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Strategic Commitment

A. Tony Prasetiantono Week 9

Strategic Commitment
• Strategic commitments are decisions that have long-term impacts and are difficult to reserve. • Whether to invest in new capacity or introduce new products are examples of strategic commitments. • FDI is strategic commitment, short-term investment is not.

Strategic Commitment Vs Tactical Decisions
• Tactical decisions: decisions that are easily reversed and whose impact persists only in the short run. Example: what price to charge or how much output to produce in a given quarter. • Tactical decisions can be adapted to whatever situation the firm currently faces.

Strategic Commitment and the Industry
• Strategic commitment can significantly influence competition in an industry. • For example: a decision by a firm to expand capacity might deter new firms from entering the market. • However, it also could intensify pricing rivalry among firms that are already in the market.

Why Commitment is Important?
A commitment by a firm will not generate the desired response from its competitors unless it has three characteristics: • It must be visible • It must be understandable • It must be credible

Case: Airbus Vs Boeing (1)
• In 2000, Airbus announced plans to launch the A380, a super jumbo with 555 passengers. • Before this, Boeing held a virtually unchallenged monopoly market with its successful 747 model. • A few month later, Boeing announced that it would scrap its plans to build a higher capacity version of the 747, dubbed the 747X, to compete A380.

Case: Airbus Vs Boeing (2)
• But finally Boeing abandon the 747X, because of its vision about the future of air travel. • Boeing announced its plan to develop a 175-200 seat aircraft that could fly faster than any commercial aircraft in service other than the supersonic Concorde. • It would be named Sonic Cruiser, which would capable of flying at Mach 0.95.

Case: Airbus Vs Boeing (3)
• What is the Boeing’s vision? • Traditionally, airlines have utilized a hub system in which airlines fly passengers from city to city through a central “hub”, where passengers change planes and fly from the hub to their outbound destinations. • In the future, airlines will demand smaller and faster jetliners can fly passengers directly from city to city, bypassing hubs.

Case: Airbus Vs Boeing (4)
• The A380, which estimates 250 orders for the A380 as the breakeven point for the program, is still years away from profitability. • Only time will tell if enough of a market exists for the A380 at all.