BATNA

Article byWallstreetmojo Team
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

BATNA Meaning

BATNA or Best Alternative to a Negotiated Agreement is the term that determines the alternative in case of failure of a negotiation deal to keep the business going and save the business from unavoidable cost after proper evaluation of alternatives and negotiating the deal in the best possible way for the settlement.

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If the talks to decide upon a matter fail to generate a concrete action plan, the best alternative is where the parties fall back on. Thus, in such a situation, BATNA is the best option, the worst offer possible that the negotiator may accept. Therefore, it is necessary to understand all the alternatives to an agreement to reach a decision.

BATNA Explained

BATNA in negotiation means the, Best Alternative to a Negotiated Agreement. It determines the alternative plans if the negotiation or current projects fail. It ensures the smooth conduct of business. Roger Fisher and William Ury developed the Best Alternative to a Negotiated Agreement in 1981 through their book named “Getting to Yes; Negotiating without Giving In.” In the book, they explain the concept of BATNA by explaining that it is the best possible next step if the negotiations fail and also the importance of analyzing the best possible alternative and alternate plan. Nash EquilibriumNash EquilibriumNash equilibrium is a game theory concept that helps in determining the optimum solution in a social situation (also referred to the as non-cooperative game), wherein the participants don’t have any incentive in changing their initial strategy.read more also explains the importance of negotiation when no alternative is available in the book named game theory.

BATNA is cost-effective as the unavoidable cost can be reduced through the proper determination of BATNA, and the organization’s profit can be improved. It also explains the importance of a backup plan in business to keep stakeholders’ faith and improves analyzing and negotiation skills.

It helps to determine the best possible alternative if negotiation becomes unsuccessful, and frame national strategies. But sometimes, the determination becomes a complicated and time-consuming process and requires the expert to determine the BATNA analysis to prevent future losses.

For example,  the best possible alternative is available at a cost lower than the negotiated cost. In that case, the buyer first tries to convince the seller to the maximum price the buyer is willing to pay. And the maximum price that the buyer agrees to pay is Buyer’s BATNA in negotiation.

Similarly, the seller will analyze the minimum value of the negotiated deal before entering into negotiations. If the buyer offers a price lower than the deal’s minimum value analyzed by the buyer, then negotiations are more likely to fail. The minimum value analyzed by the seller is the seller’s BATNA. The analysis of current and future situations, availability of the Best possible alternatives, and the valuation of the deal entering into for negotiation are three basic components.

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Features

BATNA

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  • Aid in Determining the Importance of Negotiation: It helps determine the best alternative in an unsuccessful negotiation deal. If no alternative is available or the cost of the alternative is more than the current cost of the deal. Then it helps in determining the importance of the negotiation deal.
  • Analyze the Best Alternative: It helps to analyze the best alternative from all available alternatives to gain the maximum.
  • Helps to Reduce the Unavoidable Cost: It also helps determine the maximum value the buyer can pay for the deal. The best alternative is available for the buyer to cut the unnecessary, avoidable cost.
  • Determines the Strategies for Negotiations: Best Alternative to a Negotiated Agreement also aids in determining the strategies for the negotiations to make the deal successful at the price beneficial for both buyer and seller.

Steps

Identifying the following steps and actions is necessary:

  1. List out all the strategies to make the negotiation possible.
  2. Determine the maximum cost if the negotiation is favorable.

List out all the options available as Alternatives.

  1. Analyze the Best possible Alternative.
  2. Analyze the cost of the Best Possible Alternative and compare it with the maximum cost of negotiation.
  3. If the cost of the best possible alternative is lower than the maximum cost of negotiation, then the Best Alternative is said to be BATNA.

Example

John has decided to buy a second-hand car, for which he went to the dealer to enquire about the same price. Per the dealer, the second-hand car that matches John’s requirements is available at $3,000. And the same car is offered at $2,500 by a colleague of John. The minimum price John is willing to pay is $2,400. So, the buyer’s settlement range is between $2,400 – $2,500. And dealers in the future can sell the same car to another customer at a minimum of $2,450. The buyer’s BATNA strategy is $2,500, and the seller’s BATNA is $2,450. Therefore, a negotiation deal is possible within the range of $2,450 – $ 2,500.

Importance

It is vital in business deals; the importance is explained as under:

  • It helps to analyze every aspect of business deals and the maximum cost involved.
  • Through the BATNA model, unnecessary and avoidable business costs can be reduced.
  • Explain the importance of negotiation deals and helps to determine the strategies to be used for negotiation.
  • It helps to find out the additional negotiation methods if the cost of the Alternative is higher than the negotiation cost.
  • The Best Alternative to a Negotiated Agreement explains the importance of analyzing current and future situations.

Advantages

  • BATNA analysis is used in many essential business deals, like amalgamation and mergers.
  • It is used for cost-effective benefit.
  • It improves negotiation tact.
  • It explains the importance of a backup plan.
  • Determining BATNA help in improving the analyzing skills;
  • The Best Alternative to a Negotiated Agreement is helpful for every type of organization.
  • It ensures the business operations would not be affected in case of failure of a negotiation deal.
  • The Best Alternative to a Negotiated Agreement improves the efficiency of the business organizations.

Disadvantages

  • Analyzing the BATNA strategy increases the cost of business, like research and valuation costs.
  • Determining the Best Alternative to a Negotiated Agreement process is complex.
  • Expert Knowledge and high-level experience are required for determining BATNA.
  • The risk of a wrong selection of choice is involved.
  • Its determination is a time-consuming process.
  • The calculation of BATNA doesn’t consider future uncertainties.

BATNA Vs Reservation Price

BATNA analysis is the best possible alternative to an agreement in case the discussion fails while reservation price is the worst case the negotiators can accept. The differences between them are as follows:

BATNAReservation Price
In case of failure to negotiate, it is the best possible option.It is the worst possible option that the dealer accepts.
Value is lower than the reservation Price.Value is higher than BATNA.
It is usually a scenario or situation.It deals mainly with numbers or value or price.

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