Transaction Cost Economics Influence on Strategic Management - Coursework Example

Outline Transaction Cost Economics’ Influence on Strategic Management I. Introduction Thesis ment: This paper will review the intellectual accounts of strategic management and determines the influence of transaction cost economic on the discipline. Thereby, it demonstrates the wide array of managerial economics topics and dimensions to which transaction cost principle valuably applies. II. Transaction Cost Economics and Strategic Management Transaction cost economics has had a commanding influence on the discipline of strategic management. Undoubtedly, of all the sophisticated current subfields of economics, transaction cost economics has the highest resemblance to strategic management. A. The Multidivisional Corporation B. Boundaries of the Firm C. Vertical Integration and the Virtual Corporation III. General Organizing Framework The impact of transaction cost economics that will be discussed in the preceding parts will relate to specific but significant concerns in strategic management. IV. Conclusions I. Introduction Transaction cost economics had an influential effect on the area of strategic management. This should not be astonishing, as transaction cost economics was formulated in the first place to assist in explaining the presence and structure of firms, and of by far and large economic institutions and these are fundamental aspects in the area of strategic management. Undoubtedly, of all the developed recent branches of economics, transaction cost economics has the most apparent resemblance with strategic management. Within the field of strategic management, transaction cost economics is the foundation in which economic thoughts, business frameworks, and organizational theory meet. Due to its emphasis on institutional element, rather than statistical demonstration, it has wider spectators among non-economists than other subfields of organizational economics. The resemblance comes from similar sectors of inquiry. They as well acquire from a similar intellectual mode, which motivates inquiry into the justifications for particular institutional aspects. Not astonishingly, the clinical investigations carried out by strategy researchers and economic historians as well have aided influence the progress of transaction cost economics (Dosi 1998). This paper will review the intellectual accounts of strategic management and determines the influence of transaction cost economic on the discipline. Thereby, it demonstrates the wide array of managerial economics topics and dimensions to which transaction cost principle valuably applies. II. Transaction Cost Economics and Strategic Management Transaction cost economics aims to give details on the reasons an agreement has a definite structure and has specific attributes, and this micro-analytical preciseness has great appeal for academics of strategic management, who have a clear-cut empathy for disaggregation (Buckley 1996). Furthermore, the transaction cost economics paradigm is clearly comparative and facilitates one to mention something regarding the efficiency components of various organizational forms and structures. Scholars of transaction cost economics have as well delved at questions of internal system and the means in which particular assessments, decisions and actions are taken. Transaction cost economics hence bears substantial normative significance and is hence of considerable value to the discipline of strategic management, which desires to be regulatory (ibid, 104). A. The Multidivisional Corporation One of the important concerns in strategy, as emphasized elsewhere, is appropriate depiction of the purpose of the headquarters division in a multi-business company. Applying the historical work of Alfred Chandler, Williamson formulated the theoretical foundation for the multidivisional corporation, which he referred to as the M-form. Williamson maintained that the M-form enhanced capital allocation through maximizing the informational leverages that internal mechanisms had over outside market processes. In his book entitled Markets and Hierarchies, Williamson claimed that the internal capital market of a firm, through being capable of making use of the in-house audit systems of the firm, could amass information more inexpensive and better than could financial institutions (Buckley 1996, 106). The fundamental idea is that managerial judgment could be monitored not just through competition in the product industry and capital market alike but by in addition management itself through the employment of organizational form. This was an influential idea of paramount significance to managers, shareholders and public policy forecasters. While people’s interpretation of the headquarters purpose is currently somewhat more developed, Williamson’s early formulation of the M-form assumption encouraged a sequence of empirical investigations that helped place M-form in a new perspective and facilitated in constructing new procedural norms for empirical study in industrial organization theory. Williamson as well was one of the earliest to point out that new organizational frameworks were themselves ground-breaking and of paramount relevance to the larger society. The empirical investigations in the United States and the United Kingdom demonstrated that the financial effects were considerable, even though these advantages were immediately contested away, in so doing showing that the M-form was quite easy to duplicate (Dosi 1998, 83). Still, the outcomes demonstrated that at least temporary competitive advantage can originate from this standard organizational form. This reality had been doubted but by no means mathematically illustrated until the researches which Williamson motivated were completed. Furthermore, this work establishes it apparent that organizational structure could itself make up an innovation and present the foundation of competitive leverage for at least a specified period of time. This idea was significant to succeeding developments in the discipline of strategic management, in which organizational form and mechanism, combined with technology came to be perceived as a possible source of competitive advantage (ibid, 84). B. Boundaries of the Firm The greatest input made by Williamson and the transaction cost framework has been in examining the boundaries of the firm, specifically handling concerns of where the firm should submit to the economy and vice versa. Boundary issues are completely fundamental to the area of strategic management, namely, “vertical integration, outsourcing, diversification, joint ventures, and divestiture” (Buckley 1996, 110) are all basically concerns of boundary; and their examination is the means of several dominant management consulting firms. However, before the advance of transaction cost economics, there were nearly no systematic approaches in the area of strategic management that discussed these concerns logically. This is where transaction cost economics started to influence business traditions and practices. Williamson had a logical assumption of integration. Not merely did the assumption have descriptive power in relation to illustrating the structure of firms, but it had normative influence, too. There is currently an extremely substantial ‘boundaries’ literature in the area of strategic management that employs transaction cost economics or a number of variation of it (ibid, 110). C. Vertical Integration and the Virtual Corporation There is an overabundance of literatures in industrial organizational and strategic management alike that resort to transaction cost economics to facilitate in explaining integration concerns specifically industrial settings. The earliest definite applications of transaction cost analysis to vertical integration in a particular industrial setting were cited in the petroleum industry, preceded by automobile manufacturing and aerospace. A number of other initial applications involved forward integration into advertising. These early applications demonstrated the competence of the paradigm and encouraged a substantial research plan and literature managers. For example, a very realistic version of the paradigm, in definite, spick and span managerial medium can be located in Stuckey and White (Buckley 1996). In the recent decade, attempts have been made to analyze virtual corporation and investigate the boundaries of firm, rather than the boundaries of markets. Transaction cost economics has considerable things to mention regarding outsourcing. III. General Organizing Framework The power of transaction cost economics discussed hitherto associates to specific limited but essential concerns in strategic management. Whereas it would be well-built, at least founded on this concise discussion, to describe the application of transaction cost economics as embodying a managerial economics school of thought, an attempt made by Williamson promoted a unique paradigm for strategy. The work of Williamson is an important one because it perceives competitive advantage as emanating mainly from efficient mechanism of production and processes of organizations. According to him, “all the clever plays and positioning, aye, all the king’s horses, all the king’s men, will rarely save a project that is seriously flawed in first order economizing respects” (Dosi 1998, 87). This is not merely advocating the low cost strategy put forth by Michael E. Porter as the prevailing strategy (ibid). To a certain extent, Williamson underlines adaptation, appropriate reward and punishment system, the right decision of contractual and market approaches, and the establishment of an efficient structure of corporate culture and governance. There is a clear acknowledgment that advantaged market status, if somehow achieved, will immediately weaken if not sustained by organizational contracts which are appropriately thought-out and cleverly implemented. In other words, lacking a persistent concentration on efficiency, firms will fall short in attaining superior and high-end performance. Academics believe that there is significant understanding in the area of strategic management to the fundamental principles of transaction cost economics. Undoubtedly, there have been a number of attempts to formulate an assumption of strategy within a contract theory of the business organization. However, transaction economics, influential as it is, is most favorably perceived as a body of relevant concepts and insights which helps greatly in appreciating organization formulation concerns (Buckley 1996). What is lacking for strategic management assumption, thus far in any case, is an understanding of the entrepreneurial aspect of strategy. Sensing and acquiring prospects is important in the global economy in the contemporary period. The definite configuration of rewards and incentives, capabilities and skills, and organizational forms which helps this is not soundly developed in transaction cost economics. Nor is the function of know-how and knowledge accumulation. One means frontward for transaction cost economics can be methodical examination of the market for knowledge. Through exploring the comparative economics of know-how dissemination in the firm and across markets, transaction cost economics may be voluntarily broadened to encompass several of the surfacing concerns of the knowledge economy. Moreover, people’s understanding of intricate organization can indeed be facilitated by a combination of transaction cost economics and what might be referred to as the capabilities theory of the firm. The capabilities theory brings in concepts of strategic organization, free enterprise, and transformation. The idea of Chester Barnard that the fundamental dilemma of organization is that of adjustment is taken in by transaction cost economics (ibid, 112). Of particular importance to transaction cost economics is how organizations and individuals engaged in continuing agreements can adjust competently to disturbances. The plan of contractual arrangements in which organizations and individuals can have joint confidence in support of collaborative adjustment is well recognized by the paradigm. Put together against adaptive organization is entrepreneurial coordination, the assortment and putting together of innovative value chains to create competitive advantage. In the contemporary global economy, modernization can be so deep-seated that organizational adjustment does not meet all the requirements. Transformation can be considered vital. IV. Conclusions In a way, features of transaction cost economics appear most suitable for businesses which display partial instability and incremental improvement that demands adjustment, not renovation. Because every business endure life cycles, predicting just the accurate time and place where to resort to transaction cost economics is in itself a masterpiece, a masterpiece that presumably hardly any have mastered. The disappointment that several organizations and individuals may have experienced within the paradigm in this perspective frequently comes from either a deficiency in profound understanding that the true nature of transaction cost economics is all about or the inadequate capability to measure the time, place, and processes of its application. Similar to most assumptions in economics, transaction cost economics was by no means self-knowingly developed with the requirements of managers in mind. Correspondingly, there is abundant task left to sharpen up the paradigm so that it can be willingly employed by managers and their consultants. The exploration scheme of transaction cost economics in on no account consumed and has much more to assist in strategic management. Supplementary advancement will indeed gain advantage from clever incorporation with other assumptions and insights. References Buckley, Peter J. Firms, Organizations and Contracts: A Reader in Industrial Organization. Oxford: Oxford University Press, 1996. Dosi, Giovanni. Technology, Organization and Competitiveness: Perspectives on Industrial and Corporate Change. Oxford: Oxford University Press, 1998. Wyand, Charles S. The Economics of Consumption. New York: Macmillan, 1937. Read More