Transaction and Resource Based Theory - Essay Example

Transaction and Resource Based Theory Every business firm aims to make profits and to maximize the profits. This can only be realized if the firm is well organized. The organization in the firm encompasses laying out plans that are well implemented from the managerial level to the lowest part of the office. These plans are called strategies (Alaghehband et al, 2011 p 125). Therefore, businesses firms must come up with proper internal strategies that will enable them achieve their objectives. For example, a milk processing plant must own a strategy that will enable it have continuous supply of milk as the raw material. These strategies are very useful. This paper will delve on Transaction Cost and Resource Based theories to explain the significance of the internalized business strategies. Transaction Cost In the world of economics, transaction cost is described as the cost which is incurred in the event of an economic exchange (Alaghehband et al, 2011 p 126). The economic exchange can also be referred to as the cost that one undergoes for having participated in market. Transaction cost is categorized into three broad parts. Search and Costs of Information are ideally the costs that are incurred when determining that the needed goods is present in the market or has the least price. Bargaining costs entails the costs that are needed to create an agreement that is accepted with the next party for transaction and draws appropriate contract. A person who purchases a used car is prone to face different costs of transactions (Alaghehband et al, 2011 p 130). The search cost will entail the finding of that particular car. It will also encompass the costs incurred when determining the conditions of the car. The bargaining costs will entail the costs gone through during the negotiation of the price between the buyer and the seller. Lastly, the policing cost and enforcement comes in whereby the car is to be delivered eventually to the buyer and it must be having the conditions that were promised. A supplier is bound to make a bid in an environment that is very competitive with a client so as to ensure the building of a widget ((Alaghehband et al, 2011 p 129). Nevertheless, in making the widget, the supplier will have to build machinery that is very special and cannot be redeployed easily in making other products. As soon as the contract has been awarded to that particular supplier, the customer-supplier relationship evolves from the normal competitive environment to now a monopolistic or monopsony. This relationship is bilateral monopoly. This implies that the customer owns a greater leverage than the supplier in cases where the price cut actualizes. In order to avoid such potential costs, the ‘hostages’ may undergo a swap in order to escape this event. The hostages are likely to include partial ownership within the widget factory; the sharing of the revenue might occur in another way. Car manufacturing companies and their customers fall in this category in most cases. The car company forces the cut in prices for the clients (Alaghehband et al, 2011 p 125). Defense suppliers, particularly the military appears to experience a contrary problem, cost overruns happen a lot of time. Modern day technologies like the Enterprise Resource Planning, ERP, have been pit to aid in supporting such strategies technically. Therefore, the theory attempts to justify the existence and expansion of companies. The theory also gives reasons why such enterprises move to the external environment to source out for more activities (Alaghehband et al, 2011 p 138). The theory of transaction advocates that companies must minimize the incurred costs in exchanging resources within the environment. The companies must also reduce the bureaucratic costs and the exchanges that occur within the company. Businesses must weigh the transaction costs with the environment. According to the theory, institutions and the markets as different and possible forms that can be used to organize and coordinate economic transactions (Alaghehband et al, 2011 p 138). In case the transactions cost appear to be higher than the internal bureaucratic costs of the company, the company is bound to grow and has the ability to perform. However, cases where the bureaucratic costs are indeed higher than external costs of transactions, the company is bound to be downsized. Resource Based Theory Resource Based View, RVB, is a basic competitive advantage that a company primarily is within the application of a bunch of tangible and intangible valuable resources at the disposal of the firm. In order to transform a short term competitive advantage to a more competitive advantage needs the resources that are heterogeneous and not mobile entirely (Alaghehband et al, 2011 p 134). Effectively, this transcends into resources that are valuable and are not predominantly imitable or even substitutable using little effort. If the above conditions are kept constant, the resources are able to hold the firm together above the returns. RVB demands that there should be identification of the key potential resources of the firm. The resources must then be evaluated. They must be valuable. This imply that they must enable a firm establish and apply a strategy that creates value. This is by the out-performing the competitors. Or it can be done by reducing its weaknesses as a company. Again, for a resource to be considered valuable, it must be rare (Alaghehband et al, 2011 p 130). In a market that has perfect competition, the resource price is expected to be a true reflection of the anticipated discounted future that is above the average returns. A valuable resource must also be in-imitable. If a single company manipulates the resource, this would make it a sole source of competitive advantage. The advantage is likely to be sustainable as long as the competitors are incapable of duplicating such a strategic aspect. Even when a resource is rare, value creating and even imperfectly imitable, more important aspects often lack sustainability. In case the competitors can counter the above aspects of the firm, I results in to zero economic gains. Case Studies This section of the paper will study two case studies of how the theories of transaction and resource based views various companies apply to outsmart their competitors and succeed in business. SONY CORPORATION OF AMERICA Transaction Cost Theory in SCA In 17th January 2013, SCA which is a fully-owned subsidiary of the Sony Corporation announced that it had entered in a contract of selling the US headquarters building, which is located at the 550 Madison Avenue, New York. It was to sell to a consortium Chetrit Group heads. The estimation of the sale value was $1.1 billion and was to close in March 2013. SCA and other businesses affiliated like Sony Entertainment, Sony Pictures Entertainment intends to remain in the premise for duration of three more years. The reason behind the sale is that the entire company of Sony is taking a range of initiative to ensure that it strengthen the financial foundation and reinforce the business competitiveness and for future growth of the company (Alaghehband et al, 2011 p 130). Sony is also trying to balance the cash inflows the outflows at the event of work so as to improve the flow through cautious selection of investments, the assets of selling, and the strengthening of controlled working capital like the inventory (Grant, 1991 p 4). The sale is made of an inclusion of the initiatives. From the above reason, competitiveness is the major reason. The building in sale at the Madison is one of the many resources that SCA has. Its use is being limited as a resource so as to maximize the out puts. While at this, SCA is bound to undergo the following transaction cost. Information cost will be incurred by SCA especially when it is seeking information about the changes of venue that occurs in the organization (Barney et al, 2011p 1300). Of course, new venue has to be found to house other SCA firms. The bargaining cost will also be experienced in the organization. Resource Based Theory in SCA Being one of the leading electronic companies in the world, SCA, under the umbrella of Sony, faces a lot of competition from rivals like Samsung and JVC. However, it has managed to combat the competition by manufacturing quality brands of electronic. This has greatly improved the reputation of the company. The company is renowned globally and boasts of great and visionary strategies. GENERAL MOTORS Resource Based Theory in Action General Motors Company is a corporate which designs, sells and builds trucks and cars. The company owns about 18 brands, for example, Chevrolet, Buick and Opel. The company often operates in almost 160 countries. GM is among the largest vehicle manufactures. The competitive advantages of General Motors lie in the fact that it has a global presence. The company is renowned all over the world (Barney et al, 2011p 1300). The business also boasts of new strategies and new business vision. General Motors has strong brand portfolio which makes it stand above the rivals. The company is well acquainted with the home market and has about four better performing brands. The company also has opportunities like possession of positive attitude that is direct to green vehicles (Grant, 1991 p 12). These vehicles are environmental friendly. Opportunity lies also in the increasing fuel prices, the ever changing needs of the customer and the wide growth that emanates from acquisition. Transaction Theory in General Motors As a multibillion company that operates all over the world, general Motors is obliged to undergo a lot of processes in the process of production in order to respond to the ever demanding need of its consumers (Grant, 1991 p 4). Initially, in the 20th century, the company specialized in the manufacture of cars for the affluent parts of the society. With the emergence of Toyota Company, a new rival in the market that produced cheaper cars for all classes of customers, general Motors had to change in various ways. The change of the company to the manufacture of cheaper and affordable cars has made the company undergo the transaction costs (Grant, 1991 p 4). Initially, the company had to find information about the production of such cars, so it incurred the search cost (Barney et al, 2011p 1300). The bargaining cost is incurred when they create prices with the customers to ensure they are affordable. When the cars are delivered as promised to the clients, law enforcement costs are incurred. Transaction and Resource Based theories cannot be excluded in modern day business. This paper has studied the mechanism in which the two theories operate. It has further studied the two case studies of the General Motors and the SCA which depict the application of the two theories bearing in mind that that are significant for the success of the business. Reference Alaghehband, Forough Karimi, et al. "An assessment of the use of transaction cost theory in information technology outsourcing." The Journal of Strategic Information Systems 20.2 (2011): 125-138. Barney, Jay B., David J. Ketchen, and Mike Wright. "The future of resource-based theory revitalization or decline?." Journal of Management 37.5 (2011): 1299-1315. Grant, Robert M. "The resource-based theory of competitive advantage: implications for strategy formulation." Knowledge and Strategy.(Ed. M. Zack) pp (1991): 3-23. Read More