From transaction cost to transactional value analysis: Implications for the study of inter-organizational strategies

Zajac, Edward J. & Olsen, Cyrus P.

Journal of Management Studies, 30 (1): 131-145

Presented by Nan Zhang

2 Overview

Motivation

Two limiting emphases of transaction cost analysis

A transactional value framework

Conclusion and Discussion

3 Motivation (a)

Two limitations of transaction cost perspective

• A single party, cost minimization emphasis: neglects the interdependence between exchange partners in the pursuit of joint value.

• An over-emphasis on structural features: neglects process issues.

New approaches of transaction value analysis

• A joint value maximization emphasis• A process dimensions emphasis relevant to creating and claiming value in inter-

organizational exchange relationships.

4 Motivation (b)

The pursuit of greater joint value requires the use of governance structures that are less efficient from a transaction cost perspective. Expected joint gains outweigh transaction cost considerations.

The transactional value approach complements or is consistent with the implicit intent of transaction cost theory.

Transaction costs are NOT non-existent or irrelevant for the study of inter-organizational strategies.

The authors propose a framework that views the cost of addressing transaction cost concerns as simply a subset of total costs to be aggregated.

5 Two limitations of transaction cost analysis: 1) A single party, cost minimization emphasis (a) Williamson (1975) discusses the organization of

economic activity as a decision between markets or hierarchy: a make or buy decision.

The usual transaction cost minimization calculus for the vertical integration decision reflects a single-firm orientation (i.e., calculations conducted by one firm for its own independent purpose and use).

However, inter-organizational strategies seek to create and sustain a relationship that is valuable to all parties: the blending of market and hierarchy.

6 Two limitations of transaction cost analysis: 1) A single party, cost minimization emphasis (b) In the case of firms involved in a joint venture: Whose

transaction costs will be minimized? Firm U, D or some combination?

If minimizing costs of combination of the two (average or weighted?), it suggests a very different calculus is required to assess the efficiency of the various intermediate governance structures that fall between markets and hierarchies.

Thus, the crucial transaction issue is both organizations’ concerns for:

1) Knowing the partner’s preferences and concerns as a basis for exchange and mutual gain;

2) Discovering ways in which similarities or shared interests can be exploited to maximize co-operative joint gains.

7 Two transactional value approaches:

1) A joint value maximization emphasis (a) The estimate of the negative impact that the

opportunistic behavior will have on the value of expected future exchange with its partner determines a firm’s willingness to act opportunistically.

Maximizing NPV in the exchange relation is the KEY.

Value estimations and realizations are based upon the interests of both exchange partners.

Ongoing exchange relationship can create value that could otherwise not be created by either firm independently.

When the expected joint gains are higher than transaction costs, inter-organizational strategies having greater joint value will typically require the use of less efficient governance structures.

8 Two transactional value approaches:

1) A joint value maximization emphasis (b) How is value actually created in interdependent

exchange relationship?

Gains from differences in interests: can be traded off to create mutual benefit;

Gains from similarities in interests: usually be blocked or hidden.

A process approach is needed.

9 Two limitations of transaction cost analysis: 2) A structural emphasis

Williamson (1975-1985) views the transactional structure as influencing the conduct and the performance of the exchange.

The overall logic of market structure-conduct-performance paradigm is mirrored in the transaction cost perspective (bilateral monopoly vs. small numbers; exit barriers vs. asset specificity).

It fails to recognize that a ‘fundamental transformation’ is in fact a process.

Thus, any fundamental transformation over time needs to be understood primarily in terms of developmental process, rather than a simple comparison of ex ante and ex post structural properties.

10 Two transactional value approaches:

2) A process emphasis (a)

11 Two transactional value approaches:

2) A process emphasis (b)

The norms of reciprocity, role integrity, and the preservation of the relationship are setting the tone for the continued execution of contracts: maximizing the cooperative opportunity that is magnified by the developmental process is of interest.

However, the transaction cost perspective viewed the continued execution of contracts as primarily sensitive to one firm’s potential exploitation of ex post structural features of the market context.

12 Conclusion and Discussion

This article integrates strategic, learning, and transaction cost explanations by showing their relatedness and potential tradeoffs among them.

Strategic and learning gains often increase transaction value while simultaneously increasing transaction costs; however, the value gains often outweigh the transaction costs efficiency losses.

This article also provides an analysis of relational context processes over time and offers a richer depiction of inter-organizational strategies different from the transaction approach.