Lecture 1
The two core concept in this course:
1. Strategy = sustainable positioning, making trade-offs, and forging fit
relationships among activities
2. Supply chain management = strategic and organizational management that
enables a focal firm to overcome performance trade-offs and realize operational
competitiveness through a fit among the management elements within and
across the firm to adapt to the external environment
Strategic fit = when a firm designs a strategy that leverages its internal
capabilities to respond to or counter the external environment in which it
operates
Supply chain shocks:
1. Internal shocks
▪ the implementation of generative AI
▪ increased digitalization or platformization
▪ inaccurate estimation of scope 3 carbon emissions
2. External shocks
▪ supply chain disruptions such as material shortages, supplier
underperformance, opportunism
▪ geopolitical events and natural disasters
▪ compliance to new regulations
Coase (1937): firms exist because they can coordinate economic activities more
efficiently rather than in a ‘free-for-all’ market
Two different perspectives for firms:
1. Economic or cost-based perspective
-> would it be cheaper or more expensive for me to carry out this activity
internally/externally
* Transaction cost economics (TCE) is one of the most influential theories with this
perspective
2. Strategic or competitiveness-based perspective
-> could carrying out this activity internally help me achieve a superior
performance relative to my competitors?
* Resource-based view (RBV) is a prominent theory with this perspective
Transaction costs = the costs associated with the ‘preparation and execution’
of an economic exchange (TCE)
Why do transaction costs exist?
• Bounded rationality
= limited cognitive capabilities of humans lead to decision errors and mistakes
• Opportunism
= parties act according to their self-interests
• Small numbers bargaining
= a party might have only a few potential trading partners, which might create
risk for opportunism
,• Information impactedness
= a party might benefit from information asymmetry
Two types of transaction costs:
1. Ex-ante (related to preparation)
▪ searching for a supplier in the market
▪ drafting of a contract
▪ negotiating between the two parties
▪ safeguarding (what firms do to protect themselves against opportunism)
2. Ex-post (related to execution)
▪ monitoring whether contract terms are being upheld
▪ enforcement of contracts
▪ litigation or third-party mediation when a contract breach happens
What determines the height of transaction costs?
1. Asset specificity
-> when an asset is highly specific for a particular transaction, the supplier has a
lot of power over the buyer since he can only buy this specific asset from this
specific supplier
2. Uncertainty
-> when there is a lot of uncertainty surrounding a transaction, the transaction
costs will be higher
3. Frequency
-> the more frequent a transaction takes place, the lower the transaction costs
will be
TCE aims to understand which of the three governance structures is most
efficient for transactions:
1. Market
-> simple transactions with low asset specificity and uncertainty but high
frequency can be governed by the market with no particular relationship
2. Hybrid
-> for transactions with medium levels of specificity, firms might form strategic
alliances or use long-term contracts to govern the relationship
3. Hierarchy
-> it might be efficient to carry out highly specific and uncertain transactions
inside the firm
Limitations of TCE:
1. It has a cost-dominant perspective on firm decisions, which mostly aims to
minimize costs
2. It does not consider the competencies of firms or other potential competitive
advantages of carrying out a process internally/externally
3. It has a specific perspective on opportunism: do all firms act according to their
self-interests? Should we not consider trust or reputation at all?
According to RBV, to create competitive advantage, a resource should be VRIN:
1. Valuable (can it generate value)
2. Rare (how many firms possess this resource)
3. Inimitable (how sustainable is my competitive advantage in this resource)
, 4. Non-substitutable (can another resource be used by competitors instead)
VRIN/O: A firm should also be organized in a way to take advantage of such a
resource by having appropriate:
▪ Reporting structure
▪ Management control systems
▪ Compensation policies
Pralahad and Hamel (1990): core competencies
= collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technologies
Limitation of RBV:
1. It looks at things from a very narrow perspective: competitive advantage
2. According to RBV, the set of resources possessed by the firm is static, which
might reduce its applicability in a dynamic environment
3. Some scholars argue that RBV provides little to no managerial implications and
is not prescriptive
The two core concept in this course:
1. Strategy = sustainable positioning, making trade-offs, and forging fit
relationships among activities
2. Supply chain management = strategic and organizational management that
enables a focal firm to overcome performance trade-offs and realize operational
competitiveness through a fit among the management elements within and
across the firm to adapt to the external environment
Strategic fit = when a firm designs a strategy that leverages its internal
capabilities to respond to or counter the external environment in which it
operates
Supply chain shocks:
1. Internal shocks
▪ the implementation of generative AI
▪ increased digitalization or platformization
▪ inaccurate estimation of scope 3 carbon emissions
2. External shocks
▪ supply chain disruptions such as material shortages, supplier
underperformance, opportunism
▪ geopolitical events and natural disasters
▪ compliance to new regulations
Coase (1937): firms exist because they can coordinate economic activities more
efficiently rather than in a ‘free-for-all’ market
Two different perspectives for firms:
1. Economic or cost-based perspective
-> would it be cheaper or more expensive for me to carry out this activity
internally/externally
* Transaction cost economics (TCE) is one of the most influential theories with this
perspective
2. Strategic or competitiveness-based perspective
-> could carrying out this activity internally help me achieve a superior
performance relative to my competitors?
* Resource-based view (RBV) is a prominent theory with this perspective
Transaction costs = the costs associated with the ‘preparation and execution’
of an economic exchange (TCE)
Why do transaction costs exist?
• Bounded rationality
= limited cognitive capabilities of humans lead to decision errors and mistakes
• Opportunism
= parties act according to their self-interests
• Small numbers bargaining
= a party might have only a few potential trading partners, which might create
risk for opportunism
,• Information impactedness
= a party might benefit from information asymmetry
Two types of transaction costs:
1. Ex-ante (related to preparation)
▪ searching for a supplier in the market
▪ drafting of a contract
▪ negotiating between the two parties
▪ safeguarding (what firms do to protect themselves against opportunism)
2. Ex-post (related to execution)
▪ monitoring whether contract terms are being upheld
▪ enforcement of contracts
▪ litigation or third-party mediation when a contract breach happens
What determines the height of transaction costs?
1. Asset specificity
-> when an asset is highly specific for a particular transaction, the supplier has a
lot of power over the buyer since he can only buy this specific asset from this
specific supplier
2. Uncertainty
-> when there is a lot of uncertainty surrounding a transaction, the transaction
costs will be higher
3. Frequency
-> the more frequent a transaction takes place, the lower the transaction costs
will be
TCE aims to understand which of the three governance structures is most
efficient for transactions:
1. Market
-> simple transactions with low asset specificity and uncertainty but high
frequency can be governed by the market with no particular relationship
2. Hybrid
-> for transactions with medium levels of specificity, firms might form strategic
alliances or use long-term contracts to govern the relationship
3. Hierarchy
-> it might be efficient to carry out highly specific and uncertain transactions
inside the firm
Limitations of TCE:
1. It has a cost-dominant perspective on firm decisions, which mostly aims to
minimize costs
2. It does not consider the competencies of firms or other potential competitive
advantages of carrying out a process internally/externally
3. It has a specific perspective on opportunism: do all firms act according to their
self-interests? Should we not consider trust or reputation at all?
According to RBV, to create competitive advantage, a resource should be VRIN:
1. Valuable (can it generate value)
2. Rare (how many firms possess this resource)
3. Inimitable (how sustainable is my competitive advantage in this resource)
, 4. Non-substitutable (can another resource be used by competitors instead)
VRIN/O: A firm should also be organized in a way to take advantage of such a
resource by having appropriate:
▪ Reporting structure
▪ Management control systems
▪ Compensation policies
Pralahad and Hamel (1990): core competencies
= collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technologies
Limitation of RBV:
1. It looks at things from a very narrow perspective: competitive advantage
2. According to RBV, the set of resources possessed by the firm is static, which
might reduce its applicability in a dynamic environment
3. Some scholars argue that RBV provides little to no managerial implications and
is not prescriptive
