BUS4098 Week 2

Commitment to Manufacturing Plans

© 2016 South University

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Business Simulation

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[Parent Lecture Name]

Commitment to Manufacturing Plans

In the simulation, apart from capital spending decisions, one of the major decisions firms make is in terms of building and expanding their factories. It is true that choosing not to build or expand is a signal that you can send, but unlike the decision to add capacity, you can easily reverse that decision in the next year.

By issuing stock or taking on long-term debt to finance the expansion, a firm makes it difficult to obtain capital for other projects. And even if the expanded plants are not used, they will still have to be paid for. Because managers must carefully consider the long-term implications of these decisions, rival firms are assured that there is clear intention when these decisions are made.

Large production capabilities impact and limit a firm's strategic choices. A firm with high capacity will be unable to pursue a low-volume, "boutique" strategy in every market. Somewhere, there will have to be a high-volume-oriented approach. Also, the greater the capacity a firm obtains, the more the firm will go with the high-volume strategy across multiple markets in order to make the plants efficient.

For other firms looking to be low-cost-volume players, this is a sure sign that this is the firm with which they will have to contend. For those firms that are pursuing an up-market strategy that relies on pricing power rather than spreading fixed costs as the method to enhance profit margins, this is a signal that the expanding firm is unlikely to be a future rival without major strategic repositioning.

Commitment to Celebrities

Bidding on celebrities presents another situation in which firms make major commitments that constrain future strategic moves. Here, the firms become committed to salaries for the celebrities they hire and need to pay the celebrities regardless of the firms' performance. The firms require huge advertising budgets if they want to exploit the celebrities' potential.

Celebrity bidding implies how and where a firm intends to compete. Many celebrities have different effects in different geographic markets. Therefore, a strong bid for a particular celebrity may indicate the geographic market or markets on which the bidder is focusing its strategic intentions.

In addition to being a resource that locks a firm into certain expenditures, celebrities are critical to high- end competitors. Unlike new space for plant expansions, there is a finite supply of celebrities. Therefore, the price and the level of commitment of future cash flows can go high. Rivals can see who is joining them in a battle for highly regarded celebrities by looking at past patterns. Even high-end firms that are well- suited in terms of celebrities under contract may still be active bidders, hoping to deny rivals a much needed resource. By knowing how many firms will likely bid and how aggressively, a competitor can set an effective bidding strategy that will achieve their celebrity goal without paying too much.

The absence of celebrities in a firm's resource base almost surely signals that the firm does not want to compete at the high end of the market. But note that low-end players can get a great boost if a celebrity can accompany low prices. If the celebrity market presents the opportunity for even one celebrity to slip through at a low price, then a low-cost leader may contract the celebrity with a low annual contract

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Business Simulation

©2016 South University

3 [Document Title]

[Parent Lecture Name]

payment. The cost per-unit-sold is low when it is spread over the cost leader's high volume. In turn, savings in other areas, such as advertising, may further offset the contract price. Therefore, although they will not join the bidding war, low-cost-oriented firms must be seen as opportunistic players who may snag a celebrity if the other bidders are not careful.