Strategic Commitment and Competition

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Strategic Commitment and Competition
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Strategic Moves

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

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Classification of strategic Moves

• Strategic commitments
• decisions that have long-term impacts and are
  difficult to reverse
• Threats
• Promises

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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?

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A Simultaneous-Move Game
Firm B
R
L
1, 1
3, 2
T
Firm A
2, 4
4, 3
D
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A Sequential-Move Game
L
(1,1)
B
R
T
(3,2)
A
D
(2,4)
L
B
R
(4,3)
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Credible Commitments

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

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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.

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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
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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?

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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
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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
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Making Strategies Credible (I)

• Reducing your freedom of action
• automatic fulfillment (doomsday device)
• delegation
• cut off communication
• burn bridges behind you

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Making Strategies Credible (II)

• Changing your payoffs
• establish and use a reputation
• divide the game into small steps
• contracts
• teamwork
• irrationality
• brinkmanship

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Countering the opponents Strategic Movies

• Irrationality
• Cutting off communication
• Leave escape routes open
• Undermining your opponents motive to uphold his
  reputation
• Salami Tactics

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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

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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.

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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.

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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

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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.

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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.

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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

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A Taxonomy of Strategic Commitments
Stage 2 tactical variables are
Strategic Substitutes (e.g., quantities)
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Why didnt USX adopt?

• The decision, argues Ghemawat, stemmed from
  prior organizational and strategic commitments
  that constrained USXs opportunity to profit from
  thin-slab casting.

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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.