3: Transaction Costs Lens

Question 1

Transaction cost =

Answer 1

Transaction cost = cost of coordination

Question 2

coordination =

w 4+1 examples

+ Total?

Answer 2

• *mgmt of dependencies** eg:
• 4 process*
• info exchange
• monitoring
• perf. assessment
• handover​

1 other

• legal
• …

+ Coordination bizs, like finance and others, add up to a big slice of GDP

Question 3

total cost of production: hierarchical org. VS market

+ effect of IT

Answer 3

The more you move to the market, the more division of labor reduces your production costs, but transaction costs increase > there is an optimum point in the middle > that’s why Cos (will always) exists

+ IT allows to decrease transaction costs, thus moving the curve n the optimum

Question 4

business process =

+ role of IT

Answer 4

= a flow of activity tasks

+ usually implemented by software, thus reducing the cost of coordination

Question 5

taxonomy of biz processes: 3=2+1 core n 5=3+2 support processes

Answer 5

• core processes
  2 current:
  
  • supply chain + production + output
  • CRM (marketing > LEADS > sales > CUSTOMERS > After Sales)
    1 future:
  • R&D + ramp-up
• support processes
  3 “flows”:
  
  • budgeting
  • finance
  • control
    2 resources:
  • HR
  • IT

Question 6

1 advantage n 3 drawbacks of human work

+ media breaks example

Answer 6

+ flexibility - time - cost -error-proneness:
eg media breaks w rate of 3% >>> 26% in a biz proc w 10 steps

Question 7

if a Co has all activities on an IT information system…

Answer 7

… the info sys manages the coordination n therefore costs go down

Question 8

IT n transparency: 3=2+1 affected aspects

Answer 8

IT increases transparency of:

2 immaterial:

• processes
• behaviors

1 material:

• assets

Question 9

2+2 examples of challenges of a traditional procurement system, w/o IT

Answer 9

“systemic”:

• too many slow approval steps due to mistrust within Co
• maintaining catalog

​
​workarounds:

• maverick buying of goods outside Co catalogue w good rates
• buildup of shadow stocks: ppl buy more in advance just to be sure
• …

Question 10

How IT improves procurement

+ examples

+ overarching conseqs >>> 2 effects on negotiations

Answer 10

• electronic catalog
• electronic approval requests
• traceability n searchability of purchases > transparency > forced honesty
• no maverick buying any more coz all must use the system

+ more centralization; automation eliminates transaction jobs; but more negotiators needed!

>>> the profile of needed workers changes, as transaction workers cannot be retrained

>>> providers also decrease in number, so as to decrease transaction costs

Question 11

Case study of transparency thru IT:
Benetton

Answer 11

Coloring white pullovers ‘just in time’ based on feedback from lead shops based on small info sys

Question 12

2 advantages of transparencies in manufacturing

Answer 12

• reducing lead times
• learning best practices and transferring them from one factory to the other

Question 13

IT n division of labor in an office

• theoretical considerations
• practice

Answer 13

• IT reduces both the cost of production n the cost of transactions, so it is not so obvious whether division of labor should increase or decrease due to IT
• in office works: it reduces division of labor (secretaries!) coz ppl are more efficient n so can do more themselves, saving on transaction costs

Question 14

3 forms of coordination

Answer 14

• hierarchies > long-term relationship
• networks > different orgs collaborating for shorter times
• markets > independent actors

Question 15

Specificity of a resource

Answer 15

(amount of) value loss when being used for the next best alternative

Question 16

specificity n the 3 forms of coordination

Answer 16

• transaction costs are an increasing function of specificity;
• each form of coordination has its own cost=f(specificity);
• the curve of transaction costs relative to specificity is steepest in markets and flattest in hierarchies (at middle cost level), such that, by increasing asset specificity, the cheapest transaction costs are found, in order, in:

1. markets
2. networks
3. hierarchies

Question 17

the 3 effects of IT on transaction_costs( specificity )

Answer 17

Effects:

1. pushes it down (fixed reduction)
2. reduces steepness for specificity (variable reduction)
3. reduces the specificity itself (can update product by updating SW)

Question 18

Effect of IT on optimal form of coordination by asset specificity

Answer 18

more space for markets & networks

Question 19

market size n division of labor

+ Who discovered it?

Answer 19

the bigger the market, the more the division of labor.

Adam Smith

Question 20

Division of labor at the industry level:

Tech progress n computer industry verticality since 1980s thru effects on transaction cost

w 1 exception

Answer 20

From total vertical integration to specialized thin layers (w oligopolies)

1. chips
2. computer
3. OSs
4. applications
5. sales channels

Except Apple.

Question 21

Impact of IT on Nr of suppliers:

Normal tradeoff

twofold effect of IT for 2 types of goods w key concept

Answer 21

• there is a tradeoff bw covering all of our Co’s needs (>> more suppliers) and coordination costs, like info sharing (>> fewer suppliers)
• IT effect:
  
  • IT reduces coordination costs, which tends to increase the optimal Nr of suppliers for low-specificity goods;
  • but with specific goods & services, IT increases the benefit to buyers = buyer surplus from non-contractibles like innovation, responsiveness & information sharing, and the incentive for suppliers to invest in them is a decreasing function of Nr, therefore IT decreases the optimal Nr of suppliers for high-specificity goods

Question 22

IT n quantity purchased

Answer 22

as transaction costs go down, demand grows, as it becomes practical to execute also small purchases