(Second Edition)

Kenneth L. Port,  Jay Dratler, Jr.,  Faye M. Hammersley, Esq.,  Terence P. McElwee,
Charles R. McManis, and Barbara A. Wrigley

On-Line Problem Supplement
Copyright © 2005   Carolina Academic Press.   For permission, see CMI.

Chapter 1

Problem 1:  Licensing Deal with Jeans Manufacturer

The case study beginning below describes a hypothetical business problem that continues from chapter to chapter and addresses the issues identified in the text.  New facts are added from time to time to make the problem as realistic as possible.

Contair Corporation is the manufacturer of a very high-priced, exotic sports car called the Estrella.  With its distinct styling and quality construction, the Estrella has won numerous design awards and is one of the most famous sports cars in the world.  The Estrella has gained market recognition similar to Ferrari and Porsche but is truly pricey.  Each Estrella is handmade and only 2,000 units are manufactured and sold each year.  A fully equipped Estrella will sell for $400,000.

In 2001, however, Contair was hard hit by poor stock market performance and political instability in the Middle East, where some of its wealthiest customers reside.  Sales plummeted and Contair had to lay off 10% of its work force.

The company hired a consultant to help develop new sources of revenue.  One of the consultant's findings was that the market for the automobile had permanently shrunk.  There were simply fewer people willing to spend $400,000 to get to the grocery store (or even to the race track).  There would still be enough shipping magnates and oil barons around to enable Contair to make a razor-thin profit on each Estrella sold, but not much more than that.  The study also revealed that Estrella had incredible worldwide name recognition, even among people (particularly Spanish-speaking people) who would never purchase a luxury automobile.

Therefore, Contair's CEO decided to try to license the Estrella mark for other related or unrelated products.  The first bidder was Bevi's Jeans Company.  Bevi's wants to make a bold new line of men's pants bearing the Estrella mark.  The pants would be a "designer" article, made of slightly higher quality cotton fibers and priced at three times the regular price for men's pants.  To create market demand, Bevi's wants to do a series of glossy ads featuring jeans-bedecked men in various provocative poses on new and vintage Estrella sports cars, with appropriately beautiful, and seductively attired, high-fashion models in the background.

If the licensing scheme proves infeasible, the only viable alternative remaining would be selling the company to one of the "Big Three" automobile manufacturers.  Selling would be traumatic for the company and its workforce.  Contair's workforce includes some of the most highly skilled automotive craftspeople in the world—a dwindling breed in this era of automotive mass production.  Most have worked for Contair their entire lives.  Collectively, they possess a vast fund of know-how in the art of handcrafting automobiles.  Because of the pride these employees take in their work, the only contract that Contair has ever needed with them is a handshake.  The president is uncertain about how they will react to the "commodification" of the Estrella reputation, coming on the heels of layoffs of less skilled employees.

In a sale, Contair would likely be unable to obtain for its shareholders the actual value of a number of important intangible assets, including its network of custom parts suppliers, its proprietary customer lists (which contain customers' confidential financial information and probable net worth), and a vast photo archive on each and every Estrella sports car ever made (including photos of the initial purchasers striking poses every bit as provocative as those planned by Bevi's Jeans).

Advise the president of Contair about the pros and cons of a licensing deal with a company such as Bevi's Jeans Company.  What are the issues the president is likely to face in negotiating a licensing arrangement with Bevi's?  Would such an arrangement have any obvious advantages over an outright sale of the business?

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