Cognitive Limitations and Interest-Seeking Propensities - Assignment Example

Q2. 'Only when asset specifi is added to behavioural assumptions about cognitive limitations and interest-seeking propensities does Williamson's transactions cost framework become a powerful vehicle for analysing contractual relations.' Discuss. Introduction According to Williamson (1985, p 55) asset specificity is defined as "durable investments that are undertaken in support of particular transactions, the opportunity cost of which investments is much lower in best alternative uses or by alternative users should the original transaction be prematurely terminated". Williamson concentrates on the vitality of asset specificity and investment. He distinguishes 3 crucial scopes of transactions and they are: extent of asset specificity; level of uncertainty; and regularity of transactions. Also asset specificity is the required state for continuation of transaction costs. Requirement for decreasing transaction costs causes formation of economic institutions so as to achieve transactions in the framework and via it to reduce transaction costs (Williamson O. 1996). Williamson formulates a clear representation between the 3 dimensions of transactions and the cost-denigrating control structure, with diverse institutional agreements rising with special linking of these variables. Transaction in particular assets can help in earning quasi-rents and these quasi-rents render the motivation for distribution of struggle. Those Agreements which helps in influencing the allocation of the quasi-rent should be decided, supervised, and imposed. All these processes results in transaction costs. If opportunism jeopardises the persistence of the deal itself then amalgamation would be the best solution since it can successfully restrain opportunism. Williamson, Oliver E. (1981) states that the cause of making asset specificity critical is that, as soon as an investment is made, buyer and seller efficiently operate in a bilateral (or in any case quasi-bilateral) switch over relation for a substantial period afterwards. Williamson's Attributes of the Contracting Process (Dnaiel 2003) Behavioural Assumption Asset Specificity Contracting Bounded Rationality Opportunism 0 + + Planning + 0 + Promise + + 0 Competition + + + Governance (Adopted from Dnaiel 2003) Asset Specificity Asset specificity is a rationally understandable perception. It denotes to the level to which an asset can be redeployed to different uses, without surrendering its productive worth (Williamson, 1996). According to John and Weitz (1988, p 24), "Because non-redeployable specific assets make it costly to switch to a new relationship, the market safeguard against opportunism is no longer effective." Consequently, if asset specificity is high, TCE forecasts that the firm has a tendency to use more incorporated channel structures so that transaction costs can be minimised. The normal proposal has benefited some level of back up in existential research. Anderson (1985), John and Weitz (1988), Klein, Frazier, and Roth (1990), and Majumdar and Ramaswamy (1995) all feel that asset specificity is definitely linked to the point of channel integration. But, Aulakh and Kotabe (1997) could not discover a noteworthy outcome for asset specificity on channel combination. Two researchers discovered back up for the potential integration between internal uncertainty and channel integration. Anderson (1985) determines that the complexity of assessing salesperson execution is certainly linked to the utilisation of a company possessed sales force. In reality asset specificity produces a specific form of monopoly which is based on stretched link between economic agents. Considerable quantity of the transactions' unusual investment is an issue for competence. At the same time it links economic agents in such a way so that they have to reckon on each other very powerfully. There are events where the parties enlarge the specificity of the assets affected in the contract so as to protect against ethical danger. For instance the franchisee, which involves renting rather than owning the land on which the shop is constructed. As a result it becomes very costly to deceive as the franchiser can end the deal at any time (Klein and Leffler, 1981). Thus Asset specificity not only evokes multifaceted ex ante enticement reactions but, even more crucial, it raises intricate ex post governance structure reactions. Joskow (1985) in his research found that transaction costs framework, with assest specificity added to it, is an exceptionally powerful vehicle for deriving a better perceptive of the character of vertical supply relationships. Through his study Joskow concluded that the results of his work strongly backed the concept that buyers and sellers enter into lengthier commitments with regard to future trade right from the contract execution stage. Reliance will be to a lesser degree on repeated bragaining when relationship which are dependent on investments are more crucial for the organisation. Sure enough when a transaction implicates one party in investing capital which has slight value in other functions, the other party has substantial reason to set aside the quasi-rents through opportunistic events (Hubbard and Weiner, 1991). This only proves that when there is assest specificity involved in transactions Williamson's transactions cost framework becomes a powerful vehicle for analysing contractual relations. Q5. Explain the claim that Williamson's 'transaction cost' forgets that different governance structures have different benefits as well as different costs, and discuss its relevance to the issue of quasi-integration. Introduction The resources by which firms arrange their relationships with important suppliers and customers is a crucial area of apprehension for both managers and scholars as well-organised governance techniques are a prerequisite for firm survival (Williamson, 1991). Williamson's (1985) transaction cost premise centres on 3 key attributes: (1) Asset specificity which means the extend to which exclusive assets could be redeployed; (2) Behavioural uncertainty meaning the capacity of not anticipating timeserving behaviour; (3) Occurrence of transactions. For quiet a long time investigators have enforced the transaction cost technique as a hypothetical basis to study both combination and quasi-integration. (David & Han, 2004) state that the study of integration and quasi integration study is the most cited one. Earlier studies in particular linked to quasi-integration and it includes research cantered on customer prevailed industries like automobile manufacturers (Blois, 1972), shipbuilders (Blois, 1972), airlines (Christiaanse & Venkatraman, 2002), and retail department stores (Subramani & Venkatraman, 2003). Seller focused research were also conducted on farm equipments (Provan & Skinner, 1989) and insurance (Zaheer & Venkatraman, 1995). The above mentioned quasi-integration research have by and large backed the principles of transaction cost theory. But most experiential studies of transaction cost hypothesis have not tested all of its scopes (David & Han, 2004). Williamson's 'transaction cost' Transaction Cost economics fails to take into consideration or even to explain the variations in control systems between the extremes of market and its hierarchy. The premises of opportunism and risk detachment fundamental to the theory also come under dispute. According to Coase, 1937 and Williamson, 1975, the growing frequency of a broad class of organisational classes which are neither market nor hierarchy has really disputed conventional beliefs of organisational relationships. Possibly nowhere are these disputes more obviously visible than in the analysis of transaction cost economics (TCE). The transaction cost approach A set of inputs is transformed to get certain goods and services. These inputs are used in different manufacturing processes in different proportions and combinations. These combinations and proportions of inputs used depend on the technologies used. A different perception concentrates on the ways and means which the firms adopt to make sure that the supply of inputs is continuous and on the other side the products reaches the final consumer. All these do not consider production functions and firms are considered as governance structures (Williamson, 1985). Transaction cost theory focuses on the relative competence of diverse exchange processes. A production firm may view this as technology economy which helps in saving the cost of physical inputs. At the same time a firm as an organisation views as savings on the prices of exchange rates and finally amounting to decreased amounts of inputs required. The fundamental framework of transaction cost was improved by Williamson (1971) with the creation of 2 concepts: bounded rationality (Simon, 1961) and opportunism. The bonded rationality is related to human beings and depicts them as having limited cognitive competencies. Opportunism is explained as self interest with guile and is predominantly crucial in little number of negotiating situations. If there is a possibility of selection among many firms then opportunism does not turn into a key problem. The firm which does not possess the precise asset may take out the so called quasi-rents (Klein, Crawford and Alchian, 1978). Williamson transaction costs are applicable when associations are a) Frequent, b) Uncertain c) If specific assets are affected. At the same time it is normally accepted that transaction costs are very vital in influencing the decision of make or buy or between sell or use, the premise is short of an acceptable treatment of the demerits of vertical integration. Ghoshal and Moran (1996) debated that TCE as formulated by Williamson neglects to acknowledge that organisations are not mere replaces for coordinating effective transactions when markets fail. TCE possess exclusive rewards for governing some kind of economic action through a logical system which is different from that of a market system. According to Baker and Hubbard, (2001a, p.189) "The owner has theresidual rights of control over physical assets that is 'the right to determine how the asset is used in circumstances not covered by existing contracts, customs, or the law." Even though the most extensively used framework for accepting the limits of the firm, transaction cost theory has been picked apart for concentrating on cost minimization by not considering or undervaluing sociological determines, such as trust and opportunities (Dyer, 1997; Dyer & Chu, 2003; Ghoshal & Moran, 1996; Granovetter, 1985; Macaulay, 1963; Zaheer & Venkatraman, 1995). Thus Williamson's transaction cost fails to reflect on the governance of different structures or even the benefits of different costs. Q7. Evaluate the argument that the M-form is a more appropriate form of organization for a conglomerate than for a firm with high synergy between its activities. Introduction Diversified firms can be best managed by using the multidivisional structure (M-form). According to Chandler (1962), M-form is the suitable organizational form for branched out firms. But it has been proved through many studies that same kind of M-form firms may outwardly have considerable deviations in internal systems with respect to centralization, consolidation, and in-house control. One calls for the recognition of economies of while the other demands the establishment of an efficient organization of the in-house capital market form, and so involves organizational systems that underline contest between the divisions (Hill 1994, p 308). If the M-form structure has to be successful then it requires the survival of a powerful and professional management chain of command. The M-form has a unique benefit in carrying out testing which gives the organization more suppleness contributing to more introduction and reform. When the M-form mode of organization is used the setup costs have to be made for each unit as characteristic harmonizing is done independently in each product unit. This contributes to advanced setup costs. For instance, the managers have to be trained to align the changes. This will call for more expenditure. M-form Organization: Hill (1994) states that firms which are diversified can build value in 2 different forms. These two approaches of M-form necessitate fundamentally different organizational doctrines and may not be compatible (exhibit 1 shows the basic features of these two forms). Coase (1937) proposed that the restrictions to the dimension of the firm arise due to the increasing bureaucratic and density cost that produce diminishing returns to management. (Hill 1994, p 314), states that "since the competitive M-form corporation can be run using a more decentralized approach with less information-processing needs by the corporate centre as compared to the co-operative, form the latter reaches the limits of profitable growth earlier." Corporate ways and raising benefit through M-form Although the theory of Hill is more determined by transaction cost and primary agent theories, another generalization from case studies and the different known roles of corporate headquarters in handling the multi-business corporation has cropped up. Porter (1987) for example conducted an investigation by leading 33 diversified US companies and distinguished 4 diverse roles of the corporate headquarter: portfolio manager, restructure, skill transferor and activity sharer. Although the last 2 roles apparently fit with the example of the associated branched out corporation, each technique has some planned and managerial requirements to be efficient (Porter 1987). Williamson also counter pointed the restrictions of the outer capital market with the benefits of the inner capital market of the M-form firm. He stated that it has 3 advantages that is first it can satisfy information imbalances by auditing procedures of divisions. Second, dislocation costs are much lesser within the M-form firm. The general office need not limit its operations to a Third; the general office is not limited to key distinct accommodations as the divisional functions can be fine tuned. Thus, Williamson's argument favoured the internal capital market of the M-form firm. He stated that this form of organization can attain a more almost optimal distribution of capital resources, and the competence of divisions can be monitored more effectively, than it can be done under the external capital market as every division was an independent enterprise under the external capital. As Williamson stated: "the M-form organization ... can be viewed as capitalism's creative response to the evident limits which the capital market experiences in its relations with the firm (Williamson, 1970, p. 140)." The logic of Williamson became a leading competence basis for the survival of the diversified M-form firm. He states that M-form firm is a self adjusting technique for market breakdowns. Furthermore he argued that the functional organization which continued the M-form missed the better internal capital market attributes of the M-form. Thus, Williamson's M-form theory states that: "the organization and operation of the large enterprise along the lines of the M-form firm favours goal pursuit and least cost behaviour more nearly associated with the neoclassical profit maximization hypothesis than does the U-form organizational alternative (Williamson, 1970, p. 134)." Armour and Teece (1978) experienced Williamson's (1975) forecast that acceptance of the M-form contributes to higher benefits. They researched a few petroleum companies, and discovered that the percentage of firms that accepted the M-form increased from 16% to 78%. They also equated the lucrativeness of those firms that followed the M-form to those that did not follow the policy of M-form. They found that from 1955 and 1973 firms which followed the M-form had much improved in their basic profitable operation (approximately 30% betterment in profit) than other firms. Reference: 1. Anderson E. 1985. 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American Journal of Sociology 87:548-577. 27. Williamson, 0. E. I 970. Corporate control and business behavior. Englewoods Cliffs, NJ: Prentice-Hall. 28. Williamson, Oliver E. 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, 61 (May): 112-123. 29. Zaheer, A. & Venkatraman, N. 1995. Relational governance as an interorganizational strategy: An empirical test of the role of trust in economic exchange. Strategic Management Journal, 16, 373-392. Critical Biography: 1. Englander, E.J. 1988. Technology and Oliver Williamson's transaction cost economics. Journal of Economic Behavior and Organization, 10, 339-353. 2. Joskow, P. L. 1988a Asset specificity and the structure of vertical relationships: empirical evidence. Journal of Law, Economics and Organization. vol.4, no.1, p.95-117. 3. McGuinness, T. 1994, "Markets and Managerial Hierarchies." In G. Thompson, et al. (Eds.), Markets, Hierarchies and Networks, Sage, London, England, pp. 66-81. 4. Porter, Michael E. 1985, Competitive advantage. Creating and sustaining superior performance. New York: Free Press. 5. Schendel, Dan S./Teece, David J. (eds.), Fundamental Issues in Strategy - A Research Agenda. Harvard Business School Press, pp. 297-321. 6. Tirole, J. 1988. The Theory of Industrial Organization, the MIT press. 7. Williamson, O.E. 1999. Strategy research: Governance and competence perspectives. Strategic Management Journal, 20, 1087-1108. Exhibit: 1 Read More