Sunteți pe pagina 1din 8

1

Banyan House
The 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 Prasad who was quite
knowledgeable about finance but not a practitioner of the art and science of negotiation.
Well use the case to get a handle on the distributive part of negotiation to build
vocabulary and analytic concepts and maybe come to a few prescriptive conclusions.

The Problem and the opportunity


Prasad was on the governing board of Banyan House, a halfway house for young
men and women aged eighteen to twenty-five who needed professional guidance
and the support of sympathetic group to ease their transition from metal institutions
back to society. Many in the house had had nervous break-downs, or were
borderline schizophrenics, or were recovering from unfortunate experiences with
drugs.
Located on the outskirts of Mumbai in the industrial township of Vasai, Banyan
House accommodated about twenty residents. The neighborhood was in a
transitional stage; some said that it would deteriorate further, others that it was on
the way 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 of a full acre of ground. Its stand of banyan trees,
once magnificent, had succumbed to disease.
The governing board, through a subcommittee, had earlier investigated the
possibility of moving Banyan House from Vasai to a quieter, semi-residential
community. Other suitable houses were located in the nearby areas of Virar, and
Palghar, but the costs were prohibitive and the idea of moving was reluctantly
dropped.
Some months later, a Mr. Paresh Shah approached Banyans director, Mrs. Kulkarni,
who lived in the house with her husband and child. Shah indicated that his firm, a
combined architectural and developmental contractor, might be interested in
buying the Banyan property. This was out of the blue. No public announcement had
ever been made that Banyan House was interested in a move. Mrs. Kulkarni
responded that the thought had never occurred to her, but that if the price were
right, the governing board might consider it. Shah gave Mrs. Kulkarni his card and
said that he would like to pursue the topic further if there were a chance for a deal.
Even simple-looking decision can be deceptively complex. For example, should Mrs.
Kulkarni let on that Banyan might welcome the opportunity to move? On the one
hand, she would like to affect Shahs aspiration level implying that hell have to pay
a high price. On the other hand, she would also like to develop a positive
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
PGPM

Case 1

2
and raise his degree of concern over the outcome for entrance. There is also the risk
that Shah is a more casual buyer, and might easily walk away if discouraged.
What would you do?
The governing board asked Prasad to follow up on this promising lead. The other
board members included a local priest and prominent individuals in clinical
psychology, medicine, and vocational guidance; none besides Prasad had any
feeling for business negotiations of this kind. Since they fully trusted Prasad, 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 Prasad?
Prasad sought my advice on how he should approach Mr. Shah, and we decided that
an informal phone call was in order. In the course of the call, Prasad accepted an
invitation to discuss possibilities over coffee at a nearby coffee shop located in a
plush hotel. He decided not to talk about any money matters at that first meeting
just to sound out Shah and find out what he might have in mind. He insisted, I think
rightly, on paying his own bill. I assured him that he also did rightly in not even
hinting to Shah that the governing board was looking for other locations.
On the basis of that first meeting and some outside probing into Shahs business
affiliations, Prasad ascertained that Shah was a legitimate businessman of decent
reputation. Prasad thought that Shahs company wanted the Banyan property as a
possible site for a condominium project. Shah wished to talk money matters right
away, but Prasad needed a couple of weeks to prepare for negotiations. He used the
excuse 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 Prasad has two weeks to prepare, what should he do?
Preparing for Negotiation
What kind of information should Prasad look for in advance of negotiations?
Gathering Information
During the next twelve days, Prasad did a number of things.
First, he tried to ascertain Banyans reservation, or walk-away price (RP) that is,
the minimum price that Banyan House, the seller, could accept. The reservation
price was difficult to determine, because it depended on the availability of
alternative sites to relocate. Prasad learned that of the other sites that had
previously been located, the one in Dahisar was no longer available, but the other
two, in Palghar and in Vapi, were still possibilities for the right price. Prasad talked
PGPM

Case 1

3
with the owners of those sites and found out that the Palghar property could be had
for about Rs. 1.05 crores and the Vapi property for about Rs 1.45 crores.
Prasad decided that Banyan House would need at least Rs 1.25 crores before a
move to Palghar could be undertaken and that it would need Rs. 1.75 crores to
justify a move to Vapi. These figures took into account the cost of moving, minor
repairs, insurance.
The Vapi site (needing Rs. 1.8 crores) was much better than the Palghar site
(needing Rs. 1.25 crores), which in turn was better than the site at Banyan. So
Prasad decided that his reservation price would be Rs. 1.25 crores. He would take
nothing less, and hope to get more possibly enough more to justify the Vapi
alternative. This bit of research took about six hours, or a couple of evenings work.
Meanwhile Prasads wife, Kumud, contacted several realtors in the hope of finding
other locations Banyan could consider. There were a few nibbles, but nothing
definite turned up.
Prasad next investigated what Banyan 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 and real estate experts, he learnt that the Banyan property was probably
worth only about Rs.75 lakhs. He felt that if sold without Shah in the picture, the
house would go for between Rs. 60 80 lakhs and it was just as likely to go below
Rs. 60 lakhs as above Rs. 80 lakhs. How disappointing!
What was the story from Shahs perspective?
It was difficult for us to make judgments about the buyers RP that is, the
maximum price that Shah would be willing to offer before he definitely would break
off negotiations, not temporarily for strategic purposes, but permanently. Neither
Prasad nor I had any expertise in the matter. We went for advice to a number of real
estate experts and queried two contractors in the Vasai area.
Our experts did not agree with one another, but they all took our questions 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?
Prasad found out that the answer to the latter questions was yes. The matter turned
out to be much more involved than Prasad 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 Shahs reservation price. As of two days before the
start of real negotiations, Prasad would have bet even money that Shahs RP lay in
the interval from Rs. 1.50 to 4 crores.
How should Prasad conduct the talks? Where should he hold them?
PGPM

Case 1

4
Preparing a Strategy
After all this preparation, Prasad and I discussed his negotiation strategy. It had
already been decided that the meeting would be at a nearby hotel lobby coffee
shop where they had met earlier. Prasad and I had no objection to this venue; the
dining Room of Banyan House would be have been too hectic, and his own
university office inappropriate.
Who should come? Feeling that he needed someone at the discussions to advise
him on legal details, Prasad decided to invite Milind Gupte, a Mumbai lawyer and
former member of Banyan Houses governing board. Gupte agreed to participate,
and Prasad reserved two hours to brief him prior to the meeting.
We also thought it might be a good idea for Prasad to bring along Mrs. Kulkarni. She
was the person who was most knowledgeable about Banyan House, and perhaps an
appeal to Shahs social conscience might help. It was agreed that Prasad alone
would talk about money matters. Mrs. Kulkarni would talk about the important social
role of halfway houses and to argue that it did not make sense for Banyan House to
move unless a substantial improvement in the surrounding amenities would result:
You know how hard it is on youngsters to move from one neighborhood to another.
Just think how severe the effects will be on the young residents of Banyan House.
Mrs. Kulkarni actually did have conflicting feeling 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 Shah insisted that Prasad make the first offer, what should that be? If Shah
opened with X lakhs of rupees, what should Prasads counteroffer be? How far could
this be planned in advance? Were there any obvious traps to be avoided?
Prasad and I felt that our probabilistic assessment of Shahs 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 Rs. 5.5 crores
way over what we would settle for it might sour the atmosphere.
Prasad decided to try to get Shah to move first; if that did not work and if he was
forced to make the first offer, he would use a figure of Rs. 4.75 crores, but he would
try to make that offer appear very flexible and soft.
Prasad thought of opening with an offer of Rs. 3.5 crores and holding firm for a
while, but we felt there was a 40 percent chance that this amount would be below
Shahs RP. If Shah moved first, Prasad would not allow him to dwell on his offer but
would quickly try to get away from that psychologically low anchor point by
promptly retorting with a counteroffer of, say, Rs. 3.75 crores.
I told Prasad that once two offers are on the table one for each party the final
pint of agreement can reasonably be predicted to fall somewhere close to midway
PGPM

Case 1

5
between those extremes. So if Shah offered Rs. 1.20 crores and if Prasad came back
with Rs. 3.60 crores, a reasonable bet would be a settlement of Rs. 2.4 crores
provided, of course, that that midway figure fell within the zone of possible
agreement (ZOPA), the range between Prasads (the sellers) true RP and Shahs
(the buyers) true RP.
For starters, Prasad though that it would be nice if he could get Rs. 2.00 crores from
Shah, but of course Prasad realized that his own RP was still Rs. 1.25 crores.
We talked about the role of time.
What if Shahs most recent offer was above Rs. 1.5 crores? Should Prasad be willing
to bluff and make a show of walking away from the bargaining table even though
the offer is better than his reservation value? If Shah didnt call back with a better
offer, Prasad could say that the Banyan board had reconsidered. I reminded Prasad
that there is no objective formula for this. He would be confronted with a standard
decision problem under uncertainty, and his assessment of Shahs RP could be
better evaluated after sounding out Shah than it could be with present information.
The danger in breaking off negotiations and lot depends on how theyre broken off
was that Shah might have other opportunities to pursue at the same time.
Opening Gambits
As it turned out, the first round of negotiations was, in Prasads view, a disaster, and
afterward he wasnt even sure that there would be a second round. Mrs. Kulkarni
played her part admirably, but to no avail; it seemed unlikely that Shah would raise
his offer to Banyans reservation price.
After preliminary pleasantries and some posturing, Shah said, Tell me the bare
minimum you would accept from us, and Ill see if I can throw in something extra.
How should Prasad respond?
Prasad expected that gambit, and instead of outright misrepresentation, he
responded, Why dont you tell us the very maximum that you are willing to pay,
and well see if we can shave off a bit.
Luckily, Shah was amused at that response. He finally made his opening offer at Rs.
75 lakhs, but first bolstered it with a lot of facts about what other property was
selling for in that section of Vasai.
Prasad immediately responded that Banyan House could always sell its property for
more money than Shah was offering, and that it did not have the faintest intention
of moving. They would consider moving only if they could relocate in a much more
tranquil environment where real estate values were high.

PGPM

Case 1

6
Prasad claimed that the trouble of moving could be justified only by a sale price of
about Rs. 3.5 crores, and Mrs. Kulkarni concurred. Prasad chose that Rs. 3.5 crore
figure keeping in mind that the midpoint between Rs. 75 lakhs and 3.5 crores was
above his aspiration level of Rs. 2 crores.
Shah retorted that prices like that were out of the question. The two sides jockeyed
around a bit and decided to break off, with hints that they might each do a bit more
homework.
Where should Prasad go from here?
Prasad and I talked about how we should reassess our judgmental distribution of
Shahs RP. Prasad had the definite impression that Rs. 3.5 crore was really well
above Shahs RP, but I reminded him that Shah was an expert and if his RP were
above Rs. 3.5 crore he would want to lead Prasad to think otherwise. We decided to
wait a week and then have Prasad tell Shah that Banyans board would be willing to
come down to Rs. 3 crores.
Two days later, however, Prasad received a call from Shah, who said that his
conscience was bothering him. He had had a dream about Mrs. Kulkarni and the
social good she was bringing to this world, and this had persuaded him that, even
though it did not make business sense, he should increase his offer to Rs. 1.5
crores.
Prasad could not contain himself and blurted out his first mistake: Now thats more
like it! But then he regained his composure and said that he thought that he could
get Banyans board to come down to Rs. 2.75 crores. They agreed to meet again in
a couple of days for what they hoped would be a final round of bargaining.
The Dance of Concessions
Following this phone conversation with Shah, Prasad told me that he had
inadvertently led Shah to believe that his Rs. 1.5 crore offer would suffice. Prasad
also felt that his offer of Rs. 2.75 crore was coming close to Shahs RP, because this
seemed to be the only reason for Shahs reference to a final round of bargaining.
We talked further about strategy and we revised our probabilistic assessments of
Shahs reservation value and the likely outcome.
Over the next two days there was more jockeying between the two sides, and Shah
successively yielded from Rs. 1.5 crore to Rs. 1.65 crores to Rs. 1.75 crores and
finally to a firm last offer of Rs. 1.80 crores, whereas Prasad went from Rs 3.5
crore to Rs. 2.75 crore to Rs. 2.50 crore, and then, painfully, when Shah sat fixedly
at Rs. 1.80 crore, inched down to Rs. 2.25 crores. Prasad finally broke off by saying
that he would have to contact key members of the governing board to see if he
could possible break the stalemate.

PGPM

Case 1

7
Now, Rs. 1.80 crore not only pierced Prasads RP of Rs. 1.25 (needed for the Palghar
move), but also would make it possible for Banyan House to buy the more desirable
Vapi property. It had at that point become a question of gravy. I asked Prasad
whether he thought Shah would go over Rs. 1.80 crore and he responded that
although it would take some face-saving maneuver, he thought Shah could be
moved up. Prasad felt, that if Shah were involved in other deals, and if one of these
should turn out well, Shah might well decide to wash his hands of Banyan.
Closing Gambits
What should Prasad do to finalize the deal?
Prasad did two things next. He first asked Milind Gupte to put in place all but the
very final touches on a legal agreement for acquiring the Vapi property. Gupte
reported the next day that all was in order, but that it was going to cost Rs. 15 lakhs
more than anticipated to do some necessary repair work on the house in order to
meet Vapi municipalitys standards. Still, Rs. 1.80 crore would meet those needs.
Second, Prasad worked with Mrs. Kulkarni to find out what an extra Rs 15 30 lakhs
would mean to Banyan House. Mrs. Kulkarni said that half of any extra money
should definitely go into the Financial Aid Fund for prospective residents who could
not quite afford Banyan House, and that it could also be used to purchase items on
her little list of necessary luxuries: a color television set, a video game player,
new mattresses and dishes, repair of broken furniture, a large refrigerator so that
she could buy food in bulk, and so on. Her little list became increasingly long as
her enthusiasm mounted but Rs. 10 lakhs would suffice to make a fair dent in it,
and as Mrs. Kulkarni talked she became even more excited about those fringes than
about the move to Vapi. She was all for holding out for Rs. 2.25 crore.
The next day Prasad called Shah and explained to him that the members of
Banyans board were divided about accepting Rs. 1.80 crore (that was actually
true). Would it be possible for your company to yield a bit and do, for free, the
equivalent of Rs. 25 -30 lakh worth of repair work on Banyans new property if our
deal with you goes through? In that case, we could go with the Rs. 1.80 crore offer.
Shah responded that he was delighted that the board was smart enough to accept
his magnanimous offer of Rs. 1.8 crore. Prasad was speechless. Shah then explained
that his company had a firm policy not to entangle itself with side deals involving
free contract work. He didnt blame Prasad for trying, but his suggestion was out of
the question.
Well then, Prasad responded, it would surely help us if your company could
make a tax-free gift to Banyan House of , say, Rs. 30 lakhs, for Banyans Financial
Aid Fund for needy residents.

PGPM

Case 1

8
Now thats an idea! That is too high, but Ill ask our lawyers if we can contribute
fifteen.
Twenty-five?
Okay-twenty-five
It turned out that for legal reasons Shahs company paid a straight Rs. 2.05 crores
to Banyan House, but Shah had succeeded in finding a good face saving for
breaking his firm last offer of Rs. 1.80 crore.
Lest readers think erroneously that its always wise to bargain tough, I might suggest
another perfectly plausible version of this story: Shah might have backed out of the deal
suddenly, at the time when he made his firm last offer of Rs. 1.80 crore and Prasad
demanded Rs. 2.25 crore. An alternative venture, competitive with the Banyan deal, might
have turned out to be better for Shah.
Source: Adapted from the Elmtree House, written by Prof Howard Raiffa, Harvard Business
School

PGPM

Case 1