Question
You have been Vice President of Business Development at Erive Corp. for only six months now. You were brought on to oversee the launch of
You have been Vice President of Business Development at Erive Corp. for only six
months now. You were brought on to oversee the launch of a new basketball footwear
line. To this point, things have not gone particularly well, but your upcoming negotiation
with Theotis Wiley's agent has the potential to reverse the tide.
Your employer, Erive Corp., is a 25-year old, privately-owned sporting goods company
based in Boulder, Colorado. Erive sells sporting gear, equipment, and apparel for two
sporting disciplines: soccer and outdoorsmanship. Though not large relative to the
major diversified sporting goods companies, within these markets Erive maintains
significant market share and has a reputation for offering extremely high quality and
durable products. In recent years, Erive has been more than pleased to see its products
- particularly its footwear - make significant inroads into the urban casualwear market.
Erive attributes this phenomenon to a number of factors: the quality, comfort, and
aesthetic appeal of its products; its cult-like aura in the outdoorsman and soccer
segments; and the general increasing popularity of casual sportswear among America's
youth.
Erive also believes that its public-spirited image has contributed significantly to its
inroads into the urban casualwear market. Erive's founder and your boss, Patricia Peak,
is a huge believer in the practical and spiritual virtues of sport and the outdoors. As a
result, she has taken it as a crusade to provide under-privileged children with
opportunities to participate in sport. Among other things, Erive sponsors youth summer
camps and inner-city youth soccer leagues. Through Erive, Peak is always looking for
new ways to bring children in touch with sport, and to serve the public generally.
In view of Erive's increasing popularity, Peak decided last year to create a division
dedicated to basketball footwear. This is what brought you to Erive. Though the market
is dominated by two huge companies, Keni and Sadida, Peak believes that Erive can
thrive. Erive already has significant brand-name appeal among urban youth, who
represent the largest segment of the basketball products market. Peak also believes
that the major basketball gear companies unconscionably gouge their consumers,
charging, for example, upwards of $100 per pair of basketball shoes that cost a fraction
of the price to develop, manufacture, and market. Peak is convinced that Erive can offer
products of comparable quality and cultural appeal at half the prices currently offered by
the major players, thereby capturing significant market share. Finally, Peak feels that
Erive can successfully leverage its youth sporting efforts to advertise and market its
basketball line.
Based on your efforts, Peak, though initially resistant, has also come to appreciate the
importance of NBA player endorsements in marketing basketball footwear. The history
of branded basketball footwear confirms the pivotal role of high-profile, reputable NBA
stars in the success of the brand. However, it is in this capacity that Erive's size vis--vis
its competitors is most stark, and most distressing. For starters, virtually every major
young NBA player with legitimate prospects has already signed a shoe deal with one of
the established industry competitors. Moreover, whereas the major companies annually
allocate tens, if not hundreds, of millions of dollars to marketing and endorsement deals,
Erive has earmarked $15 million to be spent over the next two years on the initial launch
and marketing effort. Of that, close to $11 million is required to execute the actual
campaign - i.e., buy advertising space, pay the creative development team, fund the
support infrastructure, etc. This leaves $4 million for a player endorsement and, if any
remains, for Erive's basketball-related community efforts and for internal capital needs.
Up until two weeks ago, you thought you had pulled off the marketing coup of the
century. Prior to this year's college draft, you were able to come to terms with the
college sensation out of Duke University, Shane Nottanae, regarding a two-year
endorsement deal worth $3 million. Based on his indication of commitment, you went
ahead and laid the groundwork for the marketing campaign to commence with the
beginning of this year's NBA season, which happens to be four short weeks away.
Everything was set, and all that remained was for Shane to shoot the print and TV
advertisements. Unfortunately, you never got Shane to sign on the dotted line, and just
two weeks ago he backed out of your arrangement, claiming that Keni had made him a
deal that he and his family "couldn't refuse." You were devastated. You had already
made advance payments for much of the advertising time and space, and for the artistic
and production talent.
You fear that if you can't land a replacement soon, the money will be completely wasted,
and your career with Erive, if not within the industry, will be doomed. Through your
contacts among sports agents, you learned this week that Harvey Harmony had
recently terminated his relationship with Sadida and was searching for a new
endorsement deal. Harmony is entering his 7th year as an NBA professional. Early in his
career he was a stand-out player, making the All Star team in his first four seasons. But
in the last couple of years he has been plagued by injuries, and his performance level
has suffered considerably. Though he is still recognized as a fine NBA talent, you are
skeptical of his worth as an endorsement candidate, particularly for your nascent, youthfocused
basketball division. Nevertheless, Harmony has broad-based name recognition
and a blue chip reputation. The marketing department determined that Erive should be
willing to offer Harmony up to $1.6 million for a two-year endorsement contract, but the
consensus is that a younger and more talented player would be vastly preferable.
Yesterday, as you were about to call Harmony's agent to inquire into a potential deal,
Peak appeared in your office to tell you about an "intriguing" young NBA player she had
just met at a youth basketball clinic in Denver, Theotis Wiley. Peak suggested that Wiley
might be the ideal endorsement candidate, particularly given the time pressure the
company is under. At first, you couldn't believe your ears. Wiley, about to enter his
second year in the NBA, had a truly exceptional year last season - he was named to the
NBA All Rookie Team - but his reputation is about as unexceptional as it gets. In fact,
most major sponsors, and many NBA teams, consider him too risky to bother with at all.
Wiley's bad image is a product of his antics as a college player. Wiley flunked out of the
University of North Carolina after his freshman year, during which he played extremely
well but was rumored to get along poorly with his teammates and his coach, the
legendary Dan Smithfield. After that, he spent the next two years at three schools,
cultivating a reputation as a fantastic athlete with a very bad attitude by regularly
skipping practices and quarreling with teammates and coaches. Along the way, he also
had his share of run-ins with the law, including a shoplifting conviction and a marijuana
possession charge that was ultimately dropped. When Wiley finished at Buckeye State
Junior College and declared himself eligible for the draft, most NBA teams considered
him untouchable. Not surprisingly, he wasn't drafted by any team, but was eventually
signed to a two-year deal by the New Jersey Hoops, a perennially poor NBA team that
figured it would take a chance on him. To a large extent, in view of Wiley's sensational
rookie season, it appears to have paid off. Today, he is widely regarded as a player
with the skills and physical abilities to be one of the league's premier superstars,
provided he can shake his bad reputation.
Though you have your doubts about Wiley, there is reason to believe that a deal with
Wiley could be a success. Four years ago, an upstart basketball shoe manufacturer,
NoLimit, signed a first round draft pick with a checkered past, Stevie Madison, to a twoyear
endorsement contract. The deal proved to be wildly fortuitous for both parties;
Madison became a consistent All Star point guard, and NoLimit has grown into a
formidable presence in the footwear industry (though Erive feels that NoLimit is
mismanaged and, like the big players, can be outwitted in the marketplace). Today,
Madison has a much more lucrative contract with NoLimit, and the company sponsors a
number of NBA players. A few months back, you had lunch with a colleague from
NoLimit who wondered aloud whether NoLimit should attempt to sign Wiley in
light of his spectacular year.
Figuring out what to offer Wiley will prove to be no simple matter. However, you feel
pretty certain that Erive should stick with a two-year contract. Contracts of this length
are virtually standard in endorsement deals for NBA players in their first two seasons in
the league: sponsors don't want to be tied to a player who might not pan out; and
players don't want to be locked into a contract that underpays them when they blossom
into mature players.
Four years ago, NoLimit gave Madison, early in his rookie season, a two-year contract
paying him $2 million. At the time, many thought NoLimit overpaid. Generally speaking,
endorsement contracts are very idiosyncratic. However, your office has managed to
collect the following market data on sneaker endorsement contracts for rookie NBA
players who were selected in the first round of the college draft, and for All Star players
in their 3rd through 5th years:
Average per year endorsement amount ($)
1st Round Draft Picks / 3rd - 5th Year All Stars
Last year 1,625,000 / 3,000,000
Two years ago 1,400,000 / 2,525,000
Three years ago 1,115,000 / 2,135,000
Four years ago 850,000 / 1,700,000
NOTE: A later round draft pick will typically make 50% to 75% what a first round pick
might make. An undrafted player, if he signs an endorsement deal at all, usually
fetches 25% of what the average first rounder makes.
Of course, Wiley is neither a rookie nor an established fourth year All Star player. Nor
does he currently have the cachet and perceived marketability that both marquee
rookies and established All Stars possess. In fact, many still consider him untouchable.
Last year, in your previous position at one of the major sneaker companies, your
marketing department determined that they "wouldn't touch Wiley for more than 5 cents
on the dollar." However, he has since proven himself to be a phenomenal player, and,
according to Peak, he is committed to behaving like a professional.
For a lead endorsement deal of the type Erive is seeking, the company will need to sell
200,000 pairs of sneakers to break-even. Erive plans to price its shoes at about $50 per
pair. Of that $10 per pair will be spent on manufacturing and shipping, and another $10
per pair will be allocated to administrative expenses. The remainder represents funds
available to cover future research & development and profit. Selling 200,000 pairs of
shoes in a year is no small task. However, shoes associated with All Star NBA players
have been known to sell at rates in excess of 500,000 per year. Superstar players can
consistently sell 800,000 to 1,000,000 pairs per year.
Peak thinks that if everything works out, Wiley's shoe line should sell just as an All Star
player's would. In any event, notwithstanding your guarded optimism around Harmony,
she is convinced that Wiley is the only unendorsed player with the wherewithal to sell
the requisite number of shoes and to launch the Erive line into mass appeal. In keeping
with her wishes, yesterday you scheduled a meeting with Wiley's agent to discuss a
two-year basketball shoe deal. Peak has authorized you to offer up to the entire two-year
marketing budget surplus, $4 million, should that be necessary. In no event, she
has reminded you, should the total value of the contract exceed $4 million: all future
payments will be debited against the current budget. However, delaying payments on
the endorsement contract will free up capital to fund the manufacturing and marketing
effort. Any remaining surplus in the budget will be used to fund youth and community
programs and internal capital needs.
1. Your negotiation preparation - Outline and explain negotiation strategy, your negotiation style, and your assessment of your negotiating partner's anticipated strategy.
2. Your negotiation debrief - Explain the outcome of the negotiation and whether you accomplished your expected goals. Identify the success or failure of your strategies and explain what you would do differently to effect a more preferable outcome. Assess the strengths and weaknesses of your negotiating style and strategies.
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