Strategy Research: Governance and Competence Perspectives Oliver E Strategy Research: Governance and Competence Perspectives Oliver E. Williamson, 1999, SMJ Eva Herbolzheimer

Objective and Introduction Comparing the Governance (TCE) and the Competence (Capabilities) approaches and exploring future research opportunities and issues. “Six Key Moves” through which TCE has been operationalized, and applying the same moves to the competence perspective Key issues that TCE must address: Dynamic Transaction Costs Learning Generic Governance in TCE

Six moves to operationalize TCE (I) Human actors Bounded rationality, which leads to incomplete contracting Foresight (to build in dispute settling to incomplete contract) Self-interest Adverse selection, moral hazard and opportunism Unit of analysis Transaction TCE variables: frequency, uncertainty, and asset specificity Describing the firm In organizational terms as a governance structure rather than technological term (firm vs. market) Incentive intensity, administrative controls and legal rules regime To deal with Coasean puzzle: “replication,” “selective intervention,” and bureaucratic costs

Six moves to operationalize TCE (II) Purposes Served Discriminating alignment hypothesis: transactions are aligned with governance structures (transaction specific investment cost = k; safeguards = s)

Six moves to operationalize TCE (III) Empirical The theory and evidence display a remarkable congruity Efficiency criterion No feasible superior alternative More conceptual rather than operational Rebuttable

Six moves to operationalize competence (I) Human actors Bounded rationality (implicit) e.g., learning and incomplete contracting Myopia (fire department) Emphasize elusive notion of trust instead of opportunism Unit of analysis Resource in the resource-based approach Routine for evolutionary economics theory Describing the firm Emphasizes management and organization features and rejects that firm is a production function Firm as bundle of resources / routines Doesn’t address limit to firm size issue (only limit to growth)

Six moves to operationalize competence (II) Purposes served When to learn and develop interpersonal relations in a single, combined firm rather than in two separate firms? Which firms are more and which are less competent in deploying their institutional capabilities to protect their knowledge? Empirical Entails ex post rationalizations for success and has been remiss in predictive respects Research opportunity: view TCE as feeding into the competence perspective in much the same way as organization theory is grist for the study of governance Efficiency criterion Competence deals with dynamic efficiency (learning and innovation) A feasible criterion for judging dynamic efficiency is never proposed Path dependency

Overdrawn critiques of TCE Opportunism does not have the organizational consequences that have been ascribed to it Opportunism absent: no moral hazard, adverse selection, shirking, filtering, undisclosed sub-goal pursuit, distortions etc. Initial conditions can be more consequential Transaction cost is a static concept and needs to be made dynamic Timely adaptation and timely convergence Intertemporal arguments are central to TCE But, TCE could benefit from more dynamic constructions Governance does not engage the issues of management Underdeveloped cognitive specialization, imperfect understanding of bureaucracy and entrepreneurship

Research opportunities from “competence perspective” for TCE (I) Beyond piecemeal Redefine the transaction to consider interaction effects The firm as a whole is larger than the sum of parts (e.g. informal organization) Learning Relate learning to foresight and examine the myopic tendencies of learning. Call for the lens of both TCE and competence to uncover the myopic biases Beyond generic governance: strategy (see table 1)

Research opportunities from “competence perspective” for TCE (II)

Conclusion Governance and competence are both rival and complementary (more complementary). Both can answer the key questions of existence, structure, and boundaries of firms. For the competence perspective, the principal factor explaining the existence, structure, and boundaries of firms is the capacity of such an organization to protect and develop the competences of groups and individuals contained within it For TCE, the principal factor is transaction cost. TCE informs the generic decision to make-or-buy while competence brings in particulars (learning, path dependences, technological opportunities, and complementary assets)

Discussion What advances in operationalization has the competence perspective made in the time since Williamson’s 1999 article was published? What advances has TCE made in order to respond to the critiques of the advocates of the competence perspective?