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Resource Dependency and Transaction Cost Economics Theories
Resource dependency
Organizations are dependent on their environments They need resources to survive and grow
Environment becomes poor if: Important customers are lost or new competitors
enter Organizations manage their transactions with
the environment The goal: Ensure predictability of access to
resources, reduce uncertainty and dependency
Resource dependency (cont’d) Tools to minimize dependency:
1) Exert influence over other organizations to obtain resources
2) Respond to the needs and demands of other organizations in its environment
The strength of resource dependence is a function of:
1) Vitality of the resource for org’l survival
2) The extent to which the resource is controlled by other organizations (i.e., monopoly condition)
The general and specific environments
FIRM
SUPPLIER
CUSTOMER
COMPETITOR
DISTRIBUTOR
EMPLOYEE
REGULATORY INSTITUTIONS LEGISLATIVE INSTITUTIONS
OTHER INDUSTRIES GOVERNMENT
ECONOMIC INSTITUTIONS
Interorganizational strategies for managing resource dependence Specific environment:
Suppliers, labor unions, customers, customer interest groups
Two basic interdependencies in the specific environment:
1) Symbiotic interdependence Exist among an organization and its suppliers and
distributors
2) Competitive interdependence Exist among organizations that compete for scarce
inputs and outputs
Managing symbiotic interdependence Good reputation
Organization held in high regard because of fair and honest business practices Paying bills on time, providing high quality goods &
services, reliability, trustworthiness, goodwill Ex: De Beers diamond cartel
Acting honestly does not rule out negotiating over price and quality
The most informal way of managing sybiotic interdependence
Managing symbiotic interdependence (cont’d) Co-optation
Neutralizing problematic forces in the specific environment
Bring opponents on the organization’s side Give them a stake or claim to satisfy their interests
Ex: Phamaceutical companies and physicians, local schools and parents
Inter-locking directorates When a director from one company sits on the
board of another (Ex: Financial institution president elected for the board of the company)
Managing symbiotic interdependence (cont’d) Strategic alliances
An agreement that commits two or more companies to share their resources to develop joint businesses Ex: IBM (computer skills) and Sears (customer base)
establish a joint venture prodigy to provide on-line information service to customers
Types of strategic alliances: Long-term contracts Networks Minority ownership Joint venture
Managing symbiotic interdependence – Types of strategic alliances
Long-term contracts: Least formal type of alliance Can be oral or written,
Kellog has a written contract with the farmer suppliers of corn and rice Agrees to pay a certain price regardless of the
market rate when the produce is harvested They both eliminate uncertainty in their
environments
Managing symbiotic interdependence – Types of strategic alliances
Networks Defn.: “A cluster of different organizations whose
actions are coordinated by contracts and agreements rather than through a formal hierarchy of authority”
Network members work closely to support and complement one another’s activities
More ties that link members and greater formal coordination of activities Ex: Nike builds long-term relationships with suppliers,
distributors, and customers to keep core organization from becoming too large and bureaucratic.
Managing symbiotic interdependence – Types of strategic alliances Minority ownership
Organizations hold minority shares in each other Keiretsu shows how minority ownership networks
operate Members share proprietary information and
knowledge that benefit them collectively Capital keiretsu: To manage input-output linkages
Ex: Toyota and its suppliers Financial keiretsu: To manage linkages among
diverse companies. Has a large bank at the center Ex: Fuyo keiretsu
Managing symbiotic interdependence – Types of strategic alliances
Joint venture Defn.: “Strategic alliance among two or more
organizations that agree to share the ownership of a new business”
Companies that form the new business jointly design its organizational structure Provide resources for it to prosper,sends executives
to the new business The new company is free to develop its structure A JV allows the founding companies to stay small
Managing symbiotic interdependence
Merger & takeover The most formal strategy Resource exchanges occur within rather than
between organizations A powerful supplier can no longer hold an
organization as hostage Can be exercised only when an organization has
a great need to control a crucial resource or manage and important inter
Managing competitive interdependence Organizations don’t like competition since it:
Reduces the supply of scarce resources Increases uncertainty in the environment
Collusions Collusion is a secret agreement among
competitors to share information for collectively coordinating activities (illegal) Establishing industry standards for:
Price, product specifications, profit markup generally by the price leader(s) (Ex: Sony & Philips developing the standard for CD technology)
Managing competitive interdependence Cartels
An association of firms that agree to coordinate their activities
Organizations form cartels by: Signaling their intentions by public announcements
Ex: Announce price increases that they plan to see whether rivals will match those increases
Dominant industry players may discipline others that break the informal rules of the industry Some small firms may be forced out of the industry for
reducing prices below the price-cutting level of the industry
Managing competitive interdependence Third-party linkage mechanisms
A regulatory body that alows organizations to share information and regulate the way they compete Ex: Trade associations, chambers, cooperatives, etc.
Enables competitors to meet and make informal agreements to monitor each other’s activities
Lobby for government policies to protect industry members Increase the flow of information to industry members Stabilize industry competition Promote cooperation between domestic rivals
Managing competitive interdependence Strategic alliances
Competitors can cooperate to develop common technology Ex: IBM - Apple JV to develop a common microchip
that will make their machines compatible Ex: Ford and Mazda cooperated to produce vehicles
in the Ford U.S. plant Alliances and JVs in the telecommunications industry
Managing competitive interdependence
Merger and takeover Ultimate weapon to manage competitive
interdependencies Enlarges the domain and product range of a
company Sabancı takes over Gima, Koç takes over Tansaş to
increase their control over the expanding retail market in Turkey
Downside: Tall, centralized, mechanistic structures unable to
meet challenges of a rapidly changing environment
Transaction cost theory (TCE)
Tries to answer the question: “Why organizations exist?”
Why and under what conditions to select and change the aforementioned strategies
Transaction costs: Negotiating, Monitoring, Governing,
Exchanges between people and firms
Transaction cost theory (cont’d)
The goal of the organization is: To minimize costs of exchanging resources in the
environment To minimize costs of managing exchanges inside
the organization “Every dollar or hour of a manager’s time spent in
negotiating or monitoring exchanges with other organizations or inside the organization is a dollar or hour not used for creating value” Transaction costs siphon off productive value
Sources of transaction costs
Environmental uncertainty and bounded rationality The environment is uncertain and complex People have a limited ability to process
infromation and to understand the environment surrounding them The higher the level of uncertainty in the environment
the greater is the difficulty of managing transactions between organizations
Sources of transaction costs (cont’d)
Opportunism and small numbers Though not all, some people behave
opportunistically — they cheat or exploit other stakeholders in the environment When an organization is dependent on one
supplier or a small number of traders, the potential for opportunism is higher The organization has to spend resources to negotiate,
monitor, and enforce agreements with trading partners to protect itself (i.e., transaction costs increase)
Sources of transaction costs (cont’d) Risk and specific assets
Investments in skills, machinery, knowledge, and information that create value in one exchange relationship but have no value in any other exchange relationship Specific asset investments increase risk in a
business relationship To counter such a risk, the investing firm may try to
negotiate extensively and enforce terms of a contract which increases transaction costs
TCE and Linkage mechanisms Transaction costs are low when:
Organizations are exchanging nonspecific goods and services
Uncertainty is low There are many possible exchange partners
Transaction costs increase when: Organizations exchange more specific goods and
services Uncertainty increases The number of trading partners fall
TCE and Linkage mechanisms
According to TCE: As transactions costs in an exchange increase,
the firm should choose a more formal linkage mechanism such as: A joint venture A merger or a take over
The downside of formal mechanisms Internal transaction costs —communication,
negotiation, monitoring, governance of exchanges within the organization — increase
Strategies for integration and unique
design of Motorola & Chrysler
Standard versus custom parts
With suppliers of standard parts and commodities: Focused competition
Some shifting among firms Cost improvement
Highest-preferred supplier asked for a bid Competitive bids from several other preferred
suppliers Achievement of lowest possible cost
Standard versus custom parts (cont’d)
With suppliers of custom parts: Design and make a unique item Protect investments in design and any unique
tooling it may need Life-of-part agreement
Supplier is assured the business as long as the part is needed and performance keeps pace (Ex: semiconductors, liquid crystals)
At the end of custom part’s life a new design competition between preferred suppliers is initiated
Substantial design cooperation on future generations; changing suppliers is disruptive
When integration is needed Motorola’s Paging Products Group
Technological change for most parts rapid Will not change suppliers unless something
drastic occurs Process of adjustment builds deep shared
understanding Motorola looks for long-term commitment to continued
change and its objectives Shifting suppliers entail high cost and threat to
cycle time Existing suppliers are given a hand to improve
performance
With unique designs Life-of-part agreements used with custom
goods Protects the supplier’s interest Predicting future costs can be difficult
Price or productivity curve may deviate from reality over time
May damage customer or supplier Motorola enters an agreement for only the first
year to learn and set targets Quality audits to characterize generic supplier
processes, develop a generic cost model Highlighting problems, deciding on best performance
With unique designs (cont’d) Chrysler
90% of all purchases are custom designed Substantial design cooperation Supply base integrated into design work Shifts among suppliers expensive and disruptive Suppliers get life-of-part agreements, but without
price curves Each supplier suggests changes to save costs Accepted changes are shared by Chrysler on a 50-50
basis What if supplier underreports savings?
With unique designs (cont’d) Chrysler’s approach has achieved better
costs over other auto firms Relationships with suppliers that encourage more
sharing Sharing costs build trust with suppliers A need for high design integration brings about a
need for continuity Suppliers of unique parts continue from one
generation to the next Preferred supplier for the custom designed part
does not automatically get the job for Motorola and Ford