LECTURE 1: INTRODUCTION
Governance modes of make, buy, ally
1. Make
= firms seek to realize their objectives through internal procurement. Firms autonomously/internally
invest in and develop their existing resources and capabilities to market their products and services.
Benefits:
- Get property rights and thus a competitive advantage, because develop out of sight of competitors.
- Attain control over entire activity, quality, margins and markets.
- Compatible with culture and internalize learning.
Disadvantage: increased bureaucracy because the firm has full control, loss of flexibility, potential
overcapacity and build from scratch.
2. Buy
= a company uses market transactions, organized in the form of a simple contract, to procure
resources (i.e., purchase).
Benefits:
- Efficient information processing (compared to bureaucracy).
- The level of organizational and financial integration between the transacting firms is low.
- High powered incentives (self-interest)
- Bargaining power
Disadvantage:
- High transaction costs due to market failure in the following conditions: asset specificity (small
numbers) (location, physical assets, and human capital), uncertainty, inseparability of assets,
information asymmetries, market power. And opportunistic behavior resulting in an increase in
transaction costs. The opposing objectives of the transacting organizations: the buying firm aims to
lower costs, whereas the selling organization hopes to increase revenues.
3. Ally
= company forms a long-term voluntarily collaboration to exchange desired resources to achieve
individual and common objectives.
Benefits:
- Enables a firm to access complementary resources without obtaining proprietary rights.
- Speed and flexibility in obtaining access and exploiting desired resources.
- Risk and cost sharing plus economies of scale
Disadvantage
- Loss of proprietary information
- Sharing resources may also impose the risk of creating increased competition and dependence
- Antitrust laws
- Management complexities
,4. M&A (make)
= firms agree to integrate their operations as combining resources creates a competitive advantage.
Merger = two independent corporate entities into a single one,
Acquisition = the absorption of one corporate entity into another
5. Alliance network
= constitutes of a focal firm’s set of direct and indirect relationships.
Benefit:
- Access to information and resources
- Quicker identification of opportunities
- Leverage assets faster
- Speed to market
- Flexibility
Disadvantage:
- Is it manageable
- Reputation effects
- Network boundaries
, Governance mode rationales
Numerous theoretical perspectives are providing rationales for cooperative strategies and
governance mode decisions.
1. Transaction cost economics (TCE)
= transaction costs should be minimized when a governance mode matches the transaction exchange
conditions.
- stresses efficiency and cost minimization rationales for cooperation and advances insights by
recognizing the role of partners’ motives, the nature of the investments and the specific character of
the transactions.
- transaction costs = consist of ex-ante costs (drafting, negotiating and safeguarding a contractual
agreement) and ex-post costs (time and resources invested in repairing misalignments and bonding).
Two assumptions that drive the costs of transaction higher:
1. Opportunism = self-interested and deceptive behavior, results in managers being inclined to break,
whether implicitly and explicitly, the rules that govern a transaction.
2. Bounded rationality = despite the firm’s efforts to deal with complexity and unpredictability,
managers have only limited ability to plan for the future and predict various contingencies that may
arise.
Accordingly, TCE predicts that distinct transactions with variations in frequency, asset specificity and
uncertainty demand alternative governance modes to be organized efficiently.
- Frequency = the number of exchanges that constitute the transaction.
- Asset specificity = when investments specifically support an exchange relationship, such
that if the relationship were to be terminated, the value of these assets would be largely lost.
When this increases, then more likely to internalize a certain activity (doing it yourself).
- Uncertainty = the consequences of a situation are unpredictable. When higher, the more
likely to externalize.
If transactions produce uncertain outcomes, recur frequently and require substantial investments
(i.e. asset specificity), they can be organized more efficiently through hierarchical governance.
* Internationalization increases production costs but should be outweighed by reduction in
transaction costs.
Drawbacks
Governance modes of make, buy, ally
1. Make
= firms seek to realize their objectives through internal procurement. Firms autonomously/internally
invest in and develop their existing resources and capabilities to market their products and services.
Benefits:
- Get property rights and thus a competitive advantage, because develop out of sight of competitors.
- Attain control over entire activity, quality, margins and markets.
- Compatible with culture and internalize learning.
Disadvantage: increased bureaucracy because the firm has full control, loss of flexibility, potential
overcapacity and build from scratch.
2. Buy
= a company uses market transactions, organized in the form of a simple contract, to procure
resources (i.e., purchase).
Benefits:
- Efficient information processing (compared to bureaucracy).
- The level of organizational and financial integration between the transacting firms is low.
- High powered incentives (self-interest)
- Bargaining power
Disadvantage:
- High transaction costs due to market failure in the following conditions: asset specificity (small
numbers) (location, physical assets, and human capital), uncertainty, inseparability of assets,
information asymmetries, market power. And opportunistic behavior resulting in an increase in
transaction costs. The opposing objectives of the transacting organizations: the buying firm aims to
lower costs, whereas the selling organization hopes to increase revenues.
3. Ally
= company forms a long-term voluntarily collaboration to exchange desired resources to achieve
individual and common objectives.
Benefits:
- Enables a firm to access complementary resources without obtaining proprietary rights.
- Speed and flexibility in obtaining access and exploiting desired resources.
- Risk and cost sharing plus economies of scale
Disadvantage
- Loss of proprietary information
- Sharing resources may also impose the risk of creating increased competition and dependence
- Antitrust laws
- Management complexities
,4. M&A (make)
= firms agree to integrate their operations as combining resources creates a competitive advantage.
Merger = two independent corporate entities into a single one,
Acquisition = the absorption of one corporate entity into another
5. Alliance network
= constitutes of a focal firm’s set of direct and indirect relationships.
Benefit:
- Access to information and resources
- Quicker identification of opportunities
- Leverage assets faster
- Speed to market
- Flexibility
Disadvantage:
- Is it manageable
- Reputation effects
- Network boundaries
, Governance mode rationales
Numerous theoretical perspectives are providing rationales for cooperative strategies and
governance mode decisions.
1. Transaction cost economics (TCE)
= transaction costs should be minimized when a governance mode matches the transaction exchange
conditions.
- stresses efficiency and cost minimization rationales for cooperation and advances insights by
recognizing the role of partners’ motives, the nature of the investments and the specific character of
the transactions.
- transaction costs = consist of ex-ante costs (drafting, negotiating and safeguarding a contractual
agreement) and ex-post costs (time and resources invested in repairing misalignments and bonding).
Two assumptions that drive the costs of transaction higher:
1. Opportunism = self-interested and deceptive behavior, results in managers being inclined to break,
whether implicitly and explicitly, the rules that govern a transaction.
2. Bounded rationality = despite the firm’s efforts to deal with complexity and unpredictability,
managers have only limited ability to plan for the future and predict various contingencies that may
arise.
Accordingly, TCE predicts that distinct transactions with variations in frequency, asset specificity and
uncertainty demand alternative governance modes to be organized efficiently.
- Frequency = the number of exchanges that constitute the transaction.
- Asset specificity = when investments specifically support an exchange relationship, such
that if the relationship were to be terminated, the value of these assets would be largely lost.
When this increases, then more likely to internalize a certain activity (doing it yourself).
- Uncertainty = the consequences of a situation are unpredictable. When higher, the more
likely to externalize.
If transactions produce uncertain outcomes, recur frequently and require substantial investments
(i.e. asset specificity), they can be organized more efficiently through hierarchical governance.
* Internationalization increases production costs but should be outweighed by reduction in
transaction costs.
Drawbacks
