When Winning Is Everything

The Idea in Brief

Have you ever made a decision in the heat of competitive battle only to ask yourself later, "What was I thinking?" If so, you've experienced competitive arousal, a desire to beat rivals at any cost. This adrenaline-fueled, emotional state can lead to expensive mistakes in business decisions, including overpaying for acquisitions or managerial talent when other players enter the fray.

To combat competitive arousal, Malhotra, Ku, and Murnighan recommend two steps. First, understand the affliction's three drivers: 1) intense rivalry (especially in a small field), 2) time pressure, and 3) the presence of an audience (including media attention and colleagues' scrutiny). Then take preventative action; for example, reduce time pressure during a high-stakes negotiation by insisting on a short time-out.

Manage the risk factors for competitive arousal, and you focus your competitive energies on winning contests where you have a real advantage--and away from those where winning comes at too high a price.

The Idea in Practice

To avoid falling prey to competitive arousal, consider these practices:

Understand the Drivers of Competitive Arousal

Competitive arousal comes from these drivers:

• Rivalry. Going head-to-head with one or two opponents creates strong feelings of excitement and anxiety, which intensify arousal.
  
• Time pressure. An externally mandated or self-imposed deadline increases psychological arousal, which then prevents you from finding and applying relevant information to make a decision. So, you may overrely on simple decision rules (such as "Strategies that worked before will help me now").
  
• Presence of an audience. Imagine the media or your colleagues watching your every move during a high-stakes decision. When you're in the spotlight, it's hard to avoid a rush of adrenaline and to resist the urge to show you're a winner.
  

Any of these drivers fuels competitive arousal. When they're all present, the risk of making a bad decision increases exponentially.

Manage Competitive Arousal

You can't avoid dealing with rivals, making quick decisions, and operating in a spotlight. But you can minimize the potential for competitive arousal and the harm it can inflict.

First, consider circumventing competition entirely. For example, noncompete clauses can help you avoid hyper-rivalry with firms eyeing your star employees.

Second, mitigate the drivers. For instance:

• To defuse rivalry:
  

  Remember: competitors aren't evil; they're simply parties with their own interests--like you. You'll view them with a cooler eye.
  

  Be willing to step away from the bargaining table if you can't control your competitive fire in an intense rivalry. Put someone else in charge of the negotiation who's less emotionally invested and who can act as a devil's advocate regarding the worth of the deal.

• To reduce time pressure:
  

  Ask yourself: "Do I really need to make this decision today?" If not, extend or eliminate arbitrary deadlines.

  
  

  An executive used to negotiate important deals over breakfast because he was at his best early in the day. But he realized this gave him insufficient time to consider and respond to unexpected proposals. He had often agreed to price concessions he later regretted. He abandoned the breakfast-only rule.

• 
  To deflect the effects of an audience:
  

  Spread responsibility for critical decisions across team members, so no one will stand alone in the spotlight.
  

  If you anticipate that an acquisition will make headlines, calculate the price above which you're unwilling to go before word of your potential bid hits newsstands. Include premiums you're willing to pay; for example, paying extra to eliminate a competitor.

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Further Reading

Articles

Six Habits of Merely Effective Negotiators

Harvard Business Review

March 2002

by James K. Sebenius

Sebenius sheds additional light on the forces that can intensify competitive arousal and explains how to mitigate them. For example, partisan perceptions--painting your side with positive qualities while vilifying your "opponent"--can foster a stronger sense of rivalry and thus heighten your desire to beat the other side at all costs. To counteract this bias, find a trusted partner and role-play negotiating from the perspective of the other side. Remember, too, that participants in any negotiation have interests in addition to just price, such as a positive working relationship that could prove crucial in longer-term deals.

When to Walk Away from a Deal

Harvard Business Review

April 2004

by Geoffrey Cullinan, Jean-Marc Le Roux, and Rolf-Magnus Weddigen

The authors further explore a strategy for deflecting the effects of an audience: determining your walk-away price (the price above which you're unwilling to go in a negotiation). For example, if you're negotiating the purchase price of an acquisition, give most weight to the current worth of the target company. And don't overestimate synergies' potential value--which may not materialize. Assemble a team of trusted individuals who are less attached to the deal than senior management. This team can provide an unbiased examination of the target firm and hold everyone to the walk-away criteria.

Deals Without Delusions

Harvard Business Review

December 2007

by Dan Lovallo, Patrick Viguerie, Robert Uhlaner, and John Horn

Mental biases can further amp up competitive arousal during an acquisition negotiation. For instance, during preliminary due diligence, you may seek out only information that validates your initial interest in the target company. That information can make you feel even more certain that you should win the contest, igniting your competitive fire. The antidote: Seek evidence that challenges your estimates of the deal's potential value. Or, during final due diligence, you may fall prey to the sunk costs fallacy, refusing to walk away from the deal even if the costs are unrecoverable because you've already invested so much time, money, effort, and reputation. The antidote: Hire fresh, dispassionate experts to examine relevant aspects of the deal--but don't tell them your initial estimate of the deal's value.