Week 9 - lecturea PDF

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B2B Marketing MKTG90048 – Week 9

A/Prof. Erik Mooi Department of Management and Marketing

Recap of last week Last week we discussed innovation: •

Channel functions

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Channel structure

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Channel conflict

Any questions from last week?

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Agenda for today Today’s topic is the structuring or “governance” of relationships.

Topics: -

Contracts – foundation

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Contracts and relationships

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Enforcement&Litigation

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Contracts

Are contracts important? In 1980 Bill gates signed a contract with IBM to develop and retain all rights for developing an operating system called MS-DOS.

In 1985 John Scully, the CEO of Apple computer, signed a four-page agreement that gave Microsoft Corporation the right to use “the visual displays in Windows 1.0” in return for writing software for the Apple platform.

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What are contracts? Business contracts are legally binding agreements between two or more parties which state the rights and obligations of those parties concerning a particular transaction or business dealing. Contracts can be explicit (written) or implicit (an understanding, expectation, or norm).

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What are contracts? Contracts serve a number of roles: •

Their central purpose is to define the subject matter of the exchange in sufficient detail to create a shared set of rules, procedures, responsibilities, and expectations.

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Contracts identify mutually agreeable set of rights, duties, and responsibilities

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Contracts convey information (e.g., price, technical specs, warranties, etc.)

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Contracts create a common language and homogeneous expectations, through both legal (i.e. explicit) and extra-legal (i.e. normative or social) terms.

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The Conundrum of Drafting contracts • Crafting more detailed clauses clarify roles and responsibilities and reduces potential misunderstandings while safeguarding investments by discouraging the counter-party from engaging in opportunistic re-negotiations.

• In contrast, keeping contract terms open enables ex post value-enhancing adjustments but also gives the counter-party an opportunity to exploit unspecified loopholes that lead to higher problems afterwards.

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Making contracts “tight” Writing precise, specific, or explicit contracts reduces opportunism; self interest seeking with guile.

Wathne, K. H., & Heide, J. B. (2000). Opportunism in Interfirm Relationships: Forms, Outcomes, and Solutions. Journal of Marketing, 64(October), 36-51.

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Opportunism

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Opportunism

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What do buyers want? Lock in price Lock in seller to sell product/service Write down representations and warranties Include conditions to close sale Identify events that keep the buyer from buying

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What do sellers want? Lock in obligation to buy for agreed price Preserve flexibility to sell product/service to someone else (in exchange for break-up fee) Limit representation and warranties (to the best of our knowledge) Identify conditions for closing sale Limit liabilities for breach of representation and warranties (called force majeure/acts of god)

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Some do’s and don’ts Don’t omit critical facts Don’t make promises you cannot keep Act in good faith/fairness Put agreements in writing Don’t sign what you do not understand Preliminary agreements and intent to bound in themselves can create contract Allocate risk and reward

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Making contracts “open” A contracting scheme:

Yes: spot market transaction Can we walk away costlessly? No: Can we reasonably foresee contingencies?

Yes: classical “tight” contracting

No: vertical integration or “open” contracting

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How can we implement “open” contracting? Open contracting may involve: •

Simply not agreeing on a particular aspect

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Creating ambiguity,

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Stating desired rather than necessary actions or outcomes

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Contractual ambiguity A contract, or provision of a contract, that is reasonably susceptible to more than one interpretation • Examples of ambiguous language: “reasonable costs,” “good faith effort” • Examples of contracted obligations: – Franchisor support – “McDonald’s shall advise and consult with Franchisee periodically in connection with the operation and also, upon Franchisee’s request, at other reasonable times” (McDonald’s Franchise Agreement 2013, p.3)

Contractual ambiguity Contractual ambiguity is not necessarily bad. Contract ambiguity in relation to one’s obligations can… Enhance joint problem solving and collaboration: stimulates discussions among contracting parties (e.g., to clarify meaning), implying greater cooperation and joint problem solving. Deter litigation: increases the perceived costs of litigation, as it is expensive to try to “prove” that those ambiguous terms such as “good faith efforts” have not been met.

Stating desired vs required behaviors or outcomes Contracts and the negotiations these involve are often centered around “shall” or “must”. Friedlinger, Hart, and Vitasek introduce a new approach: 1.

Lay the foundation, remove old contracts and be transparent in the goals that are desired by both sides.

2.

Created shared ideas and objectives: What is it that we want and how can we get there?

3.

Create guiding principles: reciprocity, autonomy, honesty, loyalty, equity, and integrality.

4.

Align exact expectations and interests (implement).

Frydlinger, D., Hart, O., & Vitasek, K. (2019). A new approach to contracts: how to build better long-term strategic partnerships. Harvard Business Review, 97(5), 116-126.

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Contracts and relationships

Contracts&Partners Collaboration involves two key strategic choices: •

Who to work with?

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How detailed or specific do our contracts need to be?

Contracts “set the scene” and the partner decision “fills in the gaps”

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Wuyts and Geyskens Why are detailed contracts written and are close partners sought?

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Wuyts and Geyskens And explores the performance effects of both governance mechanisms:

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Wuyts and Geyskens Core constructs

Wuyts and Geyskens Transaction cost constructs

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Wuyts and Geyskens

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When do contracts help? Wuyts and Geyskens (JM 2005): contracts in themselves increase opportunism. Wuyts and Geyskens (JM 2005): Contracts do not work well for very close or non-close partners

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Contract breach

Contract breach? How do we know contracts have been breached? The counterpart is a different firm.. ..far away.. ..different and possibly uncooperative management.. ..and possibly an incentive to hide irregularities.

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Monitoring Monitoring is metering the counterpart. Can take place based on processes.. ..or on outcomes. What processes? E.g. production schedules, development process. Output: e.g. sales, quality.

Mooi, E., & Wuyts, S. (2021). Value from technology licensing–The role of monitoring and licensing experience. International Journal of Research in Marketing.

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Monitoring and enforcement Once we are able to monitor and detect irregularities, we may want to enforce. Yet, enforcement is often unlikely, even for high stakes complex IT purchases, the odds of litigation are...