Strategic Management Journal
Strat. Mgmt. J.
: 415–440 (2005)Published online 11 March 2005 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.458
ADAPTATION IN VERTICAL RELATIONSHIPS:BEYOND INCENTIVE CONFLICT
* PAUL R. LAWRENCE
and PHANISH PURANAM
Kellogg School of Management, Northwestern University, Evanston, Illinois, U.S.A.
Harvard Business School, Harvard University, Boston, Massachusetts, U.S.A.
London Business School, University of London, London, U.K.
In this study, we extend the analysis of adaptation in theories of economic organizationbeyond traditional considerations of incentive conﬂict (hold-up). We conceptualize adaptation ascoordinated and cooperative response to change, and deﬁne the adaptive capacity of a verticalrelationship as the ability to generate coordinated and cooperative responses across procurer and supplier to changes in procurement conditions. We draw on the concepts of differentiationand integration to dimensionalize the adaptive capacity of different modes of procurement. Usingdata on all component classes procured internally and externally by Ford and Chrysler, we showthat different procurement modes differ in terms of their adaptive capacity and performance. Wealso show that performance differences across modes of procurement arise as a function of thematch between adaptive capacity and adaptation requirements associated with the exchange,and not only the match between governance form and transaction hazards.
2005John Wiley & Sons, Ltd.
Vertical (procurement) relationships have alwaysbeen the favorite empirical domain of theoristsof economic organization (Coase, 1937; Gross-man and Hart, 1986; Williamson, 1975). Suchrelationships involve exchange between adjacentstages of the value chain, and they occur bothwithin ﬁrms (e.g., between different functional ordivisional areas within a ﬁrm) and between ﬁrms(e.g., between specialist design ﬁrms and special-ist manufacturers). In recent years, the study of vertical relationships has come to be dominatedby transaction cost economics (see Shelanski andKlein, 1995; David and Han, 2004, for reviews).
Keywords: coordination; organization design; differenti-ation and integration; auto industry
Correspondence to: Ranjay Gulati, Kellogg School of Manage-ment, Northwestern University, Jacobs Center, 2001 SheridanRoad, Evanston, IL 60208-2001, U.S.A.E-mail: email@example.com
In Oliver Williamson’s development of the theory,the focus is on ‘how parties engaged in a long-term contract can adapt effectively to disturbances.The need to craft contractual structures in whichthey have mutual conﬁdence
’ is the key issue(Williamson, 1991b). Williamson also notes thatin addition to incentive conﬂict, failures of adap-tation may arise ‘because autonomous parties readand react to signals differently, even though theirpurpose is to achieve a timely and compatiblecombined response’ (Williamson, 1991a). Yet, thistheoretical recognition of adaptation problems thatmight persist even in the absence of incentive con-ﬂict ﬁnds scant recognition in most prior researchmotivated by transaction cost economics.
We focus on transaction cost rather than property rights whendiscussing existing literature on the economic organization of vertical relationships. This is because the empirical strategy andmanagement literature on vertical relationships is much moreinﬂuenced by transaction cost economics than property rightseconomics (see Novak and Eppinger, 2001, for an exception).
2005 John Wiley & Sons, Ltd.
Received 1 March 2000Final revision received 10 November 2004