Eos S1b315051032

Economics of Strategy Adrian Rizki Chandra

BACKGROUND Indonesian Shoes Industry • Open unemployment plus under-employment has reached 40%. • 80% of the unemployed workers’ education are under SLTP.

• Foreign principal runs material procurement, production process, and distribution process. • Foreign principal is a pure capitalist. They abandon

Indonesia in searching for cheaper production cost.

BACKGROUND Indonesian Shoes Industry Markets PERFECTLY COMPETITIVE: • Fragmented Industry • Homogenous Product

Firms are price takers

• Perfect Information • Equal Access to Inputs & Technologies ZERO ECONOMICS PROFIT Profit Maximizing by optimizing firms’ output and Average Cost Indonesia’s Average Cost > Foreign’s Average Cost

INA PRODUCTION COST Ind AC > For AC

• Economies of Scale is not effective – Short-run economies of scale  Labor-Intensive (Hi VC & Lo FC)  spreading FC – Product-level economies of scale not achieved  failed to buy

large quantity of material  import to avoid bad quality and high cost

•

Economic Rent does not take place – Uneducated labor, Low employee’s benefit & High Turnover  need years of experience to be an extraordinary input

INA PRODUCTION COST Ind AC > For AC

P

P MC

MC AC

AC AVC

AVC

Foreign

Indonesia Q

Q

NIKE’S PRODUCTION CHAIN Network Structure

Shoes Factory

Material

Sewing

Nike Corporation

Assembly

Branding & Marketing

• Nike is the firm’s only buyer • The factory has dedicated assets toward Nike

NIKE’S PRODUCTION CHAIN The Firm’s Dependency

• The Firm become dependence toward Nike as the sole customer – Quasi-Rent very high since the firm has no other customer – Holdup Problem occurring due to Relationship-Specific

Investments – Imbalance contract that liberates Nike in calling off the deal

WHAT TO DO?

The Firm’s New Strategy • Education – Better education promotes better learning curves and ability to maneuvering new technology – Better human capital, technology progress, & technological

knowledge  learning economies – Use country’s extraordinary input  Indonesia as a agricultural country  comparative advantage

• Employee’s Benefit – Better Employee’s Benefit & Better Jamsostek Policy  promotes the possibility of extraordinary input occurring

WHAT TO DO?

The Firm’s New Strategy • Product Innovation & Market Innovation – Better concern on R&D endorse innovation on optimizing asset  economies of scope (sandals, bags, accessories)

• Better Contract, Quasi-Rent, & Holdup Problem Strategy – Mutual Contract with call-off restriction – Have more than one vendor  to reduce Quasi-Rent of each contact

• Promote Economies of Scale, Economies of Scope, & Learning Economies

WHAT TO DO?

The Firm’s New Strategy • Earns ‘good profit’ that comes from Value Creation Activities – Higher Benefit  Product Innovation & Market Innovation – Lower Cost  Economies of Scale, Economies of Scope, Learning Economies Market Economy

COMPANY PROFIT

Benefit Position Relative to Competitor Value Creation Cost Position Relative to Competitor