Ch 09

Front 1

Tactical decisions versus strategic commitment.
The market and strategic commitment:?

Back 1

What is strategic commitment and why is it important? How does strategic commitment affect competitors in the market? What is the role of flexibility?

Front 2

Tactics:
vs
Strategy

Back 2

Tactics:
Short term effects.
Easy to reverse.
Fe: Price changes of a product.

Strategy:
Long term implications.
Difficult to reverse or even irreversible.
Fe: Investment in a new production facility.

Front 3

Strategic commitment

Back 3

Definition:
Decisions or strategies of the firm that have long term impact and are difficult, if not impossible, to reverse.

Problem?
Long term and irreversibility involve risk and uncertainty.

Competition:
Commitment can have a profound effect on the decisions of competitors.
Or: The firm has to anticipate changes in terms of market rivalry.

Front 4

strategic commitment! Relevance: Why is commitment important?

Back 4

Inflexibility can be beneficial to a firm.
Limits the options of the firm, but affects the expectations of competitors.
Simultaneous game  Sequential game.

Conditions: Commitment is only valuable whenever:
It is visible.
It is understandable.
It is credible.
Fe: Really starting to build the production facility.

Front 5

Credibility

Back 5

Principles:
Change the payoffs of the game. Make it in your interest to follow through on your commitment:
Turn a threat  a warning, or turn a promise  an assurance.
Fe: Reputation or contracts.
Limit your ability to back out of a commitment:
Deny any opportunity to back down.
Fe: Relation specific investments.
Use others to help maintain commitment.
A team may achieve credibility more easily than an individual.
Fe: Subsidiary in multinational enterprise.

Front 6

For example:
A price decrease of firm a is likely to be followed by a price decrease of firm b  complementarity.
Fe: Price war among supermarkets.
An increase in output of firm a is likely to be followed by a decrease in output by firm b  substitution.
Fe: Philips makes more TV’s, then Sony makes less.

Back 6

In other words:
Strategic complements  aggressive behaviour leads to more aggressive behaviour of competitors.
Strategic substitutes  Aggressive behaviour leads to less aggressive behaviour of competitors.

Front 7

Tough and Soft Commitments (1)

Back 7

Competition: How do competitors react to strategic commitment?

Tough commitment: A commitment with an adverse effect on competitors of the firm.
Traditional view of competition.

Soft commitment: A commitment with a beneficial effect on competitors of the firm.

Front 8

Retain flexibility by:

Back 8

Adjusting the commitment when conditions change.
Postpone commitment till there is more information available.
NPV of a commitment may be negative today, but there may be an option to make a follow on investment in the future.

Front 9

Real option:

Back 9

Choice to adjust an (investment) decision based on future information.
Potential actions in the future can be assigned financial value  value of flexibility!

Front 10

option examples:

Back 10

Just some examples:

Option to delay decision: Wait for new information and learn before investing or accelerate decision in light of recent information.

Option to expand: Expansion contingent on initial investment.

Option to abandon: Once additional experience and learning is gained

Front 11

Conclusion ch09

Back 11

What can we learn from this lecture?

Start: Strategic commitment and inflexibility may lead to beneficial outcomes for the firm.

Remember: With increasing uncertainty flexibility becomes more valuable for the firm.

However: Uncertainty increases the value of flexibility, but it is often not very useful to be completely flexible.
Commitment, when successful may lead to first mover advantages and sustained competitive advantage.
Flexibility with regard to further options may be the result of past commitments.