International Lodging Merger GBUS 3050 Stephen W. Nason Professor of Business Practice HKUST Deal Making Outline: Where are We Going? Closing the Deal: Contexts National Context Firm Context Brazil PRC M&A MNC vs. Domestic South Korea Hong Kong Joint Ventures SMEs SE Asia Taiwan Outsourcing Individual vs. Individual Russia Kazakhstan US Corp. vs. Gov. Multi-party Singapore Bamara Gov. vs. Gov. VC Negotiation © Prof Stephen W. Nason – All Rights Reserved Romance 2 The Amazon International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 3 How did you feel in this Negotiation? Frustrated Annoyed What were you frustrated about? AAA preoccupied with personal information – How did Lambert react AAA opening offer Compensation scheme Why? The other side disagreed, but more They disagreed about commonsense issues Result? Yelling, pounding, frustration, difficulty, and sometimes no deal International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 4 What was the underlying reason for these problems? Lambert Hotel Rep from the US AAA Hotel Rep from Brazil Culture International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 5 Is negotiating deals cross culturally an advantage or disadvantage? When we negotiate deals cross culturally …. Participants often feel heightened anxiety Participants often feel frustrated and angry Both sides blame the other and the other’s culture for the failure Neither generally understands or works with the other party Surface understanding does not relate to true understanding Neither party attempts to understand the other’s cognitions Egocentrism and ethnocentrism common Cultural Differences make things much more difficult International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 6 Is negotiating deals cross culturally an advantage or disadvantage? When we negotiate deals cross culturally …. Participants often feel heightened anxiety International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 7 Common emotions in cross cultural deal making? Anxiety – Most likely felt before the negotiation begins and in early phase of the negotiation Anger – Most likely in the heat of the discussion Disappointment – Most likely in the aftermath Happiness/excitement International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 8 Anxiety When experiencing anxiety in negotiations people Make weaker first offers Respond to offers quicker with less thought More likely to accept poor offers More likely to exit the negotiation early Less confident Conclusion: Anxious negotiators end up with worse deals Cultural differences make negotiators more anxious Anxiety contributes to Cross Cultural Deals often being even worse International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 9 Anxiety, Confidence, and Advice When experiencing anxiety in negotiations people Less confident so more likely to seek advice This can be good, but … More likely to accept advice from poor sources – TV/movies – Friend of family member that may not have expertise – Counterpart in the negotiation Less likely to discount poor advice – Particularly from someone with a conflict of interest Do tricky negotiators often make their counterpart feel nervous on purpose? “We don’t do things like that here” International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 10 How can we minimize anxiety 1. Preparation! – The more comfortable you are with the details the less anxious 2. Anxiety is a response to novel situations – The more experience negotiating the less anxiety – Like this class! 3. Negotiate in a comfortable setting 4. Have a support crew 5. Bring in an outside expert, agent – Pretend that you are the outside expert negotiating for someone else International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 11 Common emotions in cross cultural deal making? Anxiety – Most likely before or in early phase of the negotiation Anger – Most likely in the heat of the discussion Disappointment – Most likely in the aftermath Happiness/excitement International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 12 Why do participants often feel more angry in cross cultural deals? Culture influences what we think of as the normal/proper way to behave Other cultures foster different “normal” behaviors These behaviors can seem inexplicable, not normal And when the persist it can lead to frustration International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 13 Does expressing anger result in better or worse Deals? Better, sometimes, if It is a distributive negotiation You have a stronger position Your counterpart is anxious Worse if There is integrative potential (win-win) The relationship is important Implementation of final deal is important Usually expressing anger results in Poorer outcomes International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 14 What is the impact of Anger on Deals? With anger both sides are more likely to Use power Use hard ball tactics Focus on distributive results You are more likely to reject offers – – Your counterpart is more likely to reject your offers (even if they are not angry) With anger less likely to Use collaborative approaches Build relationships Act cooperative Find maximum available value Act competitive Loose track of one’s interests Misunderstand other parties interests Seek to harm the other side Create retaliation International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 15 Anger in negotiations results in More “no-deals” Fewer high value deals with joint gains If there is a deal it is likely closer to both side’s bottom line Poorer implementation of the deal Lower satisfaction Increased need to renegotiate later Bringing anger is like throwing a bomb into the negotiation Cultural differences often foster more anger Anger contributes to cross cultural deals often blowing up International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 16 Reduce anger by Building rapport Before the negotiation During the negotiation After the negotiation Build rapport with ALL the relevant players Not just your counterpart Frame the negotiation as a cooperative problem solving venture Act in ways that sooth anger Apologize Respond to the issue, not to the emotion Do not respond with anger back* Learn about the other culture learn how to show respect, anticipate where potential problems may occur Reframe anger as sadness International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 17 Disappointment and Regret People regret missed opportunities, actions not taken, more than actions taken When finish fast often feel missed opportunities When lose opportunities due to anger we often feel regret after we have calmed down Outcome of Disappointment and Regret Poor implementation of the deal Often renegotiation, but now it is a dispute Cross Cultural Deals often result in greater disappointment and poorer implimentation International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 18 Manage Disappointment and Regret Ask questions, which results in more information being better liked feeling every option was tried, by both sides Fewer cultural misunderstandings Post-settlement settlement Explore integrative potential Build in an expectation of the need to renegotiate aspects later Excellent negotiators ensure their counterpart is happy … With the final deal Still happy when reflecting on the deal the next week and next month International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 19 Negotiating deals cross culturally makes everything more difficult. When we negotiate deals cross culturally …. Participants often feel heightened anxiety Participants often feel frustrated and angry Both sides blame the other and the other’s culture for the failure Neither generally understands or works with the other party Surface understanding does not relate to true understanding Neither party attempts to understand the other’s cognitions Egocentrism and ethnocentrism common International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 20 The Best Negotiators Come From Which Country? (Jim Thomas, Negotiate to win) Ranking of Western Countries: US, Europe? Turkey Are the worst! Greece Best: Italians Japan French Rest Asia British, Canadians, Australians Russia Africa, Latin America, Middle East East and Central Europe Tied for LAST: Germans & Americans Do not take this too seriously! International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 21 National Culture Values Individualism versus Collectivism Power Distance (egalitarian vs. hierarchy) Achievement versus Nurturing Orientation Uncertainty Avoidance Direct verses indirect Long-Term versus Short-Term Orientation Universalism verses Particularism International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 22 Individualism vs. Collectivism Individualism - Values individual achievement, freedom, and competition. Collectivism - Values group harmony, cohesiveness, and consensus. International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 23 Egalitarian or Hierarchical Power Distance - The degree to which a country accepts the fact that differences in its citizens’ physical and intellectual capabilities give rise to inequalities in their well-being. International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 24 Money or Love? Achievement Orientation - valuing assertiveness, performance, success, and competition. Nurturing Orientation - valuing quality of life, warm personal relationships, and service and care for the weak. International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 25 Predictability or Change Uncertainty Avoidance - degree of tolerance for uncertainty and willingness to take risks. International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 26 Direct vs. Indirect Direct (Low Context) - Communication primarily explicit, verbal and direct Indirect (High Context) - In addition to the verbal aspect a major portion is of communication is implicit, non-verbal and indirect – The context is necessarily to understand the communication International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 27 Now or Later Long-Term Orientation - valuing thrift in saving and persistence in achieving goals. Short-Term Orientation - valuing personal stability and living for the present. International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 28 Rules vs. Relationships Universalism – there is an ultimate truth and morality that can be applied to any situation. – A “rule is a rule” – the basis of trust is on the agreement Particularism – one looks to relationships and the specific situation to determine what is right. – Contract is a general guideline – Basis of trust is on the relationship International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 29 Cultural Value Scores for 10 Countries USA Germany Japan France Netherlands Hong Kong Indonesia West Africa Russia China Brazil PD ID AO UA LT 40L 35L 54M 68H 38L 68H 78H 77H 95H 80H 66H 91H 67H 46M 71H 80H 25L 14L 20L 50M 20L 32L 62H 66H 95H 43M 14L 57H 46M 46M 40L 50M 45M 29L 31M 80H 30L 44M 96H 25L 16L 10L 118H 60H 46L 65M 92H 86H 53M 29L 48L 54M 90H 60M 72H International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 30 Hofstede’s Cultural Scores US HK Brazil PRC Power Distance Low High High High Individualism High Mixed Low-M Low Achievement Or. High High Med. Med. Uncertainty Avoid Low Low High Med. Long- Term Or. Low High Med-H High Directness High Mixed Low Low International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 31 How might culture have affected this negotiation? Power Distance AAA wants to be strongly represented on the executive board – To not be well represented would put them “one down” compared to Lambert Negotiators should be of equal rank – If negotiate against someone of less rank then they may become offended International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 32 How might culture have affected this negotiation? Individualism – Collectivism AAA does not like contingent compensation that may create competition, Lambert does What other cultural variable might influence preferences on contingentcompensation? Uncertainty Avoidance Being compensated based some measure of performance is inherently less certain then a stable salary Countries with higher tolerance of uncertainty tend to be more open to contingent compensation International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 33 How might culture have affected this negotiation? Time US: Short Term Orientation – “Time is money” – Organize negotiation sequentially – Want to close the deal quickly, hate anything that wastes time – Get points for closing the deal early Brazil – Organize negotiation in parallel (polychronic) – Not care as much about time International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 34 How might culture have affected this negotiation? Universalism US: high universalism – “a rule is a rule” – Basis of trust is the contract Brazil: Particularistic – Contract is a guideline and exceptions will need to be made – Basis of trust is the relationship – Want to get to know you – Points for building the relationship International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 35 How might culture have affected this negotiation? 1. 2. 3. 4. Power Distance: AAA wants to be strongly represented on the exec. board Collectivism: AAA does not like contingent compensation Short Term Orientation: Lambert wants to close the deal quickly Universalism: AAA want to build a relationship These cultural values create OPPOSING preferences in the negotiation How to handle these different cultural preferences? International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 36 Preferences Lambert Lambert AAA Stock Division Lam. 50% / 50% AAA Lam. 51% / 49% AAA Each add 1% to Lam Compensation for Property Managers Voting Seats for AAA Sale of Ecotourism Business 1 2 3 4 Naming of AAA Properties AAA AAA by Lambert AAA-Lambert Lambert-AAA Lambert Management of AAA Hotel Properties L. exp 1 R. M in U.S. 2 R. R in US 2 R.R. in Brazil 2 R.R w/o training AAA x<10% 10%≤x≤20% 21%≤x≤49% 50%≤x≤79% x>80% x≤$600,000 $600,001≤x≤$750,00 $750,001≤x≤$900,000 $900,001≤x≤$999,999 x≥$1,000,000 Timing Under 20mins Under 10 mins Less than 10 mins under > Allotted time Building the relationship with the Lambert Representative 1Q 2 Qs 3 Qs 4 Qs 5 Qs 37 Distribution of Stock Ownership & Points Ownership % Lambert AAA Points Lambert Ownership % AAA Lambert © Prof Stephen W. Nason – All Rights Reserved AAA Points Lambert AAA Preferences Lambert Lambert AAA Stock Division Lam. 50% / 50% AAA Lam. 51% / 49% AAA Each add 1% to Lam Compensation for Property Managers Voting Seats for AAA Sale of Ecotourism Business 1 2 3 4 Naming of AAA Properties AAA AAA by Lambert AAA-Lambert Lambert-AAA Lambert Management of AAA Hotel Properties L. exp 1 R. M in U.S. 2 R. R in US 2 R.R. in Brazil 2 R.R w/o training AAA x<10% 10%≤x≤20% 21%≤x≤49% 50%≤x≤79% x>80% x≤$600,000 $600,001≤x≤$750,00 $750,001≤x≤$900,000 $900,001≤x≤$999,999 x≥$1,000,000 Timing Under 20mins Under 10 mins Less than 10 mins under > Allotted time Building the relationship with the Lambert Representative 1Q 2 Qs 3 Qs 4 Qs 5 Qs How Can You Maximize Your Results? Trade! Each party gives up their low priority interests in exchange for getting their high priority interests. – Ask: 1. Does each have different interests? 2. Do they put different weights on the same interests? – If the answer to either question is yes then can trade issues. Trade away less important issues in exchange for more important issues International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 41 Preferences Lambert Lambert AAA Stock Division Lam. 50% / 50% AAA Lam. 51% / 49% AAA Each add 1% to Lam Compensation for Property Managers Voting Seats for AAA Sale of Ecotourism Business 1 2 3 4 Naming of AAA Properties AAA AAA by Lambert AAA-Lambert Lambert-AAA Lambert Management of AAA Hotel Properties L. exp 1 R. M in U.S. 2 R. R in US 2 R.R. in Brazil 2 R.R w/o training AAA x<10% 10%≤x≤20% 21%≤x≤49% 50%≤x≤79% x>80% x≤$600,000 $600,001≤x≤$750,00 $750,001≤x≤$900,000 $900,001≤x≤$999,999 x≥$1,000,000 Timing Under 20mins Under 10 mins Less than 10 mins under > Allotted time Building the relationship with the Lambert Representative 1Q 2 Qs 3 Qs 4 Qs 5 Qs Outcome Lambert Outcome A: Distributive Issues Stock Dist. (66%) Naming (AAA-Lambert) Sale of Ecotourism Business ($750,001 - $900,000) Outcome B1: Integrative Issues (Compromise) Voting Seats (2 seats) Mgmt of AAA Hotel Properties (2 R.R. in Brazil) Compensation (21-49%) Outcome B2: Integrative Issues (Trade) Voting Seats (4 seats) Mgmt of AA Hotel Properties (1R.M. in U.S.) Compensation (<10%) AAA Any other potential trades? Consider the various preferences International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 45 How might culture have affected this negotiation? 1. Power Distance: AAA wants to be strongly represented on the exec. board 2. Collectivism: AAA does not like contingent compensation 3. Short Term Orientation: Lambert wants to close the deal quickly 4. Universalism: AAA want to build a relationship These cultural values create OPPOSING preferences in the negotiation How to handle these different cultural preferences? Perfect Trade – Finish quickly in exchange for relationship (answers to questions) Voting seats are more important to AAA than Lambert (Power Distance) Conclusion: Trade based on culture! International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 46 Timing and Questions Timing and Questions were perfect trades Answering questions costs Lambert nothing How did Lambert respond to the questions? – These questions were “so stupid?” Finishing early costs AAA nothing How did AAA respond to rush to finish? – Ignored it Why was there such difficulty with these issues? Universalism Time Orientation International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 47 Pace or Life (out of 31 Countries) The need to get things done now! Walking speed US 6th HK 14th Brazil 31st 1-2-3 Ireland, Netherlands, Switzerland International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 48 International Lodging Merger Short Term………….…………………………..…Long Term Universalism………………………………….….…Particularism International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 49 How Should you Proceed When Negotiating in Another Culture? Adapt to the other culture? – Learn their culture and negotiate according to their values Don’t adapt at all, both negotiate according to own culture Make them adapt to you Partially adapt Answer depends on how well each side knows the other party’s culture International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 50 Culturally Responsive Negotiation Strategies Based on how well a negotiator knows the other party’s culture: – Low knowledge – Moderate knowledge – High knowledge Some strategies may be used by ones self (unilaterally) Others strategies involve the participation of the other party (joint) International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 51 Do Not Know the Other Culture Well Use an Adviser (Unilateral Strategy) – Advisor that is familiar with the cultures of both parties – Useful for negotiators who have little awareness of the other party’s culture – Typical Outcome – Effectiveness depends on advisor Convince the Other Party to Use Your Approach – But the other party may become irritated or be insulted – Can get good distributive outcomes, but rarely integrative – Typical Outcome – Works Poorly Cross-Cultural Negotiations © Prof Stephen W. Nason – All Rights Reserved 52 Understand the Other Culture Moderately Well You alone Adapt to the Other Party’s Culture – Involves making conscious changes to your approach so it is more appealing to the other party – Typical Outcome – Works well if try it moderately – Works poorly if try to adopt other cultures approach completely Coordinate Adjustment (Joint Strategy) – Both parties make mutual adjustments to find a common process for negotiation – Typical Outcome – Can work well if both parties knowledgeable and sincere Cross-Cultural Negotiations © Prof Stephen W. Nason – All Rights Reserved 53 Understand the Other Culture Very, Very Well! Negotiate according to the other parties culture – Typical Outcome – Only works if the negotiator is bilingual and bicultural – Just being bilingual is not enough Coordinate Adjustment: Symphony (Joint Strategy) – parties to create a new approach that includes aspects of either home culture – Craft an approach that is specifically tailored to the negotiation situation, other party, and circumstances – Typical Outcome – Very difficult but can be very successful – Often results in the highest level of integrative solutions – Use when very important and have the time Cross-Cultural Negotiations © Prof Stephen W. Nason – All Rights Reserved 54 Summary: How to Effectively Close Deals in Another Culture Do not negotiate purely according to your own culture or try to negotiate purely according to your counterparts culture Negotiate according to your own experience and culture but – Learn as much about the other culture as you can – Adapt to the other party’s culture moderately but not completely – Find ways to demonstrate respect for the other’s culture If the other side is knowledgeable about your culture and is willing to adjust then you can try to Coordinate Adjustment – Both parties make mutual adjustments to find a common process for negotiation – Takes time and effort – Can be the most effective Cross-Cultural Negotiations © Prof Stephen W. Nason – All Rights Reserved 55 Considerations when Negotiating in Another Culture Recognize that behaviors of others that you find offensive or silly may be culturally driven Recognize that you may offend others with your own culturally driven behavior Recognize that some things which appear so obvious (e.g. pay-forperformance) are actually influenced by culture International Lodging Merger © Prof Stephen W. Nason – All Rights Reserved 56 Conclusion: Key Take-Aways Trading issues adds value Find differences in how each side prioritizes issues Trade low priority issues for high priority issues Cultural differences make negotiations more difficult Participants often feel frustrated and angry Both sides blame the other and the other’s culture for the failure Cultural differences make negotiations more profitable! Cultural differences are differences in priorities Cultural differences provide opportunities to trade Cultural Differences make things more difficult Cultural Differences are an opportunity to ADD VALUE International Lodging Merger 57 © Prof Stephen W. Nason – All Rights Reserved