Strategy Research: Governance and Competence Perspectives Oliver E. Williamson, 1999, SMJ Presented by Wenting (Christy) ZHU 1

Outline Research question Six key moves through which the governance perspective works The same six key moves through which the competence perspective works Challenges posed by the competence perspective for TCE (mistaken critiques and research opportunities) Conclusion Discussion

Research question Strategy is interdisciplinary (TCE, organization theory, contract law) How do perspectives of governance and competence work in the study of strategy? Both combine economic reasoning with organization theory Governance perspective values economics (TCE) more, whereas the competence perspective values the organization theory (process)

Six moves to operationalize TCE 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 Commons: the transaction TCE variables: frequency, uncertainty, and asset specificity Describing the firm In organizational terms as a governance structure rather than technological term Incentive intensity, administrative controls and legal rules regime To deal with Coasean puzzle: “replication,” “selective intervention,” and bureaucratic costs

Six moves to operationalize TCE Purposes served Discriminating alignment hypothesis between transactions and governance

Six moves to operationalize TCE 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 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

Six moves to operationalize competence 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 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

Mistaken critiques from “competence perspective” for TCE Opportunism does not have the organizational consequences that have been ascribed to it. Opportunism absent: two ideal forms of organization; incentive, control, and contract law differences vanish; no conflict and bargaining/haggling Initial conditions can be more consequential Transaction cost is a static concept and needs to be made dynamic Timely adaptation and timely convergence Governance does not engage the issues of management Underdeveloped cognitive specialization, imperfect understanding of bureaucracy and entrepreneurship

Research opportunities from “competence perspective” for TCE 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) Beyond generic governance: strategy (see table 1) 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

Research opportunities from “competence perspective” for TCE

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 Geoffrey Hodgson holds that the ‘contractual approach’ is preoccupied with monitoring and metering. That is more the focus of the agency perspective (Alchian and Demsetz, 1972) rather than the governance perspective. However, transaction cost is engendered because of opportunism and metering difficulties, and contract is one of formal governance. What is the difference between contract perspective and governance perspective? Barnard held that adaptation was the central problem of economic organization and emphasized cooperative adaptation of a ‘conscious, deliberate, purposeful’ kind, working through administration. Also, strategic management is about coordination and resource allocation inside the firm (Rumelt et al., 1991). The firm’s capacity of adaptation and coordination, which one plays a more important role in achieving distinctive competence?

Discussion Given organization theory feeds into the study of governance, will adapting to uncertain environment influence the firm’s transaction cost? What is the definition of transaction cost? What are the components of transaction cost?