Adapted from “Making Threats Credible,” by Deepak Malhotra (professor, Harvard Business School), first published in the Negotiation newsletter.
While the stakes are usually lower, negotiation often resembles a game of Chicken. Both sides make threats in an effort to change their counterpart’s behavior or beliefs. You might threaten to take your business elsewhere unless the other side sweetens her offer or pursue litigation if she refuses to address your grievances. Your success depends on whether your threat is credible. Does your counterpart truly believe you’re ready to walk away from the deal?
One way to make your threats more credible is to increase your costs of not following through on the threat. Imagine that you’re thinking about bidding to acquire another company that would be of great value to your firm. Your only reservation is that your bid might invite your biggest competitor to follow suit, instigating a costly bidding war. If you lost the war, your company would almost certainly take a hit in the stock market. Even if you won, the bidding war may have driven the price so high that the deal is no longer worthwhile. You would love to bid, but only if your competitor stays out of the game.
Rumors suggest that your competitor is willing to counter your bid, but you believe these are strategic leaks designed to scare you off. You know that your competitor probably doesn’t have the resources for such an acquisition and that it would lose a great deal if its bid failed. Because its threat to counter your bid is not credible, you decide you will place a bid.
The day before you are to announce your bid, your competitor’s CEO says at an open meeting that he has no specific acquisition plans, but that he will definitely make competitive bids as necessary to protect his company’s strategic position. Without a doubt, this announcement is a veiled threat directed squarely at you.
Unfortunately, the CEO’s announcement has changed the game. While it still may be costly for his company to bid, it’s now even more costly for it to back away from the public commitment he made. If the company now fails to respond with a competitive bid, it is likely to take a greater hit in the stock market than if he had simply kept quiet and let you bid. By increasing the cost of not following through on the threat, the company has made its threat credible. This may be more than enough of an incentive for you to decide not to bid after all.
As the CEO’s strategy illustrates, increasing the costs you will incur by not following through on your threats can persuade others that you mean business. Increasing your costs fundamentally changes the game being played. If your threat is not credible because the costs of following through are visibly high, you may need to lower those costs and make sure your counterpart knows they have dropped.