TJT S E50 Yritysmuodostelmat ja niiden informaatiojärjestelmät Jukka Heikkilä Marikka Heikkilä

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1 TJT S E50 Yritysmuodostelmat ja niiden informaatiojärjestelmät 2006 Jukka Heikkilä jups@cc.jyu.fi Marikka Heikkilä mheikkil@jyu.fi

2 Move to the Market (Malone et al., 1987) Transaction costs, plus an additional dimension: Complexity of product description Complexity in general (various sources) Task Environment Interrelatedness/Dependency/Connectedness 2

3 General argument favoring shift toward Markets (Malone et al., 1987) Coordination unit costs reduced by IT ifnothingelseis changed markets are more favourable than before. the result of reducing coordination costs without changing anything else should be an increase in the proportion of economic activity coordinated by markets p

4 2nd argument favoring shift toward Markets (Malone et al., 1987) High Low Market Hierarchy Complexity of product description relative to the capabilities of the technology Low High Asset specificity relative to the capabilities of the technology

5 Move to the Middle (Clemons, Reddi & Row, 1993) Earlier, presence of unwanted opportunism lead to vertical integration of companies From vertical integration towards cooperation With utilization of IT Lower-relationship specificity Better monitoring capabilities Reduction in the costs of IT Enables companies to benefit from production economies of large specialized suppliers The conclusion does not match with Malone et al., (1987) Why? 5

6 Move to the Middle (Clemons et al., 1993; Coase, 1937) Companies degree of outsourcing depends upon the total cost Total cost = sum of the production cost and the transaction cost for producing a given component The structure of the firm evolves to select the governance structure and degree of outsourcing that minimizes the total cost? 6

7 Move to the Middle (Clemons et al., 1993; Williamson, 1985) Transaction cost economies Finding suppliers from the markets is expensive (think of the opportunity costs of) Cost of finding a reliable supplier Contracting Monitoring and enforcing the contract Coordinating with the supplier Redefinition of Transaction costs decomposed TC = coordination cost + operations risk + opportunism risk 7

8 Opportunity cost Trade-offs of the decisions you make The costs of opportunity forgone, excluded Only the second best, xor third best, xor the fourth best Important in finding hidden costs i.e. unnoticed opportunity costs Also known as economic cost Itis notonlymoney, butcanbeanything(e.g. time) Don t include sunk costs in calculi! Why? 8

9 The Changing Characteristics of IT More detailed description of IT: Decreasing average unit cost of IT increasing economies of scale informational economies of scale Increasing information availability and processing capacity Increasing standardization and interconnection 9

10 Move to the Middle (Clemons et al., 1993) Connection of IT with transaction costs? IT reduces coordination costs Reduces the unit cost of communicating and reacting to information OR creates excess information ( )? IT lowers operations risk Increased information availability and processing capacity enable improved monitoring and incentives IT reduces opportunism risk Hence, Move to the Middle -hypothesis: A greater degree of outsourcing will take place But the firm will rely on fewer suppliers than before 10

11 IT and the Governance Structure of Outsourcing IT is inexpensive and scale-intensive, provides an effective monitoring capability, and is less relationshipspecific outsourcing Fewer Suppliers Organizational costs of establishing human relationships and business processes are more significant than IT costs Incentives to suppliers Increased costs and reduced benefits of search suppliers are evaluated on lead time, flexibility, reliability, innovation and value-added services. Long-Term Suppliers Time to recoup the investment Learning curve effects Incentives 11

12 About technological determinism: "Technology is fully determinative of economic organization only if (1) there is a single technology that is decisively superior to all others and (2) that technology implies a unique organization form. Rarely, I submit, is there only a single feasible technology, and even more rarely is the choice among alternative organization forms determined by technology.", (Williamson, 1985, p. 87). The options for organizing increase; and there is a polarization on the market (check e.g., Gurbaxani & Whang, 1998) 12

13 More nuances needed Later views on Williamson (among others) Criticism on the dichotomy of market vs. hierarchy on the dyadic, uncomplicated relationship view on transaction, whereas in real life complex relationships Firm A, is a joint subsidiary of firms B and C, has technical agreements with D and E, subcontracts work to F, is in marketing association with G and so on. So complex and ramified are these arrangements, indeed, that the skills of a genealogist rather than an economist might often seem appropriate for their disentaglement. Macneil (1985, p. 496, c.f. Powell (1990) p. 329) Credible commitments in relation with size, focus, specialization 13

14 Etiology of Networks (Powell, 1990) Powell gave (qualitative) grounds to a number of new concepts and definitions on Non-market, non-hierarchical modes of exchange represent a particular form of collective action (Powell, 1990, p. 322): Co-op as a long run effective arrangement Networks create incentives for learning and the dissemination for learning Open-ended quality of networks beneficial when resources are variable and the environment uncertain Especially feasible means of utilizing and enhancing intangible assets Tacit knowledge Technological innovation Side-effects Rationale: Know-how, trust, demand for speed 14

15 Key Features Market Hierarchy Network Normative Basis Contracts- Property Rights Employment Relationship Complementary Stenghts Means of Communication Prices Routines Relational Methods of Conflict Resolution Hagglingresort to courts for enforcement Administrative fiat- Supervision Norm of reciprocity- Reputational concerns Degree of Flexibility Commitment Among the Parties High Low Medium Low Medium to High Medium to High Tone or Climate Precision and/or Suspicion Formal, bureaucratic Open-ended, mutual benefits Actor Preferences or Choices Independent Dependent Interdependent Mixing of Forms Repeat transactions (Geertz, 1978) Contracts as hierarchical documents (Stinchcombe, 1985) Informal organization (Dalton, 1957) Market-like features: profit centers, transfer pricing (Eccles, 1985) Status Hierarchies Multiple Partners Formal rules 15

16 Side-effects Each node/contact point can be a source of conflict Power (remember Clemons et al.!) Dependency & particularism Networks restrict access (of outsiders) Recurring transactions between members Particular, compatible technologies -> Increased dependency on the activities and decisions of the others (remember, Kumar & van Dissel) 16

17 Rationale and antecedents for network forms (Powell, 1990) Know-how Distinctive competencies: Intellectual capital (=knowledge) or craft based skills in culture, science, design, programming) More need for metaknowledge and know-how Fungible knowledge applicable to wide range of activities Object of exchange and organization Under what circumstances collaboration and shared responsibility? On-going, complementary activities -> sharing critical information -> development of trust -> emergence of common values, Resources & tangibles (equipment, services, patents) on the market/between organisations 17

18 Rationale and antecedents for network forms (Powell, 1990) The demand for speed Fast access to information, flexibility, responsiveness Passing information up and down within an organisation? Acquiring information from the market? Or generating new interpretations i.e., filtered and interpreted through the reliable network nodes? Thicker information than from the market, Freer information than within a hierarchy Risk & expense sharing 18

19 Rationale and antecedents for network forms (Powell, 1990) Trust Co-operation and solidarity, or a sense of generalized reciprocity (vastavuoroisuus) In this kind of long-term relationships there is little need to formalize exchange relationships Reputation as indications of reliability Peer monitoring and acceptance/punishment Quality preferred over quantity Northern Italy, Southern Germany, Scandinavia, Far East Common (homogeneous) background Ethnic, geographic, ideological, professional Institutional contexts Legal, political, economic Skilled labor, security, salaries, external mechanisms for job-training, relative equity, relaxed anti-trust standards, r&d policy, linkages between universities and industry 19

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21 Research evidence (Holland & Lockett, 1997) Technological development Market Complexity Economic forces IOS Coordination strategy Network structure A firm s decisions Asset specificity 21

22 Research Evidence (Holland & Lockett, 1997) High CASE 5: Worldwide Futures CASE 4: Global Money - Banks Market component % CASE 3: European Computers IT suppliers CASE 2: Fashion Stores Fabric Suppliers Low CASE 1: Personal Communications Component suppliers Low Hierarchy component % High 22

23 Research Evidence (based on Tsupari et al., 2001 & 2004 on manufacturing industry in Finland) 23

24 Research Evidence (Holland & Lockett, 1997) Mixed mode hybrid structure consisting of both markets and hierarchies also in network form Case organizations in steady-state (vs. inherently transient) conclusion is: The hybrid structure is relatively stable The degree will vary, the hybrid structure has always the market element of competition ensuring change Economic forces Technological development 24

25 Unresolved issues (Powell, 1990) Why cross-national variation? How to explain the diversity of formation of networks in industries? Sustainability and rebuild of networks? Can we find behavioural differences between forms of organizing? Simultaneous competition & collaboration? Performance? Complexity? Information processing? Future orientation? 25