1. Strategy Research: Governance and Competence Perspectives
Oliver E. Williamson, 1999
Strategic Management Journal., (20)
Jinah Ryu

2. Structure of the paper
[Question] Which perspective (governance vs competence) gives more useful examination on business strategy (e.g. existence, structure, boundaries of the firm)?
Stance: TCE – defending critiques of TCE
Compare Governance (Transaction Cost Economics; TCE) and Competence perspectives in the aspect of six key moves through which TCE has been operationalized
Rebut to the “Mistaken” Challenges posed by the competence perspective for the governance perspective
Address “Constructive” Challenges posed by the competence perspective for the governance perspective
[Answer] Two perspectives are complementary to each other

3. Governance Perspectives Competence Perspectives
1. Human actors
Governance Perspectives
Competence Perspectives
Bounded rationality which leads to incomplete contracting
Foresight (vs Myopic)
(Schultz, 1995)
: capacity to look ahead and reposition
Myopic (vs Foresight)
(Cyert and March, 1963)
: simple-minded, learn from trial-and-error, and adapt through crises
Self-interest
Opportunism
: strategic behavior including adverse selection, moral hazard, etc
ABSENCE of Self-interest/Opportunism!
Rather, EMPHASIZE elusive notion of Trust
Author’s analysis: Concept of trust in competence perspectives also implies a calculative approach to contract

4. Governance Perspectives Competence Perspectives
2. Unit of Analysis
Governance Perspectives
Competence Perspectives
Transaction
: occurs when a good or service is transferred between technologically separable stages
c.f. dimensions operationalizing TCE: frequency, uncertainty, asset specificity
Resource (Penrose, 1959)
: a cluster of related transactions
Routine (Nelson and Winter, 1982)
: a regular and predictable business behavior
Author’s analysis: How to operationalize the concept of routine? (Problem of Implementation)

5. + 3. Describing the Firm 4. Purposes served Governance Perspectives
Competence Perspectives
Refuse to describe the firm in technological/functional terms
Alternative mode of governance structure (incentive intensity, administrative controls, the legal rules regime) against Market
A bundle of resources/routines which consist of firm’s capability +
4. Purposes served
Governance Perspectives
Competence Perspectives
Economizing on transaction costs
(led by bounded rationality and hazards of opportunism) with specific governance structure
Making better use of its resources

6. Steps to Choose the modes of governance
k: transaction-specific investment
s: safeguards (e.g. institutional environment - laws of property and contract)
Node C vs Node D
Tradeoffs: the added bureaucratic costs VS high degrees of asset specificity + the added uncertainty which requires cooperative adaptation

7. Author’s analysis:
Competence perspective cannot answer the question on why a unified firm is better than two autonomous firms. Rather, this perspective borrows TCE’s argument to address this issue (e.g., Teece, 1986: weak property rights for knowledge).
[COMPLEMENTARIES 1] We can understand that TCE informs the generic decision to make-or-buy(firm vs market), and competence brings in particulars (composite of transactions).
Future question will be: Which firms are more and which are less competent in deploying their institutional capabilities to protect their knowledge?

8. 5. Empirical 6. Efficiency criterion Governance Perspectives
Competence Perspectives
Well progressed
Mostly ex post rationalizations for success
Absence of prediction
6. Efficiency criterion
Governance Perspectives
Competence Perspectives
Presumed to be Efficient
no feasible superior alternative
that can be described and implemented with expected net gains
is presumed to be efficient
Somewhat inefficient
Path dependent
A feasible criterion for judging dynamic efficiency is never proposed

9. “Mistaken” Critiques of TCE
[1] Opportunism does not have the organizational consequences that have been ascribed to it
No opportunism  “Utopian fantasies”; No moral hazard, adverse selection, shirking, undisclosed sub-goal pursuit…
Organizational consequences (incentive, control, and contract law differences) will vanish if opportunism is zeroed out
[2] Transaction cost is a static concept
(which works out of an equilibrium contracting setup)
Timely adaptations (ex post; keep correcting provisions) and Timely convergence (ex ante; persuading, negotiating, coordinating, and teaching outside suppliers) are intertemporal complication and central to TCE
[COMPLEMENTARIES 2] Still, TCE needs more dynamic constructions

10. “Mistaken” Critiques of TCE
[3] Governance does not engage the issues of management
Counterexamples: Informal organization, differential bureaucratic costs
Governance describes the firm as ‘managerial’ attributes : low-powered incentives, extensive administrative controls, and its own dispute settlement machinery
Still, cognitive specialization to understand bureaucracy and empirical phenomena should be developed further

11. Research opportunities raised by Competence perspective for TCE
Beyond Piecemeal
Redefine the transaction to consider interaction effects of different transactions
The firm as a whole is larger than the sum of parts
Beyond generic governance: strategy
Asking about firm-specific attributes (e.g. core competence, disabilities, pre-existing investments, actual & potential rivalry) rather than generic mode (e.g. market, hybrid, firm, or bureau)
Learning
Learning through experience: Rather than foresight (farsighted contracting; TCE view) or myopic tendencies (trial-and-error learning; Competence view)
Contract renewal: Adaptations from previous contracts
Uncovering biased learning problem: biases of success & overlooking failures

12. Discussion
[1] Which one leads the other (governance vs capability)? Aren’t governance and competence created endogenously by each other?
A firm’s governance of transactions is often influenced by the focal firm’s capability. (ex) Some information service firms could lack of technological capability in manufacturing, and prefer to use market forms when they make devices.
On the other hand, a firm can acquire specific capability after it experienced transaction process with partners in specific field. (ex) Some firms could construct negotiating capability or knowledge from previous contracts with other firms in particular industry, and take more advantageous position when they work with other firms in that industry in the future.
[2] How to differentiate firm’s asset specificity from firm’s capability in empirical setting? Are they mutually exclusive?