Strategic Complement

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21 Aug, 2024

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Strategic Complement is a situation where one action or decision positively influences other allied (or related) and interdependent actions or decisions, enhances the chances of them being chosen, and improves the result. It suggests that the benefits of the two options under consideration are positively connected, i.e., they are mutually reinforcing.

Businesses can predict their competitors’ responses using the strategic complements and substitutes framework. Complements are useful for determining price- or capacity-related requirements when used as part of preemption strategies. They also offer generalized recommendations for examining the possible effects of preemption and commitments. It enables companies to analyze pricing schemes, network effects, firm-to-firm strategic relationships, and market participant behavior.

What Is Strategic Complement?

Strategic complement is an idea that states that choosing one course of action or decision increases the likelihood of choosing another. The idea implies that the advantages of the two actions are related favorably or that they reinforce one another.
It is essential to understand and acknowledge the interdependence in economic and business contexts as the advantages of one action strengthen the advantages of another, leading to mutually beneficial outcomes.
Businesses use it to increase market share and achieve objectives by combining complementary products, services, or strategies. It strengthens competitiveness and promotes growth through innovation and technological advancements.
In the context of investments, it can empower investors to make strategic portfolio adjustments for increased profit-making, even in challenging financial markets.

Strategic Complement Explained

Strategic complement refers to the idea that the value of two choices or actions is positively correlated. One action or choice influences the rate of choosing its complementary option. This can be better explained in the case of firms producing complementary products such as pens and refills. The consumer's choice of refill goes up when they buy a pen. Since one choice leads to another, it is said to be positively correlated and mutually reinforcing.

It supports the analysis of pricing strategies, market participant behavior, network effects, and strategic relationships between businesses. Businesses can improve their market position and chances of profitability by making well-informed decisions pertaining to aspects that complement their plans. This can be made possible by gaining a thorough understanding of strategic complements, which offers insights into the dynamics of cooperation and competition.

Businesses employ the strategic complement approach to increase their market share and accomplish their objectives. Complementary products, services, or strategies can help businesses find synergies that strengthen their competitive edge, draw in more consumers, and boost revenue.

This strategy improves company competitiveness, grows the customer base, and aids in the expansion of adjacent industries—all of which promote economic growth. It encourages businesses to create additional goods or services to distinguish themselves from the competition, propels economic growth, and promotes technology advancements—all of which promote innovation and competitiveness.

Investors can use this strategy to boost the performance of their investment portfolio. By selecting investments that complement each other, investors can earn high returns. For instance, buying the bonds of a particular company operating in an industry that is booming and is expected to grow further is a promising investment choice. The reason strategic complements work so well is the value proposition they offer when combined. When applied correctly, they have the potential to work in difficult or complex financial markets as well.

Examples

Let us look into a few examples to understand the concept better.

Example #1

Suppose Stacey runs WinTech Manufacturing Ltd., which is a new business in Texas. She manufactures printers. Her company is located in a geographical area where many hospitals, schools, and IT companies operate.

While the initial decision was just to manufacture printers, Stacey decided to expand and include other allied products. She realized that the company, which was profitable, could be more profitable if it also manufactured ink cartridges.

Cartridges and printers go hand in hand. Buyers need cartridges frequently, which means repeat purchases are high. Hence, cartridges are a strategic complementary product for printer manufacturers. A few months later, Stacey also decided to include other products, such as toner cartridges, a variety of papers, paper trays, etc.

In her case, Stacey’s market awareness, target audience selection, and growth mindset helped her correctly identify strategic complements that would support her business and improve its financial outcomes.

Example #2

A July 2023 news report explains how strategic complements work in business. Bosch’s acquisition of Paladin Technologies sent a clear and direct message to its competitors about the company’s ambitious growth plans. The 2023 article highlighted that this acquisition would effectively complement the company’s decision to acquire Climatec, LLC in 2015.

This business move was made not only to enhance Bosch’s technological and technical strengths but also to reach various markets worldwide. It was clear as day that the business vision, approach, and reach of Paladin and Bosch matched each other well, strengthening the strategic blend of innovation and growth.

Strategic Complement vs Strategic Substitutes

The differences between complements and strategic substitutes are listed in the table below.

Points	Strategic Complement	Strategic Substitutes
Concept	A scenario where the value of one decision or action rises with another is referred to as a strategic complement.	A scenario where the value of one decision or action falls with another is referred to as a strategic substitute.
Correlation between the choices	It suggests a positive association with reference to the benefits between two choices.	Strategic substitution suggests a negative correlation between the advantages of the two given activities.
Outcome	When two parties engage in complementary actions, and both sides benefit from the strategy, it may result in a win-win scenario.	Strategic substitution often results in a zero or negative situation where the gain of one party comes at the expense of the other.
Significance	This promotes collaboration and coordination and results in mutually beneficial behaviors.	Strategic substitutes may result in competitive behavior and strategic differentiation of choices or products.
Examples	Some good examples include bread and butter, tennis balls and rackets, etc.	Some examples of strategic substitutes include equity and bonds, coffee and tea, etc.

Frequently Asked Questions (FAQs)

1. Why are prices strategic complements?

A price drop seen in one linked product while the demand for another increases might be considered a strategic complement. For example, if ink cartridge costs drop, customers may find it more economical to buy printers, which could lead to a spike in the demand for printers. However, it must be noted that this phenomenon may not always hold if substitutes are easily available.

2. How do strategic complements affect demand?

Strategic complements have a beneficial impact on demand because they boost the demand for the complementary product based on the rise seen in the original product's adoption or consumption. For example, the demand for smartphone accessories such as AirPods and cases has increased due to the continually growing popularity of smartphones.

3. How do strategic complements affect supply?

It can create interdependencies between the production of complementary items and affect their supply numbers. A rise in one product's supply may cause an increase in a complementary product's supply. For example, an increase in electric vehicle manufacturing may lead to an expansion of charging stations and related infrastructure, as these will be required to meet the increasing demand for charging them.