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 Boeings 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.