Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure Chi, Tailan (1994), Strategic Management Journal, 15 (4): BADM 546, Group #1 (Meredith Blumthal, Wooje Cho, Barclay James, and Kumar Sarangee)

2 Chi ’ s Questions/Motivations Under what conditions can strategic resources be traded across firms? What are the difficulties? What mechanisms can mitigate these difficulties? Four Main Sections: Conditions for inter-firm trade Difficulties in trading Remedies for trading difficulties Implications (mode of transaction: Acq vs CV)

3 What is a Resource? Firm resources – ‘ all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness ’ (Barney, 1991)

4 What is a ‘ Strategic Resource ’ ? Imperfectly imitable resource – other firms face uncertainty in replicating the resource (Lippman & Rumelt, 1982) Imperfectly mobile resource – other firms face difficulty in acquiring it from its present employer (Peteraf, 1993) Strategic Resource – A resource with these features AND that has no substitutes with these features

5 Conditions for Inter-firm Trade Three ways of trading: Acquisition of all or part of firm Purchase of the resource ’ s service Transfer of skills and routines (IBM creates new unit to develop OS and has employees trained by Microsoft)

6 Antecedents of Imperfect Imitability and Mobility Imperfect imitability can be ascribed to causal ambiguity (uncertainty about why something happens the way it does) Imperfect mobility can be ascribed to specificity (resource specialized to firm- specific needs)

7 Conditions for Inter-firm Trade Gain in trade stems from complementarity (Rumelt, 1974) Complementarity – joint use can yield a higher total return than sum of individual use returns Necessary conditions for gain from trade in assets or resources: 2 firms with complementary strategic resources will have an incentive to trade when neither expects to be able to exploit the complementarity by trying to replicate the other ’ s resources or acquiring imperfect substitutes in the market 2 firms with complementary resources (1 strategic, other normal): A) “ Strategic resource firm ” – no expectation of being able to exploit by acquiring normal resource in the market B) “ Normal resource firm ” – no expectation of being able to replicate strategic resource or acquire imperfect substitutes in market

8 Difficulties in Trading Sources of Imperfect Imitability: Tacitness of resource – skills and routines rely on learning by doing (Penrose, 1959; Polanyi, 1967) Complexitity of resource – existence of many different and interrelated skills and routines (Nelson & Winter, 1982) Specificity of resource - resource specialized to specific transaction (Williamson, 1985)

9 Difficulties in Trading Four Primary Transaction Cost Problems: Adverse Selection – “ bad ” products are more likely to be available ( “ market for lemons ” George Akerlof) Moral Hazard (Shirking) – supplier of a service (highly tacit) may shirk because it is difficult for the acquirer (buyer) to measure supplier ’ s performance Cheating – breach of a precisely specified obligation (ex ante contractible aspects of coordination) Holdup – any opportunistic behavior that reduces efficiency of joint decision-making (ex ante NON- contractible aspects of coordination)

10 Relationships tacitness complexityspecificity causal ambiguity adverse selection Sources of Imitability: Shirking cheatingholdup Transaction Cost Problems (Trading Difficulties): information asymmetry Value creationAppropriation of value

11 Remedies for Trading Difficulties Adverse Selection & Shirking (Value Creation) Apportionment of Residual Claimancy (input contributor’s payoff contingent on output measurement) Cheating & Holdup (Appropriation) Eliminate interdependency Deterrence- Assignment of Residual Control Transaction ProblemRemedy

12 Implications: Mode of Transaction (Acquisition vs. Collaborative Venturing) Acquisition Removes cheating and holdup Does not eliminate adverse selection and shirking Collaborative Venturing – each firm bears some residual claimancy and holds some residual control

13 Implications: Mode of Transaction (Acquisition vs. Collaborative Venturing) Necessary conditions for a CV to be the optimal choice of transaction mode 1) Each firm has some resources that give rise to adverse selection or moral hazard in trading 2) Each firm supplies some resources that are either specialized to the rest of that firm or give rise to significant measurement difficulties

14 Contributions Chi takes the underlying characteristics of resources and examines how these characteristics cause transaction difficulties Chi incorporates resource-based and transaction costs perspectives Other thoughts: What about the influence of uncertainty on the choice of transaction mode (Acquistions vs. Collaborative Venturing)?