A kinder, softer deal
Separating the Cake: A Radical New Way to Negotiate
by Barry Nalebuff, Harper Business, 2022
Whoever is defeated in a negotiation will eat Barry Nalebuff’s new book, Cup cake. Professor Milton Steinbach at the Yale School of Management, who co-founded Honest Tea as a side gig, combines logic and empathy in a strategy based on power-based negotiating tactics.
The simple principle that drives Nalebuff’s approach is this: the bargaining pie – that is, the value created by the agreement, over and above the value that the parties to the deal can create on their own – must be divided. even. It doesn’t matter who has the most power or who needs the deal most – what matters is the value that comes from the agreement and the inability of either party to achieve it without the other. In this sense, all parties to the agreement have a legitimate claim to an equal share of the negotiating pie.
Nalebuff illustrates this concept with an easy-to-understand example: a pizzeria will give Alice and Bob a 12-piece pizza if they can agree on how to split it. If they can’t, it gives them half of the pie, but splits it unevenly: four pieces for Alice and two for Bob. These no-deal sections include what Roger Fisher and William Ury call BATNA (the best alternative to a negotiated deal) in their bestselling negotiation book, Start Yes.
Nalebuff’s solution is to focus on the extras Alice and Bob get if they make a deal. He split the six additional slices in half. This gives Alice a total of seven slices (her BATNA is four slices plus her half of the six slices in the negotiation pie) and Bob gets five slices (his BATNA is two slices plus one half his six slices in the negotiation pie). Voilà.
Nalebuff, who has taught this method to MBA students and executives at Yale for the past 15 years, as well as online at Coursera, writes: “The pie framework will change the way you approach negotiations in business and life. “It will allow you to see the negotiation more clearly and logically. It will lead you to an agreement where the principle applies regardless of the specifics of your situation. It will help you make persuasive arguments by identifying inconsistencies in their approach.”
The pie framework will change the way you approach negotiations in business and in life.”
Nalebuff traces this approach to negotiation from 2,000 years ago with a case described in the Babylonian Talmud, the basis for Jewish law. In it, there were two court attendants holding robes. One person requests the whole garment; the other asked for half of the clothes. The court awarded the claimant three-quarters of the suit and one-quarter of the latter. How does this fit into the pie approach? Nalebuff explains: “If we look at both claims together, we see that the dispute is really just over half. “The Talmud’s solution was to give each side what was conceded to him and then split the amount in dispute.”
As logical as this sounds, there are nuances involved and the difficulty of determining the size of a pie that makes it much more complicated to split it than it is to split a pizza. For example, when Coca-Cola expressed interest in acquiring Honest Tea from Nalebuff and its co-founder Seth Goldman, the two were excited by the prospect of mining scale and his market reach. beverage giant to grow their 10-year-old company—but they’re not ready to sell. The parties overcame this hurdle by agreeing that Coke would purchase an initial minority share of Honest Tea in 2008 and then, after three years, have the option to purchase the remainder. But how much will Coke pay in three years? It will help Honest Tea buy, produce, and distribute in the meantime, and it doesn’t want to pay more for it for its own efforts.
“My rebuttal is that both are equally necessary to be able to achieve that additional sale,” Nalebuff explains. “Yes, Honest Tea couldn’t sell without Coke’s trucks, but Coke couldn’t grow those sales without Honest Tea on their trucks. Only by coming together can we make a cake. ” They solved the problem by setting a price based on a multiple of the expected sales for three years without Coke involvement, plus a payment of half the multiple of the sales. actual sales were higher than that expected.In other words, they split the value they co-create.(Coke, which acquired Honest Tea in 2011, this spring announced plans for plans to remove the brand from its beverage portfolio by the end of the year.)
One of the highlights of Cup cake is the level of scrutiny and rigor that Nalebuff has devoted to developing the approach. But if there is one key point, it seems to be the ability to convince all parties in the negotiation to comply with its commands, especially those that believe they have a more powerful position. While Nalebuff has gone to great lengths to equip the reader with a compelling argument to split the pie, personal experience shows this is likely easier said than done.
Clever words: Nestlé USA tried to buy Honest Tea before Coke. Nalebuff recalls an approximate price that took into account the value created by the (cake) deal, “but when the Swiss headquarters saw the number, the executive was shocked and canceled the deal.” favorable. The head of Nestlé USA is back with Honest Tea in much reduced quantities — I said no. He then wrote to Seth implying that I had ruined the hopes and dreams of Seth, his family, and all their future generations.”
Tetley also tries to buy Honest Tea. According to Nalebuff, when Honest Tea turned down his offer, the message that Tetley’s CEO conveyed was, “If you don’t sell to us, we’ll crush you like these tea leaves.”
Nalebuff clearly wanted to be rewarded for implementing these tough tactics, but luckily Honest Tea was in the game and Coke was on the wing. Imagine a situation if Nalebuff and Goldman needed to sell and their only options were Nestlé USA and Tetley. It doesn’t seem like both companies are interested in splitting the pie.