Thursday, October 8, 2020

"The Founder" and the Art of Negotiation

The movie “The Founder” is the origin story of the McDonald’s fast food chain.  In the movie, based on real events, businessman Ray Kroc is able to negotiate himself into a position with the company.  Kroc begins as head of franchising and expansion and needs to use considerable informational and normative influencing tactics to gain entry, made more difficult by its private and controlling creators, Dick and “Mac” McDonald.  There are several negotiations throughout the movie, culminating in a full takeover of McDonald’s by Kroc.  

Flattery is a tactic where the negotiator is trying to bring the other side to the table by appealing to their ego.  When you say good things about someone, they are more likely to listen and keep talking.  In “The Founder,” Kroc legitimately believes that the “Speedee” system setup by the McDonald brothers in their San Bernardino, California restaurant is revolutionary and is ripe for franchising.  Furthermore, Kroc’s expertise from working in the industry – he is a traveling milkshake machine salesman – gives him even greater standing to back up the flattery he extolls on the brothers.  Ultimately, the tactic works, as Kroc is able to join the company.  That said, it took several attempts.  Kroc is initially stonewalled, with the brothers telling him they have tried franchising and that it does not work for their operation.  He ends up returning with a new pitch, based on deeper research he has done.  Once he had his foot-in-the-door, he was not going to take no for an answer.  The appeal was still flattery, but Kroc needed to buttress it with other normative and informational negotiating elements to close the initial deal.

Anchoring is a tactic based on setting a reference point in a negotiation.  Often, we think of anchoring as setting a number (such as price, percentage, etc.), but it can also be setting a process and/or logic anchor.  While you should never reveal your reservation point, a well-founded, relevant anchor can sometimes lead to a better final agreement, as proceeding negotiations and concessions become based on the initial anchor.  In “The Founder,” Kroc’s initial contract – which he reviews and agrees to very quickly – does not ultimately fulfill his needs.  He quickly realizes that the money coming in does not even cover his “monthly nut,” as he himself says.  In the movie, he even takes out a home equity loan to invest in expansion and cover costs.  The contract with McDonald’s has him receiving 1.4 percent of franchise profits.  In one of the many scenes where he calls the McDonald brothers (often ending in him hanging the phone up intensely), he appeals to fairness based on equity.  He wants to realize the value of what he is putting into the franchising operation.  He is simply not making enough from the deal and attempts to anchor by asking for 4 percent of franchise profits.  “Mac” McDonald says no.  Kroc quickly counters with 3.5 percent.  “Mac” again says no.  Anchoring does not work, as Kroc slams the phone in frustration.

Intimidation and aggressive behavior are similar hardball tactics whose intent is to put the opposition on the backfoot, win concessions (that you believe you might not otherwise), and gain the greater piece of the perceived fixed pie.  It is associated with distributive bargaining.  Once Kroc realizes that he cannot get the McDonald brothers to renegotiate the initial contract, he resorts to aggressive behavior.  In many ways, Kroc’s business posture is aggressive in general.  He is in charge of expansion, after all.  On the other hand, the McDonald’s brothers are very conservative (in fact, at one point “Mac” yells back at Kroc on the phone “I am a card-carrying Republican”) and seek control over details large and small, which is stipulated in the contract.  The alignment of interests between the two parties quickly decouples.  It is this frustration for Kroc that seems to generate the intimidation and aggressive behavior towards the brothers.  He becomes obsessed with winning and engages in every means possible to force the brothers back to the table.  And it ultimately does work.  In “Getting To Yes,” it said that in general hard beats soft because soft will typically accommodate the demands of the other side. It is up to the “soft” side to recognize and neutralize the hardball tactics.  Kroc’s aggression works in many ways because the McDonald brothers allow it to go unchecked.  

Contingent contracts are a way to turn differences into value, to bet on expectations of future events and results.  It is an integrative bargaining tactic that aims to maximize the pie and wring ever more value from an agreement.  To work as intended, the contingent events must be observable, measurable, unable to be manipulated, and enforceable.  They also require continued interaction between the two sides.  In “The Founder,” Kroc is not only able to compel the McDonalds brothers to renegotiate, but to actually sell to him.  The McDonald brothers lay out their demands: $2.7 million, they get to keep the San Bernardino location, and 1% of all future profits.  The 1% of future profits represents the contingent element in the demand.  Then we witness the parties at the negotiating table.  In perhaps a display of priming, the two sides are on opposing ends of the table, instead of working together on the same side.  They agree to the dollar amount, but Kroc says that his investors will not allow the deal to go through “contingent” on explicit inclusion of the future profits provision.  Kroc then says that he will make sure the McDonald brothers get their royalties, but that they will have to take his word and shake on it.  The result is that the brothers never get the future profits/royalties, which go on to amount to hundreds-of-millions of dollars per year.  

One other element from our learnings that I identified with in this movie is the importance of a BATNA, or Best Alternative To Negotiated Agreement.  When Kroc was first trying to re-negotiate the contract that had him getting 1.4 percent of franchise profits, he was doing so from a point where his alternative was losing his house, which he had taken out a loan against.  His BATNA, in other words, was not very good.  Thus, he was trying to negotiate from a pretty weak position.  We have learned that you should always be trying to cultivate and improve your BATNA.  At some point, it might become better than the actual deal you are negotiating.  For Kroc, it was when he meets the businessman Harry Sonneborn that his BATNA becomes so strong that he can actually buy out the McDonalds brothers.  Sonneborn convinces Kroc that he should think of McDonalds as a real estate business and not a food services business.  Kroc then sets out to purchase and lease out the land where franchisees will put the restaurants.  It was a way to make him a lot of money and give him a lot of power, while skirting around the provisions of the original contract with the McDonald brothers.  That real estate company then becomes so big – “national” as Kroc says – that it makes the value of the single McDonald brothers’ San Bernardino location minuscule in comparison.   He substantially improved his BATNA and came out with a lot more than he originally bargained for.

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