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Feb 09, 2016
Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure
Chi, Tailan (1994), Strategic Management Journal, 15 (4): 271-290.
Slides Prepared By Wenxin GUO
ThemesThe paper develops a theoretical framework for analyzing the exchange structure in the trading of imperfectly imitable and imperfectly mobile firm resources.
What is strategic resource?
Conditions for strategic resources to be gainfully traded
Barriers to imitation and impediments to trading (4 primary transaction cost problems)
Remedies: residual claimancy & residual control
Transaction modes & Implications
What is strategic resource?
Nature of Strategic ResourcesImperfectly imitableOther firms face uncertainty in replicating the resource on their own (Lippman and Rumelt, 1982)
Imperfectly mobileOther firms encounter difficulty in acquiring the resource from its present employer (Peteraf, 1993).
Sustainable competitive advantageIt provide rents that are more than temporary and have no substitutes (Barney, 1986b, 1991; Hill, 1991)
Components of Strategic Resources
Related ConceptsComplementary strategic resourcesStrategic resources are by definition idiosyncratic (Barney, 1991), Two sets of strategic resources that exhibit some complementarity have mutual dependence on each other and are thus co-specialized (Teece).
Normal resourcesResources that are easily imitable or mobileReceive normal returns only (with no rents)
2. Conditions for strategic resources to be gainfully traded
Modes of TradingAcquisition of the whole firm or the part of the firm
Purchase of the resource's service
Transfer of the skills and organization routines
Conditions of Gainfully TradingCondition 1:
Two firms that possess complementary strategic resources will have an incentive to trade their strategic resources when neither of them expects to be able to exploit the complementarity more profitably by trying to replicate the resources of the other
Conditions of Gainfully TradingCondition 2:
When there exists complementarity between the strategic resources of one firm and the normal resources of another firm, the two firms will have an incentive to trade the strategic resources:
(a) if the former does not expect to be able to exploit the complementarity more profitably by acquiring the normal resources on the open market
(b) if the latter does not expect to be able to exploit the complementarity more profitably by trying to replicate the strategic resources of the former on its own or acquire imperfect substitutes on the open market.
3. Barriers to imitation and impediments to trading
Four primary transaction cost problems:
Adverse SelectionMoral HazardCheatingHoldup
Sources of Imperfect ImitabilityThree characteristics (Reed and DeFillippi (1990))
Tacitness Skills & organization routines whose creation and replication heavily rely on learning by doing (Penrose, 1959; Polanyi, 1967).
Complexity It arises from the existence of different and interrelated skills and organization routines within a firm (Nelson and Winter, 1982).
SpecificityIt refers to the condition that a resource is specialized to the needs of specific transactions (Williamson, 1985).
tacitnesscomplexityspecificitycausal ambiguityadverse selectionSources of Imitability:ShirkingcheatingholdupTransaction Cost Problems (Trading Difficulties):information asymmetryValue creationAppropriation of value
Sources of Imperfect ImitabilityCausal ambiguity (Lippman & Rumelt (1982))Uncertainty about what resource attributes are responsible for superior performance and how a firm can build resources with the right attributes.
Causal Ambiguity & Adverse SelectionAdverse selection is due to the difficulty that a prospective acquirer faces in assessing the skills and capabilities of the supplier. (e.g. :chemical compound bid)
divergent beliefs & expectationsonerous negotiationCausal AmbiguityAdverse Selection
Tacitness & Moral HazardMoral hazard is due to the difficulty that the acquirer faces in ascertaining the supplier's effort in providing its skills and capabilities.
Polanyi (1967), tacit knowledge is difficult to articulate and can not be fully coded in technical manuals.
Deficient performance measurement with a positive opportunity cost for the provision of the service will induce the supplier to shirk
Loss of high-powered incentive (Williamson, 1985) of managers of the acquired firm can cause a significant degradation in their performance.
Complexity, Specificity & Cheating, HoldupResource interdependency
When a firm's resources consist of many different and interrelated skills and organization routines, co-specialization arise.
Need for coordination
Hazard of CheatingHazard of holdup
Cheating in ex ante contractible aspects of coordination
The temptation to cheat is due to:
the existence of gain from cheating under imperfect price constraints (Hennart, 1993).
the absence of effective punishment for cheating under imperfect behavioral constraints (Hennart,1988; Teece, 1986).
Hazard of cheating is the primary transaction cost problem hindering coordination.
Holdup in ex ante non-contractible aspects of coordinationFrequent joint decision makingNegotiationsBargaining CostCoordinationmismatch of negotiation strategiesasymmetric information about contingenciesuncertainty about each other's preferences
Residual claimancy Residual control
Measurement problems & Residual ClaimancyResidual claimancy
Refers to the extent to which an input contributor bears the variation of the outcome from the production process it participates in (Barzel, 1989).
It can be used to alleviate both the problems of adverse selection and moral hazard.
Different forms: profit, sales, output, productivity and quality
Rule: to make the input contributor's payoff contingent upon a variable (or variables) that most closely measures its contribution (Holmstrom, 1979)
Coordination Failures & Residual ControlIntegration
Exclusive control (horizontal integration):Used when the firm's own strategic resources exhibit the property of non-exclusion in use
Unified control (vertical integration)Used when specialized assets are required in an adjacent stage of production that is not presently under the firm's control
the extension of a firm's control rights cover a subset rather than all of the resources
Coordination Failures & Residual ControlDeterrence building
Used when it is too costly to eliminate the conditions of resource interdependency
E.g.: punishment (withholding cooperation or reducing level of cooperation); Joint Ventures
*Remedies for Trading Difficulties
Adverse Selection & Shirking (Value Creation)Apportionment of Residual Claimancy (input contributors payoff contingent on output measurement)Cheating & Holdup (Appropriation)Eliminate interdependencyDeterrence-Assignment of Residual Control
Overview of four primary transaction cost problems and two principal remedying mechanisms
5. Transaction Modes & Implications
Aim to effect the transfer of residual claimancy and residual control
The hazards of cheating and holdup can basically be removed
the acquirer may still face difficulty in assessing the value of the resources in the acquisition process and encounter a degradation of performance of the acquired personnel after the acquisition
Transaction ModesCollaborative venturing (CV)
CVs are subject to both measurement difficulties and coordination failures.
The potential advantage of a CV over the complete acquisition is primarily due to the fact that both firms involved in the exchange can be apportioned some residual Claimancy.
A necessary condition for CVs to be the optimal choice is the presence of high transaction costs (Hennart, 1988, 1991; Shan, 1987, 1990).significant adverse selection or moral hazard,resources specialized to the rest of that firm or engender significant measurement difficulties
Interactions between Two Structural DimensionThe two dimensions of the exchange structure are not only distinct but also interrelated.
Conclusion: A broader definition of trading is needed to conduct a full analysis of the exchanges involving imperfectly imitable and imperfectly mobile firm resources
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