Transaction Cost Economics Theory - Essay Example

? Assessment of the Usefulness of Theories of Transaction Cost Economics and Resource Based View in Explaining Firms’ Internationalising Strategies. Name: Course: Tutor: Date: Transaction Cost Economics Theory This is a theory that tries to explain why companies exist, why they outsource activities to the external environment, and why they expand. The theory argues that companies try to minimize the bureaucratic costs of exchanges within the company, and that companies try to minimize the cost of exchanging resources with the environment. In their operations, the companies therefore, analyse the bureaucratic costs of conducting in-house activities, and the costs of exchanging resources with the environment (Williamson, 2010; Boneta, Peris-Ortizb & Gil-Pechuanb, 2010; McIvor, 2009). The market and the institutions are considered different forms of coordinating, and organizing economic transactions. The firm makes a decision basing an analysis on this theory to find out an appropriate move; whether to outsource or use internal resources. If such an analysis reveals high external costs, the firm will not outsource since it will have determined that it has the capability to perform its operations cheaply. This means the firm will grow. When the external costs are lower than the internal bureaucratic costs, it is advisable to outsource the activities to be performed in the market. Such acts lead to minimized transaction and bureaucratic costs. Using the internal bureaucratic means of operation when the cost is higher than the transaction costs in the market reduces the firm’s growth rate or intentions. It is highly likely that a company will expand if the cost of performing the activities is lower within the company, than when outsourced to external providers in the market (McIvor, 2009; Leiblein, 2003). Resource Based View Theory According to this theory, a firm has tangible and intangible assets tied to the firm semi-permanently, and these resources give the firm its competitive advantage, and later its sustainability status. The theory argues that, a subset of a firm’s resources enables it to achieve a competitive advantage over other firms, and another subset enables it to stay superior for a long period of time. The resources that enable a firm to achieve a competitive advantage are rare and valuable. After creation of the competitive advantage, a firm is able to sustain it over longer periods of time. The firm will then be able to protect itself against resource transfer, imitation, or substitution (Revilla, Cordeiro & Sarkis, 2011; Flynn, Morita & Machuca, 2010). When firms in a specific industry are competing in a market, these respective firms must have some unique resources that improve performance more that other companies. This creates the competitive advantage of a firm. If for example a firm has a unique strategy of acquiring customers, it will beat the other firms in the market, and gain more market share. This will be its competitive advantage. Not all firms therefore, should have the same resources that give a certain firm a competitive advantage. Such a resource or resources must be difficult to duplicate or imitate through other means (Flynn, Morita & Machuca, 2010). Usefulness in Explaining Firms’ Internationalising Strategies The transaction cost economics theory explains why firms exist, expand and outsource certain activities. Internationalising a strategy means using the same strategy internationally. A firm may have its headquarters in Atlanta, but has found ready market in various other states, and countries outside United States. If this firm analysed its strategies, and found out that using one type of strategy, or by using certain strategies, the transaction costs and the internal bureaucratic costs are minimized, it will continue to use the same strategies internationally. Specific strategies therefore, ensure a new firm exists in a region; a firm expands to certain regions and survives or outsources to survive in the market. Analysing this considering the Resource Based View theory, one can consider the strategies as the resources that give a company a competitive advantage (Todeva, 2006). Internationalization of these strategies therefore, is a way of becoming sustainable in the business market. With time, the companies will be known by these strategies; they may patent and deter imitation, making it a long term survival resource. These theories are useful in understanding why companies internationalize strategies. From the transaction cost economics theory, one would conclude that internationalization of strategies is minimizing transaction costs. Using Resource Based Review (RBV), one would conclude that such strategies are the firm’s resources that help them build a competitive advantage, and sustained growth and long term operations (Todeva, 2006). RBV has been used by strategy researchers to analyse strategic options available to companies from both an inside-out and outside-in perspective. It has also encouraged exploration of the usefulness of considering resource in analysing firms rather than analysis from the product side. The resource can be a person or an asset (Kirsch, 2007; Dietrich & Krafft, 2012). In Kamyabi and Devi (2011), a study was conducted on Iranian manufacturing SMEs. It focused on finding out factors that affected decision making on whether to outsource management accounting practices. Using Transaction Cost Economics, and Resource Base View theories, the study found out that behavioural uncertainty, technical competence, asset specificity, trust in accountant, and degree of competition, are the factors that influence the organizations to outsource management accounting practices (Kamyabi and Devi, 2011). From this study, it is important to recognize the important use of the theories in finding out the right strategies of operation for specific companies in an industry. Such an analysis provides information about the external market, hence the decision on whether to outsource or not. This decision plays a role in determining what strategies a company should use. Internationalising these strategies is just a continuation of what the company found appropriate for carrying out its activities (Kamyabi & Devi, 2011). Examples Samsung and Apple are perfect examples of the use of Transaction Cost Economics and RBV theories in understanding company decisions. Apple released iPhone 5 in 2012. The price was $650, while it had no tangible changes. Samsung on the other hand, produced several iPhones selling at less than $100 in Indonesia, India, and China. The difference in price is attributed to the strategies used by these companies. It is indicated that Samsung controls the entire manufacturing process of its iPhones, while Apple has to rely on suppliers to find products it can use to develop its devices, and assemble the whole product. The Transaction Cost Economics theory advocates for the use of internal bureaucratic costs when the external environment is not favourable. It seems the external environment has a higher transactional cost when it comes to the production of iPhones. Samsung recognized this, and it forms its competitive advantage over Apple. This strategy is not easy to copy because there are different factors involved in the manufacturing processes of the two companies (Worstall, 2013; Nisen, 2013). Samsung would internationalize such a strategy because it minimizes transaction cost hence increased growth. Another example is Toyota Corporation. The company has a unique manufacturing process that has been attributed to its success. This manufacturing process was internationalised, so that Toyota used it in various areas of operations in different countries. It served as a source of its competitive advantage. The strategy brought Toyota up the charts, and has not gone down ever since although the company experiences some challenges (Spear & Bowen, 1999; de Frahan, 2007). It is indicated that several manufacturing companies have tried to imitate Toyota’s manufacturing process, but are unable to. This proves the claims of the RBV theory that a firm has to have certain tangible and intangible resources, to have a competitive advantage. Toyota has also been able to sustain this since 1998. It has protected its manufacturing process from imitation, and transfer through rigid encryption of the system forming a paradox (Spear & Bowen, 1999). McDonalds is another example. It has two main strategies that it uses as its competitive advantage. It ensures that its operational costs are low so that its products’ prices are lower than the competitors. It also has a speedy delivery of its food. Based on the two theories above, one can conclude that McDonald used its resources (the strategy, human resources, finances, and position in the market), to ensure very low operational cost and speedy delivery of services; hence a competitive advantage. According to the transaction economics cost theory, one can conclude that the transaction cost of producing food by McDonalds considering its strategy, and transaction cost of speedy delivery of food, is lower when the company conducts the operations internally (Mourdoukoutas, 2013). References Boneta, F. J. P., Peris-Ortizb, M., and Gil-Pechuanb, I., 2010, Integrating Transaction Cost Economics And The Resource-Based View In Services And Innovation, The Service Industries Journal, 30(5): 701-712. de Frahan, A. H., 2007, How Toyota Is Rejuvenating the Idea of Corporate Culture, Fast Company Magazine. Retrieved on 4th December 2013 from: http://www.frahanblonde.com/sites/default/files/articles/Toyota_Corporate_Culture.pdf Dietrich, M. and Krafft, J., 2012, Handbook on the Economics and Theory of the Firm, New York: Edward Elgar Publishing. Flynn, B. B., Morita, M. and Machuca, J., 2010, Managing Global Supply Chain Relationships: Operations, Strategies and Practices, New York: IGI Global. Kamyabi, Y. and Devi, S., 2011., Using Transaction Cost Economics and Resource-Based Views in Management Accounting Outsourcing: An Empirical Study of Iranian SMEs, Middle-East Journal of Scientific Research 10 (1): 87-98. Kirsch, K., 2007, Critically Review how the Resource-based View Has Developed Our Understanding of Strategy, Norderstedt: GRIN Verlag. Leiblein, M. J., 2003, The Choice of Organizational Governance Form and Performance: Predictions from Transaction Cost, Resource-based, and Real Options Theories, Journal of Management, 29(6): 937–961. McIvor, R., 2009, How the Transaction Cost and Resource-based Theories of the Firm inform Outsourcing Evaluation. Journal of Operations Management, 27 (1). pp. 45-63. Mourdoukoutas, P. (9 11 2013). Is McDonald's Losing Its Competitive Edge? Forbes. Retrieved on 7th December 2013 from: http://www.forbes.com/sites/panosmourdoukoutas/2013/09/11/is-mcdonalds-losing-its-competitive-edge/ Nisen, M., 15. March 2013. Samsung Has A Totally Different Strategy From Apple, And It's Working Great. Business Insider. Retrieved on 4th December 2013 from: http://www.businessinsider.com/samsung-corporate-strategy-2013-3 Revilla, E., Cordeiro, J. and Sarkis, J., 2011, Transaction Cost Economics and the Resource Based View’s Influences on Supplier Environmental Collaboration, Working Paper No. 2011-18. Spear, S. and Bowen, H. K., 1999, Decoding the DNA of the Toyota Production System, Harvard Business Review Magazine. Retrieved on 4th December 2013 from: http://hbr.org/1999/09/decoding-the-dna-of-the-toyota-production-system/ar/1 Todeva, E., 2006, Business Networks: Strategy and Structure. New York: Taylor & Francis Williamson, O. E., 2010, Transaction Cost Economics: The Natural Progression, American Economic Review, 100: 673–690. Worstall, T., 9. September 2013, Why Samsung Beats Apple or Vice Versa, Forbes. Retrieved on 4th December 2013 from: http://www.forbes.com/sites/timworstall/2013/09/09/why-samsung-beats-apple-or-perhaps-vice-versa/ Read More