Edited by Peter G. Klein and Michael E. Sykuta
Chapter 21: Strategy and Transaction Costs
Laura Poppo Strategy is a complex domain, and while I do not intend to trivialize alternative definitions and approaches to strategic management, in this chapter strategy is fundamentally about achieving competitive advantage through resources, capabilities, and/or competences: the resource-based view of the firm. According to Williamson (1999), this realization of ‘strategy’ occurs by economizing through optimal governance: choosing the optimal form of governance. For rent-generating assets, firm ownership offers the greatest ability to coordinate, adapt, and protect because potential conflict ‘threatens to undo or upset opportunities to realize mutual gains’ (Williamson, 1999, p. 1090). Bounded rationality, opportunism, and the characteristics of the transaction remain central conditions that constrain this boundary decision. Through a comparative governance choice assessment, managers assess how should they organize an activity given its ‘pre-existing strengths and weaknesses (core competences and disabilities)’ (Williamson, 1999, p. 1103). Firms thus generate advantage by minimizing the misappropriation of rent, adaptation delays, and coordination problems (transaction costs). Some strategists, however, do not necessarily agree that the transaction cost framework ultimately informs strategic analysis. Some dismiss its applicability outright because opportunism can be mitigated through informal mechanisms, such as trust (Madhok, 1995; Adler, 2001). Others offer alternative views of the firm (Conner and Prahalad, 1996; Foss, 1996) or of the dynamic nature of resources (Langlois, 1992; Teece and Pisano, 1994) that necessitate a broader domain or set of logics than that offered by the transaction cost logic alone. For example, resources may generate profit for the firm not simply from avoiding...
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