Description
The ppt is explaining about strategy and control.
Strategy and Control
Transaction Cost Theory
? Transaction costs are the costs of running the economic system
(equivalent to ‘friction’ in physical sciences) ? Basic principle:
? Economic
institutions will develop to economise on transaction costs. Such institutions are usually dichotomised as atomistic markets, which involve anonymous, short-run relationships, and intra-firm hierarchies. In between, quasi-integration exists where long-term relationships between identifiable (rather than anonymous) economic actors are important.
? Ex ante transaction costs:
? Costs
of drafting, negotiating and safeguarding an agreement
? Ex post transaction costs:
? ‘Maladaption’
costs – incurred when transactions drift out of alignment with requirements; ? Haggling costs – incurred if bilateral efforts are made to correct ex post misalignments; ? Set up and running costs – associated with the governance structures (often not the courts) to which the disputes are referred; ? Bonding costs – of effecting secure commitments
Factor impacting transaction costs
? Bounded rationality
? Existence
of informational uncertainty (incomplete information)
? Opportunism
? ‘Self-interest
? Degree
seeking with guile’ (O E Williamson)
? Asset specificity
to which durable human or physical assets are locked into a particular trading relationship, and hence the extent to which they have value in alternative activities ? An important distinction is to be made between before and after contract execution:
? Ex ante, many potential buyers or sellers may exist, but ex post this
need not be the case if idiosyncratic investments are required.
Conditions for transaction costs
? All three factors should exist together. ? If there is ‘global’ rationality, it would be possible to construct
completely specific contracts at the outset, and hence longterm contracting would be possible. ? In the absence of opportunism, any gaps that exist in contracts, because of bounded rationality, will not pose execution hazards because neither party will attempt to gain advantage over the other. ? When asset specificity does not exist, there is no need to have continuing economic relationships, hence markets will be fully contestable.
The Property Rights Approach
? Relative benefit of exercising control over an activity (based
on the complementarity with a firm’s existing assets). ? The asymmetry between firms in the benefits they receive is the key to understanding which firm should have control over the activity. ? An organization draws its boundaries around those activities that it can derive a higher value from controlling, compared to the firms that might supply it with the activity or its output.
Strategy and control
? Strategic importance of specialized assets
? Specialization
is a necessary but not sufficient condition for higher economic value for a firm, relative to its competitors. ? Necessary, since a standard asset, available to all firms, does not add incremental value to a particular firm. ? NOT sufficient, since it is not the uniqueness of an asset alone that contributes to competitive advantage but its contribution to the firm’s value and const drivers.
? The ‘evolutionary’ nature of the boundaries of a firm
? Strategies,
markets and capabilities change continually
Strategy and control
? Three types of control problem in a supply relationship can
motivate a firm to consider vertical integration:
? Control
over input price
? When a supplier leverages its ‘special’ status for higher price ? When the firm desires a lower prices from its supplier ? E.g. target pricing programs – if the supplier accedes to the program, there is no conflict, and hence no incentive for the firm to integrate vertically
? Control
over investment decisions affecting the firm’s value
drivers ? Control over access to information
? Firm’s access to supplier’s costs and other strategic information ? Supplier’s access to critical information of the firm
Strategy and relative capability
? In analyzing make or buy decisions, we need to compare the
relative production costs or competence of the firm and its supplier in addition to looking at transaction costs or problems of control. ? When a supplier’s operation becomes more specialized to the firm’s requirements, it leads to lower volume levels, and hence raises costs (diseconomies of scale). ? A firm should consider the sum of transaction and production costs together in making its decision whether to bring an activity in-house.
The Efficient Boundaries Model
$
Sum of Coordination and Production Costs
Production Costs: In-House Minus the Market 0
a
c
Degree of Customization of the Supplier’s Input
Coordination Costs: In-House Minus the Market
The Strategic Sourcing Framework
? Need for control
? Whether
the strategic value of the activity is high or low
? Relative competence
? Whether
the firm is better or worse than a supplier in performing a particular activity
? (fig 6.2, page 165)
doc_553207539.ppt
The ppt is explaining about strategy and control.
Strategy and Control
Transaction Cost Theory
? Transaction costs are the costs of running the economic system
(equivalent to ‘friction’ in physical sciences) ? Basic principle:
? Economic
institutions will develop to economise on transaction costs. Such institutions are usually dichotomised as atomistic markets, which involve anonymous, short-run relationships, and intra-firm hierarchies. In between, quasi-integration exists where long-term relationships between identifiable (rather than anonymous) economic actors are important.
? Ex ante transaction costs:
? Costs
of drafting, negotiating and safeguarding an agreement
? Ex post transaction costs:
? ‘Maladaption’
costs – incurred when transactions drift out of alignment with requirements; ? Haggling costs – incurred if bilateral efforts are made to correct ex post misalignments; ? Set up and running costs – associated with the governance structures (often not the courts) to which the disputes are referred; ? Bonding costs – of effecting secure commitments
Factor impacting transaction costs
? Bounded rationality
? Existence
of informational uncertainty (incomplete information)
? Opportunism
? ‘Self-interest
? Degree
seeking with guile’ (O E Williamson)
? Asset specificity
to which durable human or physical assets are locked into a particular trading relationship, and hence the extent to which they have value in alternative activities ? An important distinction is to be made between before and after contract execution:
? Ex ante, many potential buyers or sellers may exist, but ex post this
need not be the case if idiosyncratic investments are required.
Conditions for transaction costs
? All three factors should exist together. ? If there is ‘global’ rationality, it would be possible to construct
completely specific contracts at the outset, and hence longterm contracting would be possible. ? In the absence of opportunism, any gaps that exist in contracts, because of bounded rationality, will not pose execution hazards because neither party will attempt to gain advantage over the other. ? When asset specificity does not exist, there is no need to have continuing economic relationships, hence markets will be fully contestable.
The Property Rights Approach
? Relative benefit of exercising control over an activity (based
on the complementarity with a firm’s existing assets). ? The asymmetry between firms in the benefits they receive is the key to understanding which firm should have control over the activity. ? An organization draws its boundaries around those activities that it can derive a higher value from controlling, compared to the firms that might supply it with the activity or its output.
Strategy and control
? Strategic importance of specialized assets
? Specialization
is a necessary but not sufficient condition for higher economic value for a firm, relative to its competitors. ? Necessary, since a standard asset, available to all firms, does not add incremental value to a particular firm. ? NOT sufficient, since it is not the uniqueness of an asset alone that contributes to competitive advantage but its contribution to the firm’s value and const drivers.
? The ‘evolutionary’ nature of the boundaries of a firm
? Strategies,
markets and capabilities change continually
Strategy and control
? Three types of control problem in a supply relationship can
motivate a firm to consider vertical integration:
? Control
over input price
? When a supplier leverages its ‘special’ status for higher price ? When the firm desires a lower prices from its supplier ? E.g. target pricing programs – if the supplier accedes to the program, there is no conflict, and hence no incentive for the firm to integrate vertically
? Control
over investment decisions affecting the firm’s value
drivers ? Control over access to information
? Firm’s access to supplier’s costs and other strategic information ? Supplier’s access to critical information of the firm
Strategy and relative capability
? In analyzing make or buy decisions, we need to compare the
relative production costs or competence of the firm and its supplier in addition to looking at transaction costs or problems of control. ? When a supplier’s operation becomes more specialized to the firm’s requirements, it leads to lower volume levels, and hence raises costs (diseconomies of scale). ? A firm should consider the sum of transaction and production costs together in making its decision whether to bring an activity in-house.
The Efficient Boundaries Model
$
Sum of Coordination and Production Costs
Production Costs: In-House Minus the Market 0
a
c
Degree of Customization of the Supplier’s Input
Coordination Costs: In-House Minus the Market
The Strategic Sourcing Framework
? Need for control
? Whether
the strategic value of the activity is high or low
? Relative competence
? Whether
the firm is better or worse than a supplier in performing a particular activity
? (fig 6.2, page 165)
doc_553207539.ppt