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FROM TRANSACTION COST TO TRANSACTIONAL VALUE ANALYSIS: IMPLICATIONS FOR THE STUDY OF

INTERORGANIZATIONAL STRATEGIES

Zajac, Edward J. & Olsen, Cyrus P.Journal of Management Studies, 30 (1): 131-145

Presented by Jiyoon Chung

Overview

Motivation Two limiting emphases of transactional cost

analysis A single firm, cost minimization emphasis A structural emphasis

A transactional value analysis A joint value maximization emphasis A process emphasis

Conclusion Discussion

Motivation

The transaction cost perspective is limited Standard transaction cost analysis is essentially a

single-party analysis of cost minimization – neglects the interdependence between exchange partners

Transaction cost theory overemphasizes the structural analysis of interorganizational exchange relationships – neglects process issues

This article attempts to provide richer perspective on transactional concerns and interorganizational strategies by:1) offering a transactional analysis framework that is

based on joint value maximization2) proposing a set of process dimensions

Motivation

Note: The transactional value approach in some ways complements or is consistent with the implicit intent of transaction cost theory

This article does not claim that transaction costs are non-existent, or irrelevant for the study of interorganizational strategies

This article proposes a framework that views the cost of addressing transaction cost concerns as a subset of total costs

Two limiting emphases of transaction cost analysis – 1) A single firm, cost

minimization emphasis

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, the distinguishing feature of interorganizational strategies is the blending of market and hierarchy – relational approach is needed

Two limiting emphases of transaction cost analysis – 1) A single firm, cost

minimization emphasis

In the case of a joint venture, a question arises: whose transaction costs will be minimized? It suggests that 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 transactional issue for interorganizational strategies is both organizations’ concern for:1) knowing the partner’s preferences and concerns as a

basis for exchange and mutual gain2) discovering ways in which similarities or shared

interests can be exploited to maximize cooperative joint gains

Process dimensions

Two limiting emphases 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 relationship – fails to recognize that a ‘fundamental transformation’ is in fact a process

The authors suggests that any fundamental transformation in interorganizational exchange relationships 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

Two limiting emphases of transaction cost analysis – summary

Let’s consider:

1) Interdependence between exchange partners

2) Developmental processes of the exchange relationship

Transactional value analysis – 1) A joint value

maximization emphasis

A firm’s inclination to act opportunistically is often determined by the firm’s estimate of the negative impact that the opportunistic behavior will have on the value of expected future exchanges with its partner – maximizing NPV in the exchange relationship is important

Thus, the emphasis on value maximization requires a recognition of the interdependence of the exchange partners (i.e., by taking the partner’s perspective, the focal firm can better estimate the value and duration of the interorganizational strategy)

Transactional value analysis – 1) A joint value

maximization emphasis

How is value actually created in interdependent exchange relationships? 1) Gains from differences in interests2) Gains from similarities in interests

Learning about the differences and similarities in interests of a partner is an unfolding process overtime – a process approach is needed

Transactional value analysis – 2) A process approach

Interorganizational exchange processes can be described in three distinct temporal and logical stages:

1) Initializing2) Processing3) Reconfiguring

Transactional value analysis – 2) A process approach

Transactional value analysis – 2) A process approach

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

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

Conclusion

This article integrates strategic, learning, and transaction cost explanations by showing their relatedness

This article provides an analysis of relational context and offers a richer depiction of interorganizational strategies

Discussion

The author suggests that recognizing the importance of joint value maximization should lead to searches for jointly satisfactory outcomes in situations of conflict.

Is this always true? What should be necessary conditions for this

argument to be true?