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Chapter 7

Chapter 7. Strategic Commitment Oleh : Deddi Wahyudi & Dian Eky. Strategic commitment are decisions that have long-term impacts and are difficult to reverse Strategic commitment should be distinguished from tactical decision

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Chapter 7

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  1. Chapter 7 Strategic Commitment Oleh : Deddi Wahyudi & Dian Eky

  2. Strategic commitment are decisions that have long-term impacts and are difficult to reverse • Strategic commitment should be distinguished from tactical decision • Strategic commitment can significantly influence competition in an industry • The detail of market rivalry can influence the commitments make

  3. There are three essential characteristics to having a valuable strategic commitment: • It must be visible • It must be understandable • It must be credible • A key to credibility is irreversibility • Public statement and contract can facilitate commitment

  4. Strategic commitment and competition New Concept :1. Capture how competitors react when one competitor changes a tactical variablea. Strategic complements b. Strategic subtitutes2. Capture whether a commitment by one firm places its rivals at a advantagea. Tough commitment b. Soft commitment

  5. Strategic Complements & Strategic Substitutes Strategic Complements…..The more of the action one firm choose, the more of the action the other firm will also optimally chooseStrategic Substitutes….The more of the action one firm takes, the less of the action the other firm optimally choose

  6. The rule…. • Strategic complement a. Upward sloping reaction function (Bertrand Model) b. Component : price 2. Strategic substitute a. Downward sloping reaction ( Cournot Model) b. Component : quantity

  7. Commitment have… 1. Direct effect its impact on the present value of the firm’s profit 2. Strategic effect competitive side effect of the commitment

  8. Tough and Soft Commitment Tough Commitment….- bad for competitor- easier to visualize because they conform to the the conventional view of competition as an effort to outdo one’s rival- A tough commitment is a commitment that is going to have an adverse effect on the competitors of the firm.- We make a tough commitment when the positive strategic effect outweighs the potential negative direct effectSoft commitment- good for its competitor- A soft commitment is a commitment that is going to have a beneficial effect on the competitors of the firm.- We make a soft commitment when the positive direct effect outweighs the negative strategic effect.

  9. Tough and soft commitment in Cournot and Bertrand Equilibrium - Market with two firm… Stage 1  make commitment Stage 2  compete each other (Cournot or Bertrand analysis)

  10. Taxonomy of Commitment Strategies

  11. Flexibility & Real Option - The strategic effect of commitment is positive when the commitment alter competitor’s behavior- Strategic commitments are almost always made under uncertainty condition- Some ways firm can preserve its flexibility when making strategic commitment : 1. Modify the commitment as future condition change2. Delay making a commitment to future point until it has better idea of how profitable it is likely to be3. Undertake unprofitable commitment today to preserve the option of making a follow-on commitment in the future

  12. Flexibility & Real Option Cont… - Flexibility rises Real Option- Real option : a. exist when a decision maker has the opportunity to tailor decision to information that will be received in the futureexample : Firm wants to invest Rp 100M to enter new market, it creates 2 scenario with NPV : a. high-acceptance : Rp 300M b. low-acceptance : Rp 50M If firm invest today, expected NPV is( 0,5(300)+0,5(50)-100)=Rp 75M

  13. If firm wait and the product tuns out to have high level market acceptance, firm should invest and obtain NPV Rp. 200M. But if the NPV = Rp. 50 M ( stop invest, we assume zero NPV investment) Assume annual discount rate = 10% Expected NPV = (0,5(200)+0,5(0))/1,10 = Rp 91M It’s better for the firm to delay the investment until they have as much as information of the new market

  14. A Framework For Analyzing Commitment - A commitment-intensive decisions are durable, specialized, and untradable after the firm has moved forward with them- Pankaj Ghemawat developed a four-step framework for analyzing these decisions:1. Positioning Analysis Analyze the direct effects of the commitment2. Sustainability Analysis Analyze potential responses to the commitment by competitor and impact of those responses to the competition

  15. A Framework For Analyzing Commitment… 3. Flexibility Analysis analyze uncertainty4. Judgment Analysis analyze the distorting factors of the firm that affect the optimal choice of the strategy2 types of error :Type I : rejecting an investment that should be madeType II : Accepting an investment that should be rejected

  16. Terima Kasih….

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