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Aug 23, 2019 2019-08 Business Administration Faculty

Want to negotiate more lucrative contracts? Step outside your industry and think big picture

The key to becoming a better negotiator may be learning from examples outside your industry, and training yourself and others to think broadly about those examples – according to new research by Jihyeon Kim and Jeffrey Loewenstein of Gies College of Business and Leigh Thompson of Northwestern University’s Kellogg School of Management. Their research suggests both practitioners and teachers who only focus on cases from familiar industries may be hindering their ability to take knowledge acquired in one context and apply it to another situation.

Loewenstein_Kim_ss“Much management education and professional training occurs in classrooms and on screens, and too little of what happens there ends up influencing what people actually do at work,” said Kim, a doctoral student at Gies Business. “The intuitions of professional students about what helps are not always accurate. For example, many companies ask for training cases set in their own industries, and yet one key finding from this study is that this is actually counter-productive.”

The authors conducted an experiment with 420 managers across various industries through an executive education program. The managers were given a written case study example illustrating the contingent contract principle, either from a familiar or unfamiliar industry. The case studies covered four dominant industries represented in the executive education program: computer/high-tech, pharmaceuticals, consulting, and insurance. Managers in the high-familiarity-example condition were asked to pick the case study that was most familiar to them, while the low-familiarity-example group were asked to pick the least familiar case.

All managers were also randomly given either broadening or narrowing questions about the example. The broadening questions encouraged managers to consider how the given example would apply to other situations whereas narrowing questions led participants to focus on the specifics of the example. The following day, participants worked with a counterpart in the same condition for face-to-face, one-on-one negotiations. This exercise involved a television station’s agreement to broadcast episodes of a cartoon series – an example that provided an opportunity to apply the contingent contract principle.

The authors found that participants who studied an example from an unfamiliar industry were more likely (38%) than the high-familiarity group (21%) to transfer their knowledge to the next day’s negotiation exercise. The low-familiarity group was also more likely to transfer the negotiation principle than the control group (13%), which was not provided any training. The high-familiarity group performed no better than the control group. In addition, participants who were asked broadening questions were more likely (42%) to apply the correct negotiation principle than the group who receiving the narrowing questions (15%). The content analysis of the managers’ open-ended responses revealed that openness to learning is a key reason unfamiliar examples and broadening questions improved the transfer of the key negotiation principle.

Next, the authors examined the value of the contracts which were negotiated in the television station exercise. The contingent contracts negotiated brought a greater expected value ($4,519,532) than those which did not using contingent contracts ($3,657,177) which indicates the usefulness of training and knowledge transfer.

“When we talked about it afterwards, professionals who did not make contingent contracts overwhelmingly said that they should have done so, and that it would have resulted in a more valuable deal,” said Loewenstein, Associate Dean of Graduate Education and Professor of Business Administration at Gies Business. “Accordingly, helping people be open to learning by drawing from examples set outside one’s own industry and asking broadening questions about examples can help people later make use of what they learn. And that can help people make better and more valuable deals.”

The authors summarized that managers are more likely to learn and apply a new negotiation principle when it comes from an unfamiliar industry and is considered through broad questions. In fact, these managers showed a more than threefold improvement over those who did not receive any training. Also, the contracts they negotiated were worth about 30% - or $1 million – more than the untrained managers.  

“Learning is not just about whether we can think something new, it is also about whether we are motivated to be open to learning,” said Kim. “By lowering the level of familiarity and asking broadening questions, we can encourage people to be more open to learning. That, in turn, makes people more likely to use what they have learned in the future.