Transaction Cost Economics
The transaction cost economics (TCE) and the resource-based view (RBV) provide two effective theoretical frameworks based on organisational theory. These two theories define almost similar things relating to existence of a firm and its successful business strategies (Gorovaia and Windsperger 2018). However, these two theories possess distinct characteristics. The transaction cost economies helps a firm to prevent from negative outcomes that may be occurred due to bounded rationality and opportunism. On the other side, resource-based view exploits positive opportunities of the concerned company. These positive opportunities can be occurred from resource configurations. Therefore, this contrast statement of these two theories can encourage an ongoing debate regarding the relationship between these two. Some researchers have stated that these two theories are completely incompatible, as these theories highlight same aspect from distinct point of view. Therefore, this debate defines the domains of transaction cost economies and resource-based view to understand their importance in respective field. Some researchers argue that TCE has overrated explanatory power compare to that of RBV. However, some other researchers state the opposite as well. Therefore, this essay intends to critically analyse these two theories based on their degree of usefulness depending upon internationalising strategies of firms. The essay illustrates these two concepts with the help of company.
The transaction cost economies is a kind of theory of how the business transaction have been structured for challenging decision environments. One of the fundamental objective behind the formation of the transaction cost economies is to understand the significance of the transaction which involves two exchange partners and the transactions. In terms of economics, the transaction cost are the type of costs which s incurred while making economic exchanges during the purchase of the good and services. The theory of the transaction cost economics are also termed as the social cost theory which is a concept developed by Ronald Coase. According to the theory of transaction costs economics there are basically there types of transaction costs which includes policing costs, bargaining costs and the search costs(Becker 2017). According to the transaction cost economics, transaction can be both internal and external to the organization. Therefore, it can be said that the transaction cost economics generally focuses on the organization of the transaction which takes place whenever a good or service is transferred from a provider to a user. The framework of the transaction cost economics provides economic descriptions which is quite helpful for the decision makers. There are various types of transaction costs which includes search cost, bargaining costs, screening cost, transfer costs, enforcement cost and the monitoring cost.The cost of transaction are the information cost which are incurred in identifying the size of the firm. The transaction cost comprises of the incurred cost in searching for the best supplier or customer (Moszoro and Spiller 2016). The transaction cost theorists states that the total cost is incurred by firms which can be grouped into two components which includes transaction cost and the production cost. The transaction cost is also known as the coordination cost. The transaction cost economics states that the difficulties and the costs which are associated with market transaction favour hierarchies. It also sometimes market as an economic governance structure.
Resource-Based View
The transaction cost economics seeks to describe and understand the two kinds of heterogeneity. One kind of heterogeneity is the diversity of transactions and the second kind of heterogeneity is the diversity of organizations. One of the objective of the transaction cost economics is understanding discriminating alignment. Some of the points which examines the logic and applicability of the Transaction Cost Economics are:
- The TCE can also be described as a theory of constructive stakeholder whose primary objective is ensuring the efficient transactions and avoidance of waste.
- The transaction cost economics offers a contrast and counterpoint to other organization theories.
- One of the phenomenon of the transaction cost economics is addressing the vertical integration.
This theory explains how the transaction costs are important in the institutional structures which can also be efficient in governing the economic activities. The transaction cost theory also explains why the EJV are more powerful to the contracts(Becker 2017). There aresome factors which affects the choice between the contracts and the equity joint venture. These factors include the asset specificity, technological uncertainty, resource complementarity, behavioural uncertainty.
The development of the fish markets in a Chinese fishery community states the impact of the transaction cost on the institutional structure of change. The market is knows to be the central building block in the modern economic theory (Hansen Henten and Maria Windekilde 2016). The case study of the fish market in China refers to the institutional structure of exchange. This particular case study states that there is apresence of two fishing village in Dong’s village and Wen’s village where in case of the Dong village the middlemen buy fish on the fishing ground and transport them to the markets. On the other hand in the Wen’ village the middle man and the fisher man transport their fish across the lake (Wang 1999). The fisherman at the Wen’s village expands their scopes of the primary activities along with the value chain. Therefore it can be said that the fishing firm sat the Wen’s village contrasts to the market to the Dong’s village (Sambasivan et al. 2017). The cost of establishing the markets in the Wen’s village is too high which fails to emerge. The fishes from these two villages are transported close to the highway. By comparing the two routes it have been found that thedistance between the Ports A and B have been the shortest compared to the other route. This can be determined by the difference of the transaction cost which turn out to be important for determining the marketing channels present between the two villages. Focussing on the operation of fish markets in the Chinese Fishery Community, the case study shows how transaction cost helps in determining the marketing channels. The case study also shows that how the institutional structure of exchange responds to the costof carrying out the exchange of transactions (Moszoro and Spiller 2016). At the Dong’s village, the low transaction cost are incurred to the middle man who makes the entrepreneurial efforts rewarding. The existence of the market will encourage thee division of labour which is present between the fish transportation and fishing which also increases specialization.
The resource-based view represents a managerial framework through which a firm can determine its strategic resources for obtaining potential comparative advantage. The specified firm exploits these resources for obtaining sustainable competitive advantage. A firm experiences comparative advantage through possessing rare resources or combination of resources (Kozlenkova, Samaha and Palmatier 2014). This in turn helps the concerned firm to produce products with higher quality or reduce the production costs. Hence, resource based view gives importance of a company’s internal factors, which help the company to grow and perform efficiently. This theory further highlights resources as well as capabilities of a firm to generate a competitive advantage. This comparative advantage helps the firm to experience competing advantage among others. Therefore, researchers have made strong arguments to observe that whether RBV has any strong relationship with the performance of a firm for obtaining this competitive advantage (Hoskisson, Gambeta, Green and Li 2018). In this context, it can be mentioned that this theory divides the entire resources into tangible and intangible one.
Comparing Transaction Cost Economics and Resource-Based View
The main objective to select resource based view is to develop the strategy of a firm based on its culture, entrepreneurship and leadership. Different companies have different cultures while every leaders as well as entrepreneurs have different views and perspectives. Hence, RBV has some merits as a strategy for developing the strategy of a firm. RBV is considered as an explanation regarding performance.
To understand the concept of this resource based view, this essay can consider Toyota as an example. This company performs efficiently within automobile industry successfully, as it has obtained competitive advantages compare to others. Through using all resources as well as capabilities efficiently, the company has formed competency. This in turn helps the company to become the largest car-maker across the world. Using superior and standard productivity, the firm has made a difference with its competitors like General Motors. This in turn helps Toyota to maximise utility (Angulo-Ruiz, Donthu, Prior and Rialp 2018). The specified company has generated confidence among consumers and this further helps Toyota to convince customers successfully about products. As a result, the firm successfully generates value creation in market. This further helps the company to charge comparatively higher prices in market for earning more profit. Toyota chiefly follows a unique production system that other rival companies cannot follow and assimilate easily. This system considers different manufacturing techniques, such as self-managing teams, inventory system within proper time and decreased setup times regarding complex equipments. Toyota uses upscale quality along with high-tech performance features for competing with other companies, who make luxury car. For this, the company utilises its supply chain management system as well as capabilities regarding low cost assembly through manufacturing Lexus models. Toyota uses comparatively better efficiency as well as product where functions of the company perform efficiently to produce high quality products. This further helps the company to differentiate with others and reduces costs of productions. The pricing strategy provides advantage to Toyota compare to BMW and Mercedes and consequently attracts more consumers ((Davis and Simpson 2017).). However, it has become difficult for these rival firms to follow this low pricing strategy through reducing production costs.
Except this unique pricing strategy, Toyota also conducts research and developments for upgrading production capabilities and resources. This further can help the company to maintain top position among its other strong competitors. Rival companies intend to compete with Toyota through applying various production and business strategies. However, hybrid cars of this specified company have occupied new markets successfully and consequently generate value for consumers.
Instead of these advantages, this resource-based view possesses some critiques during the time of firm’s development strategy. The firm cannot select this RBV theory to achieve sustainable comparative advantage, as it can provide insufficient outcomes (Belton 2017). Therefore, the firm can use both Porter’s industry analysis along with activity based view in the form of profitability source. This is because these two theories are complementary and chiefly focus on external factors. According to researchers, the theory of RBV does not have sufficient information (Gellweiler 2018). This further makes the concept as an unable and unclear one. Therefore, firms do not impose this concept always. Moreover, researcher also highlights that resources have indefinite value according to this theory. The research base view considers resources as large as well as impractical (Goh and Loosemore 2017). Other researchers also argue that RBV does not differentiate various forms of resources that can help a company to experience sustainable comparative advantage. Researchers also criticise RBA, as it cannot help a firm to develop its practical implications based on theory.
Case Company Analysis
The above case study the market comprises of continuum of the middlemen whose efforts of buying and selling bring the market to work. The case study of the Chinese fish markets shows how the transaction cost help in determining the appropriate market channels. Therefore it can be stated that the transaction cost theory is an important factor upon which the productivity of the economic system depends. Therefore, it can be concluded that resource based strategy is a good one. This is considered as an essential factor to achieve sustainable development within a firm. This can be done through stimulating capabilities, resources as well as competencies. However, it is not an efficient way where firm chiefly highlights internal factors and rejects external industries from its operation. It is essential for a firm to diversify within the product market. This theory also helps the firm regarding reorientation for competing with other competitors. Thus, industry analysis done by Porter acts as a complementary with activity based view. Therefore, a firm can obtain sustainable competitive advantage through a better process for outperforming within competitors through considering these theories.
References:
Angulo-Ruiz, F., Donthu, N., Prior, D. and Rialp, J., 2018. How does marketing capability impact abnormal stock returns? The mediating role of growth. Journal of Business Research, 82, pp.19-30.
Becker, G.S., 2017. Economic theory. Routledge.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. Macat Library.
Cheung, S.N., 2016. Economic organization and transaction costs. The New Palgrave Dictionary of Economics, pp.1-5.
Davis, P.J. and Simpson, E., 2017. Resource-based theory, competition and staff differentiation in Africa: Leveraging employees as a source of sustained competitive advantage. American Journal of Management, 17(1), pp.19-33.
Gellweiler, C., 2018. Cohesion of RBV and industry view for competitive positioning. Strategic Management, 23(2), pp.3-12.
Goh, E. and Loosemore, M., 2017. The impacts of industrialization on construction subcontractors: a resource based view. Construction Management and Economics, 35(5), pp.288-304.
Gorovaia, N. and Windsperger, J., 2018. The choice of contract duration in franchising networks: A transaction cost and resource-based view. Industrial Marketing Management.
Hansen Henten, A. and Maria Windekilde, I., 2016. Transaction costs and the sharing economy. info, 18(1), pp.1-15.
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Kozlenkova, I.V., Samaha, S.A. and Palmatier, R.W., 2014. Resource-based theory in marketing. Journal of the Academy of Marketing Science, 42(1), pp.1-21.
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Sambasivan, M., Deepak, T.J., Salim, A.N. and Ponniah, V., 2017. Analysis of delays in Tanzanian construction industry: Transaction cost economics (TCE) and structural equation modeling (SEM) approach. Engineering, Construction and Architectural Management, 24(2), pp.308-325.
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Wiesner, E., 2017. Transaction cost economics and public sector rent-seeking in developing countries: toward a theory of government failure. In Evaluation and Development (pp. 108-131). Routledge.
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