The Effects of Exclusive Contracts on Organizational Competitiveness Jessica Paige Merz James Madison University
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James Madison University JMU Scholarly Commons Senior Honors Projects, 2010-current Honors College Spring 2012 The effects of exclusive contracts on organizational competitiveness Jessica Paige Merz James Madison University Follow this and additional works at: https://commons.lib.jmu.edu/honors201019 Recommended Citation Merz, Jessica Paige, "The effects of exclusive contracts on organizational competitiveness" (2012). Senior Honors Projects, 2010-current. 448. https://commons.lib.jmu.edu/honors201019/448 This Thesis is brought to you for free and open access by the Honors College at JMU Scholarly Commons. It has been accepted for inclusion in Senior Honors Projects, 2010-current by an authorized administrator of JMU Scholarly Commons. For more information, please contact [email protected]. “The Effects of Exclusive Contracts on Organizational Competitiveness” _______________________ A Project Presented to the Faculty of the Undergraduate College of Business James Madison University _______________________ in Partial Fulfillment of the Requirements for the Degree of Bachelor of Business Administration _______________________ by Jessica Paige Merz May 2012 Accepted by the faculty of the Department of Management, James Madison University, in partial fulfillment of the requirements for the Degree of Bachelor of Business Administration. FACULTY COMMITTEE: HONORS PROGRAM APPROVAL: Project Advisor: Eric Stark, Ph.D., Barry Falk, Ph.D., Associate Professor, Management Director, Honors Program Reader: Laura Parks, Ph.D., Assistant Professor, Management Reader: Cristina Roeder, MBA Lecturer, Management Dedication I dedicate this thesis to my family for continuously supporting me throughout my life and my college experience. Their support and encouragement is what motivated me to continue through the honors program at James Madison University. I would also like to dedicate this thesis to Mollie Brooks for being my “Thesis Buddy” over the past year. Her support and friendship throughout this process considerably more enjoyable. 2 Table of Contents Acknowledgements ....................................................................................................................................... 4 Introduction .................................................................................................................................................. 5 Exclusive Contracts ....................................................................................................................................... 8 AT&T and Apple .......................................................................................................................................... 20 Ticketmaster ............................................................................................................................................... 29 Pfizer’s Exclusive Contract with Lipitor ....................................................................................................... 35 Sony’s Exclusive Contracts for Playstation2 ................................................................................................ 41 Discussion.................................................................................................................................................... 48 References .................................................................................................................................................. 58 3 Acknowledgements I would like to thank Dr. Eric Stark, an associate professor of management at James Madison University, for his guidance while serving as my advisor over the past three semesters. I would also like to thank my two readers, Dr. Laura Parks, an assistant professor of management at James Madison University, and Ms Cristina Roeder, a lecturer in management at James Madison University, for lending their management expertise throughout this process. 4 Introduction Organizational Competitiveness In order to compete effectively, organizations must capitalize on their competitive advantages within their business strategy. Competitive advantage comes from “a firm’s resources and capabilities that enable it to overcome the competitive forces in its industry(ies)” (Dess, Eisner & Lumpkin, 2010). Organizations derive their competitive advantage from various aspects of the organization and these advantages must be difficult to imitate in order to provide a sustainable advantage. According to Michael Porter, there are three generic strategies to achieve competitive advantage. The first is cost leadership, which is requires minimizing costs in all aspects of the business. This does not necessarily mean that the company offers the lowest prices, just that they minimize their costs. The second strategy is differentiation, which involves creating a product or service that receives industry wide recognition as being unique and valued by customers. The final generic strategy is the focus strategy, used by companies that want to gain a competitive advantage by focusing on a very specific market (Porter, 1996). There are countless ways to achieve a competitive advantage within these generic strategies. Overall, the main competitive goal for an organization should be either to perform activities that are different from its competitors or to perform similar activities in a different way. Strategic Assets One way that organizations can attain a competitive advantage within their industry is by utilizing their assets, both tangible and intangible. Strategic assets must be “difficult or even impossible to copy” in order to provide a significant and unique advantage in the marketplace (Connor, 2007). Strategic assets can be broken down into smaller categories by specifically 5 defining the durability and sustainability of these assets. Durability refers to the ease with which an asset can be lost to the competition and sustainability refers to an asset’s lifespan. When considering the durability of strategic assets, assets can be divided into tangible and intangible assets. Tangible assets are defined as “organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources and technological resources” (Connor, 2007). Conversely, intangible assets are defined as “organizational assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources (Connor, 2007). Generally, tangible assets are easier to lose to the competition than intangible assets because they are easy to define and consequentially, they may be easier to imitate. When examining sustainability, strategic assets can be divided into permanent and temporary assets. Permanent assets exist throughout the entirety of the organization’s life and are still strategically critical throughout changing circumstances. Organizations establish their permanent assets early and they serve as the infrastructure for the organization’s competitive decisions. Temporary assets are contingent upon market conditions and only provide a competitive advantage over a finite period. Organizations realize their temporary assets over time, after the initial formation of the organization and they are often specific applications of permanent assets for a short time. Tom Connor sums up the relationship between the two types of assets, saying, “Temporary strategic assets are manifested in superior products, services and processes, whilst permanent strategic assets provide the underlying capability to produce them through time” (Connor, 2007). A combination of both temporary and permanent assets can create a strong competitive advantage for an organization that knows how to utilize their assets effectively. 6 This paper will begin by defining exclusive contracts and examining the form and function of exclusive contracts in general. Following the introduction is an examination of exclusive contracts using an example-based approach. Each example will examine successful implementations of exclusive contracts. This paper will conclude with a discussion of exclusive contracts as a competitive strategy, based on both theory and the discussed examples. 7 Exclusive Contracts An exclusive contract is defined as a contract between a buyer and a seller that prohibits one party from dealing with other agents (Segal & Whinston, 2000). The specifics of these contracts vary greatly and are contingent upon the specific competitive aims of each participating organization. The possible uses of exclusive contracts vary between different industries, as does the approval of their use. Some companies view exclusive contracts as a means of ensuring that their organization develops a relationship with one supplier while preventing other companies from imitating their unique product. Exclusive contracts may also be effective in protecting a company’s time and investment from imitators. Despite potential positive returns on exclusive contracts, negative effects are also possible and have been extremely prevalent in recent years. Although this paper uses the term “exclusive contracts” to describe arrangements between the supplier and buyer of a unique product, this term is generic and as such, there are many other terms that can be used to describe such arrangements. Licensing agreements and exclusive dealings are some other situations where the concept of exclusive contracts can be applied. However, it is important to note that exclusive