1. Resource Dependency and Transaction Cost Economics Theories

2. 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

3. 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)

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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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)

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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)

23. 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

24. 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

25. 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

26. Strategies for integration and unique design of Motorola & Chrysler

27. 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

28. 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

29. 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

30. 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

31. 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 basis
What if supplier underreports savings?

32. 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