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From transaction cost to transactional value analysis: Implications for the study of inter-organizational strategies. Zajac , Edward J. & Olsen, Cyrus P. Journal of Management Studies , 30 (1): 131-145 Presented by Nan Zhang. Overview. Motivation
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From transaction cost to transactional value analysis: Implications for the study of inter-organizational strategies Zajac, Edward J. & Olsen, Cyrus P. Journal of Management Studies, 30 (1): 131-145 Presented by Nan Zhang
Overview • Motivation • Two limiting emphases of transaction cost analysis • A transactional value framework • Conclusion and Discussion
Motivation (b) • The pursuit of greater joint value requires the use of governance structures that are less efficient from a transaction cost perspective. Expected joint gains outweigh transaction cost considerations. • The transactional value approach complements or is consistent with the implicit intent of transaction cost theory. • Transaction costs are NOT non-existent or irrelevant for the study of inter-organizational strategies. • The authors propose a framework that views the cost of addressing transaction cost concerns as simply a subset of total costs to be aggregated.
Two limitations of transaction cost analysis: 1) A single party, cost minimization emphasis (a) • Williamson (1975) discusses the organization of economic activity as a decision between markets or hierarchy: a make or buy decision. • The usual transaction cost minimization calculus for the vertical integration decision reflects a single-firm orientation (i.e., calculations conducted by one firm for its own independent purpose and use). • However, inter-organizational strategies seek to create and sustain a relationship that is valuable to all parties: the blending of market andhierarchy.
Two limitations of transaction cost analysis: 1) A single party, cost minimization emphasis (b) • In the case of firms involved in a joint venture: Whose transaction costs will be minimized? Firm U, D or some combination? • If minimizing costs of combination of the two (average or weighted?), it suggests a very different calculus is required to assess the efficiency of the various intermediate governance structures that fall between markets and hierarchies. • Thus, the crucial transaction issue is both organizations’ concerns for: • 1) Knowing the partner’s preferences and concerns as a basis for exchange and mutual gain; • 2) Discovering ways in which similarities or shared interests can be exploited to maximize co-operative joint gains.
Two transactional value approaches: 1) A joint value maximization emphasis (a) • The estimate of the negative impact that the opportunistic behavior will have on the value of expected future exchange with its partner determines a firm’s willingness to act opportunistically. • Maximizing NPV in the exchange relation is the KEY. • Value estimations and realizations are based upon the interests of both exchange partners. • Ongoing exchange relationship can create value that could otherwise not be created by either firm independently. • When the expected joint gains are higher than transaction costs, inter-organizational strategies having greater joint value will typically require the use of less efficient governance structures.
Two transactional value approaches: 1) A joint value maximization emphasis (b) • How is value actually created in interdependent exchange relationship? • Gains from differences in interests: can be traded off to create mutual benefit; • Gains from similarities in interests: usually be blocked or hidden. • A process approach is needed.
Two limitations of transaction cost analysis: 2) A structural emphasis • Williamson (1975-1985) views the transactional structure as influencing the conduct and the performance of the exchange. • The overall logic of market structure-conduct-performance paradigm is mirrored in the transaction cost perspective (bilateral monopoly vs. small numbers; exit barriers vs. asset specificity). • It fails to recognize that a ‘fundamental transformation’ is in fact a process. • Thus, any fundamental transformation over time needs to be understood primarily in terms of developmental process, rather than a simple comparison of ex ante and ex post structural properties.
Two transactional value approaches: 2) A process emphasis (a)
Two transactional value approaches: 2) A process emphasis (b) • The norms of reciprocity, role integrity, and the preservation of the relationship are setting the tone for the continued execution of contracts: maximizing the cooperative opportunity that is magnified by the developmental process is of interest. • However, the transaction cost perspective viewed the continued execution of contracts as primarily sensitive to one firm’s potential exploitation of ex post structural features of the market context.
Conclusion and Discussion • This article integrates strategic, learning, and transaction cost explanations by showing their relatedness and potential tradeoffs among them. • Strategic and learning gains often increase transaction value while simultaneously increasing transaction costs; however, the value gains often outweigh the transaction costs efficiency losses. • This article also provides an analysis of relational context processes over time and offers a richer depiction of inter-organizational strategies different from the transaction approach.