3: Transaction Costs Lens Flashcards
Transaction cost =
Transaction cost = cost of coordination
coordination =
w 4+1 examples
+ Total?
- *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
total cost of production: hierarchical org. VS market
+ effect of IT
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
business process =
+ role of IT
= a flow of activity tasks
+ usually implemented by software, thus reducing the cost of coordination
taxonomy of biz processes: 3=2+1 core n 5=3+2 support processes
- 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
1 advantage n 3 drawbacks of human work
+ media breaks example
+ flexibility - time - cost -error-proneness:
eg media breaks w rate of 3% >>> 26% in a biz proc w 10 steps
if a Co has all activities on an IT information system…
… the info sys manages the coordination n therefore costs go down
IT n transparency: 3=2+1 affected aspects
IT increases transparency of:
2 immaterial:
- processes
- behaviors
1 material:
- assets
2+2 examples of challenges of a traditional procurement system, w/o IT
“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
- …
How IT improves procurement
+ examples
+ overarching conseqs >>> 2 effects on negotiations
- 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
Case study of transparency thru IT:
Benetton
Coloring white pullovers ‘just in time’ based on feedback from lead shops based on small info sys
2 advantages of transparencies in manufacturing
- reducing lead times
- learning best practices and transferring them from one factory to the other
IT n division of labor in an office
- theoretical considerations
- practice
- 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
3 forms of coordination
- hierarchies > long-term relationship
- networks > different orgs collaborating for shorter times
- markets > independent actors
Specificity of a resource
(amount of) value loss when being used for the next best alternative
specificity n the 3 forms of coordination
- 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:
- markets
- networks
- hierarchies
the 3 effects of IT on transaction_costs( specificity )
Effects:
- pushes it down (fixed reduction)
- reduces steepness for specificity (variable reduction)
- reduces the specificity itself (can update product by updating SW)
Effect of IT on optimal form of coordination by asset specificity
more space for markets & networks
market size n division of labor
+ Who discovered it?
the bigger the market, the more the division of labor.
Adam Smith
Division of labor at the industry level:
Tech progress n computer industry verticality since 1980s thru effects on transaction cost
w 1 exception
From total vertical integration to specialized thin layers (w oligopolies)
- chips
- computer
- OSs
- applications
- sales channels
Except Apple.
Impact of IT on Nr of suppliers:
Normal tradeoff
twofold effect of IT for 2 types of goods w key concept
- 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
IT n quantity purchased
as transaction costs go down, demand grows, as it becomes practical to execute also small purchases
