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Strategic Commitment and Competition

Strategic Commitment and Competition. Strategic Moves. A strategic move is designed to alter the beliefs and actions of others in a direction favorable to yourself. Classification of strategic Moves. Strategic commitments decisions that have long-term impacts and are difficult to reverse

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Strategic Commitment and Competition

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  1. Strategic Commitment and Competition

  2. Strategic Moves A strategic move is designed to alter the beliefs and actions of others in a direction favorable to yourself.

  3. Classification of strategic Moves • Strategic commitments • decisions that have long-term impacts and are difficult to reverse • Threats • Promises

  4. Strategic Commitments In 1982 … Should Philips build a disk-pressing plant to supply CDs to the American market, or should it delay its decision a year or so, until the commercial appeal of the CD market became more certain?

  5. A Simultaneous-Move Game Firm B R L 1, 1 3, 2 T Firm A 2, 4 4, 3 D

  6. A Sequential-Move Game L (1,1) B R T A (3,2) D L (2,4) B R (4,3)

  7. Credible Commitments Commitments must be • observable and understandable • irreversible (i.e. credible)

  8. Threats and Promises Threats and promises are response rules: your actual future action is conditioned on what the other players do, but your freedom of future action is constrained to following the stated rule.

  9. Example of a Threat Japan Open Close 4, 3 3, 4 Open USA We will close our market if you close yours 2, 1 1, 2 Close

  10. About the Threat • How can the US make its threat credible? • a threat might be “too big” to be credible • a threat which creates a risk of the bad outcome is called brinkmanship • How can Japan counter the threat?

  11. Example of a Promise Firm B High Low 60, 60 36, 70 High Firm A We will charge a high price if you do. 70, 36 50, 50 Low

  12. Combining Threat & Promise USA Yes No 3, 3 2, 4 Yes Europe We will intervene if, and only if, you do 4, 1 1, 2 No

  13. Making Strategies Credible (I) Reducing your freedom of action • automatic fulfillment (doomsday device) • delegation • cut off communication • burn bridges behind you

  14. Making Strategies Credible (II) Changing your payoffs • establish and use a reputation • divide the game into small steps • contracts • teamwork • irrationality • brinkmanship

  15. Countering the opponent’s Strategic Movies • Irrationality • Cutting off communication • Leave escape routes open • Undermining your opponent’s motive to uphold his reputation • Salami Tactics

  16. Case of Thin-Slab Casting Background... • Continuous casting for producing sheet steel is not very efficient because of the need to reheat the slabs before rolling them into thin sheets. • Thin-slab casting could save costs

  17. Nucor and USX In 1987, Nucor became the first U.S. adopter of thin-slab casting. At that time, Nucor was looking for a way to enter the flat-rolled sheet segment of the steel business, which had been unavailable to the so called minimills such as Nucor.

  18. Nucor and USX (cont.) USX, the largest U.S. integrated steel producer and a company 60 times as large as Nucor, eventually decided not to adopt thin-slab casting.

  19. Who adopts first? Decision-theoretic analysis predicts earlier adoption by an entrants • cannibalization or replacement effect • the innovation reduces capital costs more than operating costs

  20. Incumbent Adopt First? Game-theoretic analysis predicts that an incumbent may adopt process innovations more quickly • the business-stealing effect may outweigh the cannibalization or replacement effect.

  21. Adoption of Thin-slab Casting • The decision-theoretic analysis predicts “correctly” what actually happened in thin-slab casting. • However, the decision-theoretic approach ignores interactive considerations.

  22. Why USX “should” adopt first? • Nondrastic innovation • Capacity utilization were below 100% • price competition • process innovation like thin-slab casting would make the adopter “tough” • Returns from the new technology were fairly predictable

  23. Commitment makes the Firm... Tough Soft Strategic Complements (e.g., Price) Fat-Cat Effect Puppy-Dog Ploy Lean and Hungry Look Top-Dog Strategy A Taxonomy of Strategic Commitments Stage 2 tactical variables are Strategic Substitutes (e.g., quantities)

  24. Why didn’t USX adopt? The decision, argues Ghemawat, stemmed from prior organizational and strategic commitments that constrained USX’s opportunity to profit from thin-slab casting.

  25. Comment In forecasting the likely reactions of competitors to major strategic commitments, a firm should recognize that prior commitments made by its competitors can constrain their potential responses.

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