Resource Dependency

and Transaction Cost

Economics Theories
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
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)
The general and specific
environments
REGULATORY INSTITUTIONS LEGISLATIVE INSTITUTIONS

SUPPLIER COMPETITOR

EMPLOYEE FIRM

DISTRIBUTOR
CUSTOMER
ECONOMIC INSTITUTIONS
OTHER INDUSTRIES
GOVERNMENT
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
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
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)
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
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
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.
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
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
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
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)
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
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
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
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
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

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
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
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)
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
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
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
 Strategies for
integration and unique
design of Motorola &
Chrysler
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
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
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
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
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 50-50
basis
 What if supplier underreports savings?
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