Resource Dependency and Transaction Cost Economics Theories

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Resource Dependency and Transaction Cost
Economics Theories

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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

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Resource dependency (contd)

• 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 orgl survival
• 2) The extent to which the resource is
  controlled by other organizations (i.e., monopoly
  condition)

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The general and specific environments
REGULATORY INSTITUTIONS
LEGISLATIVE INSTITUTIONS
COMPETITOR
SUPPLIER
FIRM
EMPLOYEE
DISTRIBUTOR
CUSTOMER
ECONOMIC INSTITUTIONS
OTHER INDUSTRIES
GOVERNMENT
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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

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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

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Managing symbiotic interdependence (contd)

• Co-optation
• Neutralizing problematic forces in the specific
  environment
• Bring opponents on the organizations 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)

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Managing symbiotic interdependence (contd)

• 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

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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

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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 anothers 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.

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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

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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

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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

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Managing competitive interdependence

• Organizations dont 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)

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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

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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 others 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

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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

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Managing competitive interdependence

• Merger and takeover
• Ultimate weapon to manage competitive
  interdependencies
• Enlarges the domain and product range of a
  company
• Sabanci takes over Gima, Koç takes over Tansas 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

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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

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Transaction cost theory (contd)

• 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 managers 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

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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

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Sources of transaction costs (contd)

• 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)

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Sources of transaction costs (contd)

• 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

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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

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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

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Strategies for integration and unique design of
Motorola Chrysler
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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

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Standard versus custom parts (contd)

• 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 parts life a new design
  competition between preferred suppliers is
  initiated
• Substantial design cooperation on future
  generations changing suppliers is disruptive

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When integration is needed

• Motorolas 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

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With unique designs

• Life-of-part agreements used with custom goods
• Protects the suppliers 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

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With unique designs (contd)

• 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?

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With unique designs (contd)

• Chryslers 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

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