American–Soviet test ban talks of the early 1960s the entire argument came down to how many on-site inspections a year would be permitted, with Moscow’s ceiling at two or three and Washington asking for more. Both delegations stuck to their number, while what they should have discussed was how long and comprehensive one inspection would be. Know the width of your floor as well as its position.
II. Consider how well your alternatives age
An alternative is usually assessed on quality and credibility. How good is it, and do they believe you would use it? Its robustness is rarely assessed at all. An alternative a few counterparty phone calls can remove is thin, and so is one that decays while the negotiation runs: the option that expires, the financing that lapses, the one person who was ready to say yes but has moved on. Intel was a real alternative to Qualcomm for Apple’s modem, but could not deliver 5G in time. The question is not how many alternatives you have. It is how many will still be there on the day you need them.
III. “No deal” rarely preserves the status quo
Every assessment of alternatives starts with what happens if no agreement is reached. Business as usual is the exception. “No deal” can mean sudden death, as it does for a party in need of refinancing. “No deal” can leave both sides exposed, as an expiring supply agreement does, with the customer at risk of interrupted production and the supplier unsure of revenues. “No deal” can force the continuation of an arrangement neither side wants but neither can escape, such as with failed labor negotiations. The status quo survives only where one party owns it and the other seeks a change. Ask what the morning after “no deal” actually looks like, and assess your alternatives from there.
IV. Pushing them to their limit doesn’t prove you did well
A negotiator who judges an agreement highly because he extracted the maximum available from the counterparty confuses two measurements. Getting a good bargain is not the same as reaching a good agreement. The mistake is common because all the signals look encouraging: hard-won concessions, a counterparty at the end of its rope, emotional appeals to be reasonable. Still, their floor tells you nothing about yours.
A Few Do’s and Don’ts
Don’t Think of a deadline as a scheduling issue
A deadline pressing both parties equally is a logistics problem. But more often than not, the passage of time affects one side’s alternatives more than the other’s. A deadline from inside the room, which raises your cost faster than theirs, is an attack on your alternatives disguised as a decision gate. Negotiating faster is rarely the winning move.
Do Write down your break-even point before you start
Your break-even is the reference point from which you count gain and loss. Your walk-away is the point at which you abandon the deal. Don’t confuse them, they are different concepts. Break-even is an internal calculation regardless of available deal options or the existence of alternatives; walk-away depends solely on the ranking of alternatives relative to each other.
Internal does not mean unmovable, usually because of newly uncovered facts. A plant closes, a rate moves, a competitor signs, the new situation gets incorporated into the baseline. So write your break-even down before you start, with the reasoning attached. If a proposal scored +5 versus your break-even and it now scores +10 because of revised assumptions, the internal narrative to present the deal will look better but nothing about the offer has changed and it should still be assessed relative to the available alternatives. The reference lets you distinguish a better offer from a moved yardstick.
Don’t Assume the preparation is not worth it because your position is weak
Negotiators who start from the belief that they are the weaker party tend not to test that belief, and go on underestimating what they have. Research showed that giving unskilled negotiators more power improved their results sharply, while those of skilled negotiators barely moved. That implies skill (including doing the work) compensates for power. It also means the return on preparation is largest where the position looks worst — the condition where practitioners are least inclined to invest the effort. Test your beliefs by running a few cheap probes to see what they reveal.
Do Look for the trade that makes comparison irrelevant
An argument that your proposal beats their next best option is only as durable as that option, and they can work to improve it. An argument that your proposal is unique creates a category with a single member.
A great way to be the unique alternative is to increase what your counterparty gets out of the deal. There are three methods to accomplish that. Find the goal you genuinely share, where pulling together pays both of you more than dividing the same amount differently. Find the goal of theirs you can advance at low cost to yourself (a reference, a volume commitment, access to your forecast data). Or find the obstacle in their way that you can remove, enabling them to generate the value themselves. The third route is the cheapest and most overlooked.
Pair With
Track Record (1.1). An unproven alternative is just a claim. Your credibility is the discount factor the counterparty will apply to that third party option. You get more leverage out of an option demonstrated than the same option asserted.
Issue Decomposition (5.1). Divisibility regulates what portion you can claim of the surplus above your floor. Terms that move in coarse chunks make reaching agreement more binary, and surplus harder to claim—but they also make it harder for surplus to be taken from you. Terms that move in small increments make it easier to land on a more finely grained middle ground and claim a little more—but expose you to being shaved closer to your walk-away.
Reversibility (6.3). More options are not always better than fewer. A negotiator with many options can be pressed to use one; a negotiator without options can’t be pressed at all. The power of a negotiator often rests on a visible inability to concede. Beware the counterparty left with nothing to lose: a trapped lion goes for maximum mutual damage.
Things to Explore
Book
Fred Charles Iklé, How Nations Negotiate (1964), chapters 3 and 11. Chapter 11 makes the case that a genuinely objective minimum position rarely exists, and that negotiators prefer not to know that. Pretending or maintaining an absolute minimum spares them the complexity of internally managing and explaining shifts at the blurry edges. Chapter 3 sorts negotiations into five types according to the consequences of non-agreement: prolonging an arrangement, ending an abnormal one, taking something from the other side, building something new, or seeking no agreement at all. Iklé’s text supplies two of this pattern’s important insights: your floor is wider than you think, and the consequence of no deal is specific to the kind of negotiation you are in. Search handles: anticipated minimum Iklé, continual threefold choice.
Case study
The truce line in the Korean armistice negotiations, 1951. A border needs to be drawn somewhere on the map, and all sides had their own idea of what the fair line was. The United Nations command proposed north of the line of ground contact, on the argument that giving up air and naval operations ranging hundreds of miles north deserved compensating territory. Then those same United Nations moved to the line of contact itself, fair in the sense that neither army gained ground. The Communist side proposed the 38th Parallel, fair in light of what the map looked like before the war. The disagreement was not about the terrain itself, but the right reference point. Search handle: C. Turner Joy, How Communists Negotiate (1955).
Article
R. Duncan Luce and Howard Raiffa, Games and Decisions (1957), chapter 12, on the RAND bargaining experiments. In this experiment, participants were put in games where any two of them could form a partnership and split the proceeds, with each possible pairing worth a different amount (a laboratory version of choosing which counterparty to deal with, and on what terms). The player holding the strongest position was most frequently picked as partner, but usually ended up splitting the proceeds down the middle; the player with the second strongest position extracted more. A strong comparative position gets you into the deal; it doesn’t get you to dictate its terms.
And one you would not expect
Ariane 5 Flight 501, 4 June 1996. The rocket failed thirty-nine seconds after liftoff, destroying its payload of four satellites. The cause was a software conversion error in the inertial reference system, of which there were two. Both systems running identical software on identical hardware, the backup shut down for the same reason as the primary. Two alternatives failing in the same scenario are one alternative. Ask yourself if your outside options really are differentiated.
Relative Advantage is pattern 2.2 of twenty-seven. The two axes, the nine categories and the full set are laid out in The Negotiation Pattern Language.