Chapter 5 – Advanced Frameworks
143
Diagrammatically, the contract moves along the bold line
shown below:
The biggest appeal of a relational contract is long-term mutual
gain between two parties. However, if one party reneges on
the contract because of bigger short term gains, the other party
has no option but to punish the first party by not getting into a
similar relational contract again.
I consulted with an OEM (original equipment manufacturer)
whose core competency is to manufacture off-shore for brand-
name firms, who are its customers. Once, the OEM failed to
make a key delivery on time. The brand-name firm punished
it by not giving any more manufacturing contracts to the
OEM. The OEM tried to gain this brand-name customer back
unsuccessfully in every CES (Consumer Electronics Show)
show in Las Vegas for the next ten years, but the brand-name
firm did not oblige. One of the key executives with the OEM
said this: "We should never screw a customer, because the
customer never comes back." This is a real-life example of
lost business because the OEM reneged on the relational
contract that every delivery was to be on time, and got
punished.
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