TCE

Question 1

How is TCE different than other theories?

Compare to Porter (1980) & RBV Barney (1991)

Answer 1

Unlike conventional economics treatments of firms and industries, the focus here is on transactions, not firms, and on the difficulties of contracting, not the technical aspects of production (scale, scope, etc.).

Also, in contrast with industry and competitive analysis as developed by Michael Porter, the key to the firm’s success is seen as its ability to organize transactions efficiently, not its ability to leverage market power.

As in the resource-based view of the firm, TCE focuses on assets but is interested in how they are organized and governed, not their ability to generate rents.

Question 2

The best governance form depends on what three factors?

Answer 2

• asset specificity (i.e., how much has been specifically invested in an asset for a unique relationship?), when an asset is highly specific, it is more difficult to redeploy it for another use
• uncertainty (regarding the environment and moves that the relationship partner will make)
• frequency of the transaction

Question 3

Williamson (1975)

Answer 3

Rooted in Coase, Commons, and Simon’s theories about firm boundaries and bounded rationality

Said contracts are unavoidable…and adapting to changing contingencies are important to prevent maladaptive costs

Parties tend to choose the option that best controls the underinvestment problem

Early history focused on make vs. buy…later research focused on organizational forms (i.e., JVs, alliances, franchises, etc.)

Core hypotheses:
o The transaction attributes that create transaction costs are positively related to the degree of integration. Specifically, the more a transaction is surrounded by (a) asset specificity, (b) volume uncertainty, (c) technological uncertainty, (d) behavioral uncertainty, and (e) transaction frequency, the greater the degree of integration.
o Matching transactions to the degree of integration is positively related to firm performance.

Question 4

Ghoshal and Moran (1996) Critique of TCE

Answer 4

They disagree with the key assumption of opportunism–they argue that not only does this assumption ignore the reality that people are bound by social expectations, trust, and other constraints on their behavior, but that assuming this and using it as a key assumption to govern how organizations design their structures leads to subpar performance (e.g., the hikers & the lion)

survival of the fittest is efficient but it’s not very strategic or good for the long run performance

Williamson also assumes that cooperative behaviors cannot be assured under social control

in sum, TCE ignores social control (Ouchi, 1980) and social relations (Granovetter, 1985)

Question 5

Crook et al. 2012

Answer 5

Meta-Analysis of TCE - largely supportive of Williamson

• Supporting the RBV, assets that are highly specified and strategic (VRIO), are related to hierarchical governance (i.e., within firms)
• Findings show support for discriminating alignment: matching transactions to governance improves firm performance

New theoretical challenges to TCE
-Real Options Theory (Folta, 1998; Folta & O’Brien, 2004) – managers prefer flexibility in times of uncertainty, and they will hold off on irreversible investments until uncertainty is reduced (e.g., as uncertainty increases firms are less likely to use hierarchical governance)

Resource Based View (Barney, 1991)
-Some resources are most valuable when tightly bundled within the hierarchy, org routines, social relationships, and processes (i.e., highly specified assets)

Overall effect sizes not too large for TCE…what else might be going on?
-relational governance (Dyer & Singh, 1998); trust (e.g., Toyota and its suppliers)

Question 6

Ouchi (1980)

Answer 6

Three distinct control systems
o Market – where managers evaluate specific transaction outcomes (e.g., piece rate for production workers)
o Bureaucratic – where managers apply formal procedures, rules, regs, job specialization, etc. to direct the processes and procedures of subordinates.
o Clan – informal, norm-based social control to ensure selecting the “right” people and doing things “properly” where managers focus on selection, motivation, monitoring, and rewarding based on adherence to organizational norms