LECTURE 1
TRANSACTION COSTS
A transaction occurs whenever a good or service is transferred across a
technologically separable interface. The transaction cost approach to the study of
economic organization regards the transaction as the basic unit of analysis and holds
that an understanding of transaction cost economizing is central to the study of
organizations. Transactions costs is a loss of efficiency or energy - Firms exist to
reduce transaction costs. The lower the transaction costs, the higher the economic
activity.
BEHAVIOURAL ASSUMPTIONS
Firms are economic agents and within firms there are also individual actors. Two
assumptions:
- Bounded rationality = Transactors are constrained by cognitive limits on their
capacities to process information efficiently (incomplete contracting). Limits to
what firms know, they don’t know everything. Agents engage with this, but
they don’t know what can happen.
- Opportunism = “Self-interest with guile” could induce strategic behaviour by
transactors to lie to, cheat, confuse, mislead their exchange partners. Agents
are self-interested and could engage into strategic behaviour. We care about
our self-interest most.
GOVERNANCE FORMS
1. Hierarchy (Make) internal governance. Flexibility is reduced.
2. Market (Buy) exchange with parties, delegate the market for it
3. Hybrid (All)y establish alliances, you choose a partner, and you engage in
transactions. If a transaction occurs often, it might be more useful to establish
an alliance
The type of strategy that can be used is depending on the decision tree
,Depending on the transaction cost, type and inter governance that you can have.
You can have full reliance on the market on the left which is outsourcing everything.
In the middle there is a hybrid model with partnerships. On the other extreme there
is a hierarchy with only integration.
CRITICISM TO TRANSACTION COSTS ECONOMICS (TCE)
● Too much emphasis on opportunism and too little on trust.
● Learning curves and path dependence, if you repeat the same transaction with
the same partners, you find some path and a learning cave.
● Firms are considered heterogeneity. TCE neglects of differential capabilities
and dynamics
BUSINESS INNOVATION
The creation of substantial new value for customers and the firm by creatively
changing one or more dimensions of the business system
Example: Starbucks and third place
, INNOVATION RADAR
four key dimensions that serve as business anchors: (1) the offerings a company
creates, (2) the customers it serves, (3) the processes it employs and (4) the points
of presence it uses to take its offerings to market.
VENTURES
, Start-up entity developed with the intent of profiting financially. Many ventures will
be invested in by one or more individuals or groups with the expectation of the
business bringing in a financial gain for all backers. Most business ventures are
created based on demand of the market or a lack of supply in the market.
Types of ventures
INCUMBENT CURSE
The faith of companies, the moment they become large, established, or leaders they
are unable to come up with the next big thing. An incumbent is a firm that preceded
the radical product innovation.
Disruptive innovation = “Disruption” describes a process whereby a smaller
company with fewer resources can successfully challenge established incumbent
businesses.
S-CURVE
A radical product innovation is a new product that incorporates a substantially
different core technology and provides substantially higher customer benefits
relative to previous products in the industry. A radical product innovator is the firm
that first commercializes a radical product innovation
TRANSACTION COSTS
A transaction occurs whenever a good or service is transferred across a
technologically separable interface. The transaction cost approach to the study of
economic organization regards the transaction as the basic unit of analysis and holds
that an understanding of transaction cost economizing is central to the study of
organizations. Transactions costs is a loss of efficiency or energy - Firms exist to
reduce transaction costs. The lower the transaction costs, the higher the economic
activity.
BEHAVIOURAL ASSUMPTIONS
Firms are economic agents and within firms there are also individual actors. Two
assumptions:
- Bounded rationality = Transactors are constrained by cognitive limits on their
capacities to process information efficiently (incomplete contracting). Limits to
what firms know, they don’t know everything. Agents engage with this, but
they don’t know what can happen.
- Opportunism = “Self-interest with guile” could induce strategic behaviour by
transactors to lie to, cheat, confuse, mislead their exchange partners. Agents
are self-interested and could engage into strategic behaviour. We care about
our self-interest most.
GOVERNANCE FORMS
1. Hierarchy (Make) internal governance. Flexibility is reduced.
2. Market (Buy) exchange with parties, delegate the market for it
3. Hybrid (All)y establish alliances, you choose a partner, and you engage in
transactions. If a transaction occurs often, it might be more useful to establish
an alliance
The type of strategy that can be used is depending on the decision tree
,Depending on the transaction cost, type and inter governance that you can have.
You can have full reliance on the market on the left which is outsourcing everything.
In the middle there is a hybrid model with partnerships. On the other extreme there
is a hierarchy with only integration.
CRITICISM TO TRANSACTION COSTS ECONOMICS (TCE)
● Too much emphasis on opportunism and too little on trust.
● Learning curves and path dependence, if you repeat the same transaction with
the same partners, you find some path and a learning cave.
● Firms are considered heterogeneity. TCE neglects of differential capabilities
and dynamics
BUSINESS INNOVATION
The creation of substantial new value for customers and the firm by creatively
changing one or more dimensions of the business system
Example: Starbucks and third place
, INNOVATION RADAR
four key dimensions that serve as business anchors: (1) the offerings a company
creates, (2) the customers it serves, (3) the processes it employs and (4) the points
of presence it uses to take its offerings to market.
VENTURES
, Start-up entity developed with the intent of profiting financially. Many ventures will
be invested in by one or more individuals or groups with the expectation of the
business bringing in a financial gain for all backers. Most business ventures are
created based on demand of the market or a lack of supply in the market.
Types of ventures
INCUMBENT CURSE
The faith of companies, the moment they become large, established, or leaders they
are unable to come up with the next big thing. An incumbent is a firm that preceded
the radical product innovation.
Disruptive innovation = “Disruption” describes a process whereby a smaller
company with fewer resources can successfully challenge established incumbent
businesses.
S-CURVE
A radical product innovation is a new product that incorporates a substantially
different core technology and provides substantially higher customer benefits
relative to previous products in the industry. A radical product innovator is the firm
that first commercializes a radical product innovation
