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Managing strategic partnerships - Coggle Diagram

- - - - Value creation mechanisms
        
        Activities: Problem-finding and acquisition, problem solving, choice, implementation and evaluation
        
        Resources: Competencies and reputation
        
        Economics: Information asymmetry, learning and knowledge
      - Value appropriation mechanisms:
        
        Revenue mechanisms: Pay for resource utilization, no-cure and no-pay licensing
        
        Protection mechanisms: Status and patents
  - - - Since customers embody the problems to be solved, they are an active participant in the process of creating solutions (e.g., Tuli, Kohli, and Bharadwaj 2007; Colm et al. 2020)
        
        Since access to diverse sources of knowledge is important in solving complex customer problems, value shops commonly form reciprocally linked value systems of sub-contracting and collaborating firms that together harness the knowledge required to develop desired solutions
      - Knowledge and learning play a particularly
        central role in the value creation process.
        
        E.g., Walter Powell and colleagues on knowledge networks in the biotechnology and pharmaceutical industries (1996; 1998; 2004);Chakravarty, Zhou, and Sharma (2020)
      - Governing challenges
        
        ‣ Cooperation (e.g., adverse selection, knowledge hazards; Ulaga and Kohli 2018)
        
        ‣ Coordination (e.g., representational gaps problems (Tuli, Kohli and Bharadwaj 2007)
      - Signaling (Kirmani and Rao 2000), industry-level reputation (Eccles 2007), and cross-understanding (Sande et al WIP)
        
        Governing “temporary organizations” (Hadida, Heide, and Bell 2019; Ghazimatin, Mooi, and Heide 2021). ‣ Unique selection and enforcement challenges due to project size (# of subcontractors) and contract duration (e.g., to avoid common ex-post cost overruns, ability-based selection is essential in large projects with short contract duration; see Ghazimatin, Mooi, and Heide 2021)
  - - - Resolving Information Asymmetry: Signaling, Endorsement, and Crowdfunding Success (Courtney, C., Dutta, S., & Li, Y. (2017))
      - Effectiveness of Reputation in Contracting for Customized
        Production: Evidence from Online Labor Markets (Mingfeng Lin, Yong Liu and Siva Viswanathan
        2018)
      - Kirmani & Rao 2000
      - Akerlof 1970
    - - Mobilizing the Temporary Organization: The Governance Roles of Selection and Pricing (Elham Ghazimatin, Erik A. Mooi and Jan B. Heide)
      - Trust and Formal Contracts in Interorganizational Relationships – Substitutes and Complements (Mellewigt T., Madhok A., Weibel
        A.)
      - Baer 2013
      - Nickerson & Zenger 2004
      - Puranam & Raveendran 2013
      - Gulati 2012
        
        Other non-legal devises
        
        Even in a situation of perfect alignment of interests, partners still need to divide labor and to coordinate effectively to complete their joint and individual tasks. As a result, the focus shifts to creating structures, institutions, and relationships that enable partners to work together across boundaries.” (Gulati et al. 2012, pp.2-3)
        
        This paper articulates the cooperation and coordination perspectives as distinct and complementary facets of collaboration in strategic alliances. The two perspectives can help identify different challenges and risks that alliance partners face, and highlight different sets of solutions that partners implement during the partner selection, alliance design, and post-formation phases to ensure collaborative success.
        
        From the cooperation perspective, relational concerns dominate—particularly concerns about partners’ willingness to contribute to the alliance and equitably share its outcomes. The mantra here appears to be “If there’s a will, there’s a way!”: as long as partners get along, agree on goals, and maintain their commitment to the joint effort, any organizational problem is assumed to be possible even trivial, for partners to resolve.
        
        From the coordination perspective, technical and administrative concerns—especially doubts and anxieties about partners’ ability to realize the value proposition that the partnership is predicated on—eclipse all other problems
        
        Integration of the two perspectives, then, seems to promise theoretically richer models of strategic alliances. However, our analysis of prior research finds different conceptions of how cooperation and coordination issues interrelate and interact: simple independent and more complex interdependent models are the most frequently proposed, but further elaboration of the underlying mechanisms and boundary conditions is warranted.
        
        Two perspectives:
        
        We define inter-organizational cooperation as joint pursuit of agreed-on goal(s) in a manner corresponding to a shared understanding about contributions and payoffs.3 Cooperation, in this view, is a behavioral outcome of variable quality—inter-organizational relations can range from highly cooperative to highly uncooperative—that relies on partners’ agreement about the provision and appropriation of resources for the collaborative effort (Table 1).
        
        Coordination is broadly understood in the social sciences as the linking, meshing, synchronization, or alignment of actions (Aiken, Dewar, DiTomaso, Hage, & Zeitz, 1975; Okhuysen & Bechky, 2009). In an inter-organizational context, we define coordination as the deliberate and orderly alignment or adjustment of partners’ actions to achieve jointly determined goals. We regard coordination as an outcome that can be characterized by efficiency, the relative cost of designing and operating coordination mechanisms and, by effectiveness, the degree to which coordination efforts actually produce the desired alignment or adjustment of action. Coordination typically involves the specification and operation of information-sharing, decision-making, and feedback mechanisms in the relationship to unify and bring order to partners’ efforts, and to combine partners’ resources in productive ways. In short: coordination seeks to ensure that partners’ efforts “click” and yield the desired outcomes with minimal process losses
    - - EGO-NETWORK STABILITY AND
        INNOVATION IN ALLIANCES (PANKAJ KUMAR
        AKBAR ZAHEER 2019)
      - Networks, Propinquity, and Innovation in Knowledge-intensive Industries (Whittington, Owen-Smith, Powell, 2009)
      - Effect of Alliance Network Asymmetry on Firm Performance and risk (Anindita Chakravarty, Chen Zhou and
        Ashish Sharma 2020)
      - Powell 1996
      - Social network theory 2021
        
        A graph consists of a collection of objects, called
        vertices, connected by links, called edges. In social networks (e.g., economic) vertices and edges
        are commonly referred to as actors and relationships
        
        Actor characteristics: e.g., size
        
        Relationship characteristics: e.g., business, friendship,
        advice, strength of relationship
        
        Two vertices are considered neighbors if they are
        connected by an edge. Degree (centrality) of a vertex is the number of
        neighbors. A sequence of vertices where each consecutive pair in the sequences is connected by an edge is called a path
        
        Length of a path is the number of edges in the
        sequence of vertices. Distance between two vertices in a graph is the
        length of the shortest path between them. A graph is connected if there is a path between every
        pair of vertices
        
        The diameter of a (connected) graph is the average
        distance between pairs of vertices. A connected component (or simply component) of a (non-connected) graph is a subset of vertices (or subgraph), where “(i) every vertex in the subset has a path to every other; and (ii) the subset is not part of some larger set with the property that every vertex can reach every other.” (Easley and Kleinberg 2010, p. 29)
        
        A connected component containing a significant fraction of all vertices in the graph is referred to as a giant component. An edge is defined as a bridge if deleting the edge causes the neighboring vertices to lie in two different components. A local bridge increases the distance between neighboring vertices by more than two (Granovetter 1973)
- - - - Value creation mechanisms
        
        Activities: Network promotion and contract management, service provisioning and infrastructure operations
        
        Resources: Network (set of members or nodes)
        
        Economics: Direct and indirect network externalities
        
        Global network effects (scale) drives how many a customer can
        connect with
        
        Direct on a global scale: Exchange in large networks, arbitrary relationships between similar others (new or existing). Example: • Mobile telephony C2C (e.g., Telenor)
        
        Indirect on a global scale: Exchange in large networks, arbitrary relationships between different others (new or existing). Example: • Online shopping C2B (e.g., Amazon)
        
        Local network effects drives who (specific other) a customer
        can connect with
        Important for mediation services where the identity of customers
        matters for value creation
        
        Direct on a local (identy) scale: Exchange among specific similar others (new or existing). Example: • Messaging apps (e.g., Messenger)
        
        Indirect on a local (identy) scale: Exchange among specific different others (new or existing). Payment app – C2B (e.g.,
        Vipps)
        
        Lower recruitment costs (you don’t need the entire network)
        
        Lower competition due to
        differentation
        
        Increase the need for coordination of marketing and distribution across specific customer groups
        
        Value for the customer increases with number of customer as well as the price which can be seen in the increase of demand and marginal willingness to pay for a given size
      - Value appropriation mechanisms
        
        Revenue mechanisms: Subscription and transaction fees, third-party payment, interconnection and roaming fees
        
        Protection mechanisms: Lock-in from network externalities
        
        Lock-in is that one customer is dependent on your product and has a high switching cost for changing to another firm
  - - - Horizontally interconnected and vertically layered value systems. •Horizontal interconnection or compatibility enables customers of one firm to network with customers of other firms (e.g., in banking, telecommunications, and shipping) (e.g., Andersen and Fjeldstad 2003; Mitsuhashi and Greve 2009).
      - Vertical layering allows one networking service to use another networking service as its infrastructure (e.g., in Internet service ecosystems, post and parcel services,
        internet service providers, payment services, and e-commerce services like Amazon and eBay represent the different layers)
    - - Interconnection typically co-occurs in several layers.
  - - - Virtual interorganizational relationships in business-to-business electronic markets: heterogeneity in the effects of organizational interdependence on relational outcomes (Girish Mallapragada, Rajdeep Grewal, Raj Mehta and Ravi Dharwadkar
        2015)
      - Governance Mechanisms in Business-to-
        Business Electronic Markets (Rajdeep Grewal, Anindita Chakravarty & Amit Saini 2010)
      - Platform exploitation: When service agents defect with customers from online service platform (Qiang (Kris) Zhou, B.J. Allen, Richard T. Gretz, and Mark B. Houston 2021
      - North and Walis 1994
        
        Changes in technology reduced the cost of physically taking land, labor, and capital and making physical things - what we call transformation costs - provided the fundamental driving force for increasing incomes. In turn, these changes in the production process induced changes in the institutions that control the cost of purchasing inputs, monitoring the production process, and selling outputs - what we call transaction costs.
        
        There is a strong suggestion that at the level of the firm over time transformation costs have been falling, while transaction costs have been rising. For example, economies of scale have induced the development of hierarchical managerial structures, but the cost of operating those structures has ultimately placed a limit on firm size and the economies of scale that can be realized
        
        firms incur increasing transaction costs to manage their ever growing size and complexity, and that these costs may gradually erode the productivity gains associated with technological change and economies of scale.
        
        One summary hypothesis of Coase is: given the existence of a specific technology, institutions are chosen by firms to minimize transaction costs. This formulation of Coase, and its shorthand, rule of thumb expression - institutions are chosen to minimize transaction costs - have been extremely productive starting points for understanding the evolution of institutions in the modern economy.
        
        Transaction costs in a Williamson world are like the time that a prospective buyer spends looking for a house : a cost which is real, but unmeasurable because it does not result in a market exchange
        
        Neoclassical production cost = transformation cost
        
        transaction augmenting technical change is a technical change that raises the productivity of transaction inputs; and, likewise, a transformation augmenting technical or institutional change is a technical or institutional change that raises the productivity of transformation
        
        A transformation augmenting technical change, say one that creates lower costs at a higher level of output, will increase the derived demand for transactions (and therefore for transaction inputs) to D' D' .
        
        In a similar way institutional change in one industry can be transmitted to another industry via intermediate goods. As an example, consider the financial sector, where the development of investment banking, an organized bond market, and a securities market dramatically altered the internal structure of firms in other industries when it became possible to raise capital through an external agency. The impact is transmitted to firms outside the financial sector through the availability of an intermediate good - a transaction service, such as the use of an investment banker.
        
        The firm will regard transaction and transformation inputs as interchangeable in the production process and will utilize each input up to the point where the usual marginal conditions are satisfied for all inputs. Therefore, transformation costs and transaction costs are not independent since changes in transaction costs will lead to changes in transformation costs and vice versa. For example, a rise in the price of a transformation input will lead, ceteris paribus, to an increase in the use of transaction inputs, except in the case of gross complement
    - - Strategic action in network industries: an empirical analysis of the European mobile phone industry (Fjeldstad, Ø. D., Vacerra, M., & Narayanan, S. (2004))
      - A Matching Theory of Alliance Formation and Organizational Success: Complementarity and Compatibility (Hitoshi Mitsuhashi and Henrich R. Greve 2009)
      - Coevolution of Platform Dominance and Governance Strategies: Effects on Complementor Performance Outcomes (Joost Rietveld, Joe N. Ploog and David B. Nieboorg (2020))
      - Fjeldstad & Jakobsen2005
      - Andersen & Fjeldstad 2003
        
        Value system properties are potentially important determinants of interfirm relations because the organization of exchanges is likely to depend on the properties of the objects exchanged. For example, the exchange of knowledge or skills is more likely to occur in networks, whereas the transfer of tangible items more commonly occurs through a market transaction
        
        On the contrary, interlinking of activities, leveraging of resource heterogeneity, and the creation and exploitation of mutuality are primary functions of cooperative relationships
        
        Most firms are engaged in multiple relationships that together form a network in which the properties of the network impact properties of the individual relationships. The relationships of a network exist within a broader context where multiple actors in coproduction of value. Divide the labor of activity performance and gain access to complementing resources.
        
        The recent change toward organization of sequentially dependent industrial activities in networks may suggest that reciprocal interdependencies in a network of relations, as found for example in the development of new communication standards and technologies, dominate the coordination costs of performing sequentially interdependent production activities
        
        Value chain
        
        Optimal performance is achieved by configuration of the activities. Configuration decisions are informed by drivers, such as activity scale, and activity linkages that relate structural properties of the configuration to performance. The joint value created by firms in the value system may be optimized by cooperation that coordinates activities across firms
        
        The three forms of value creation are modeled by (1) The Value Chain, which models firms using a long-linked technology to make products; (2) the Value Shop, which models firms using an intensive technology to solve problems; (3) the Value Network, which models firms using a mediating technology to link customers.
      - Eisenmannet 2011
- - - - Resources: Brand, product, and process technology
      - Activities: Inbound logistics, operations, outbound logistics, sales and marketing, post-purchase service
      - Economics: Cost, economies of scale and value from differentiation
    - - Revenue mechanisms: Pay for products, pay for post-purchase service
      - Protection mechanisms: Patents, embodying technology in product or processes
  - - - Value chains form sequentially interrelated value systems of suppliers, producers, and distributors, each adding value to the output from the preceding chain (Stabell & Fjeldstad 1998)
    - - Primary and secondary vertical task environment (Achrol, Reve and Stern 1983) connected relations (Anderson, Håkansson, Johanson 1994) and vertical network (Achrol and Kotler 1999)
  - - - On the Measurement of Interfirm Power in Channels of
        Distribution (Gary L. Frazier (1983))
      - Interfirm Adaption in Business
        Relationships (Hallén, Johanson, Seyed-Mohamed, 1991)
        Journal of Marketing, 55 (April), 29-37
      - Emerson 1962
        
        Power is a property of a social relation. Power is not an attribute of
        an actor
        
        Definition:
        ‒ A’s power over B = A’s ability to overcome resistance of B
        
        Power resides in the other’s dependence: ‒ PAB = DBA. ‒ Dependence of B on A = ƒ (motivational investment by B in goals mediated by A and availability of alternatives)
        
        Balance and imbalance of power ‒ It is the relative dependence between two parties in an exchange relationship that determines their relative power.
        
        Strategies for dealing with imbalance: “Balancing Operations”
        ‒ Structural changes to reduce power advantage
        
        B’s Reduction in motivational investment in goals mediated by A ‒ E.g., relationship dissolution 2. B cultivates alternative sources for gratification of goals ‒ E.g., multi-channel/multi-sourcing system E.g., in a triad of equals (B-A-C), C can form a relationship with B, creating balance by closing the triad and thus reducing the power of A (e.g., platform exploitation). 3. A’s increased motivational investment in goals mediated by B ‒ E.g., manufacturer develops a superior brand. ‒ Status rewards are highly valued by many recipients while given at low cost to the giver. 4. Deny A alternative sources for achieving goals mediated by B ‒ E.g., retailer accepts exclusive dealing contract? ‒ Agents form close relationship with customers – like a coalition against the supplier (they become one)
      - Pfeffer & Salancik 1978
        
        Resource dependency
        
        Lack of self-sufficiency (with respect to resources)
        ‒ Typical in channels where you outsource for good reason (see above)
        
        Need for exchange with other parties
        ‒ Downstream (wholesalers, retailers) and upstream (suppliers)
        
        Potential dependence on external parties
        ‒ Importance of input/output (magnitude and criticality) and alternative sources/substitutability
        
        Potential demands: dependence is a problem in its own right
        ‒ Demands can be both competitive (zero-sum) and cooperative (value creation)
        
        Uncertainty in environment: dependence creates uncertainty E.g., supply chain integration (right product, right time, right place) ‒ Retailers not willing to make prices changes, run promotions, etc.
        
        Organizational response
        
        Coordination
         Ownership may not be feasible, its less flexible, and it does not give the advantages of outsourcing
        
        Explicit/formal coordination - Formal contracts - JV’s
        
        Tacit/implicit coordination
        
        E.g., Norms of flexibility (shared expectations; Macneil)
        
        Benefits: ‒ Access to information about partner (facilitates planning under uncertainty) ‒ Channel to communicate with partner (facilitates planning under uncertainty) ‒ Gain commitment from partner b/c partner understands the need of focal firm (creates predictability)
        
        Outcomes: Survival ‒ Effectiveness
    - - Coase 1937
        
        “The main reason why it is profitable to establish a firm would seem to be that
        there is a cost of using the price mechanism.” (Coase 1937, p. 390)
        
        “Coase’ central insight was that firms exist because going to the market all the time can impose heavy transaction costs. ... A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome. But if markets are so inefficient, why don't firms go on getting bigger for ever? Mr Coase also pointed out that these little planned societies impose transaction costs of their own, which tend to rise as they grow bigger. The proper balance between hierarchies and markets is constantly recalibrated by the forces of competition: entrepreneurs may choose to lower transaction costs by forming firms but giant firms eventually become sluggish and uncompetitive
        
        Two aspects of firms
        
        First, the firm is not concerned with minimizing either transaction costs or transformation costs in isolation : the firm wants to minimize the total costs of producing and selling a given level of output with a given set of characteristics. The firm will regard transaction and transformation inputs as interchangeable in the production process and will utilize each input up to the point where the usual marginal conditions are satisfied for all inputs. Therefore, transformation costs and transaction costs are not independent since changes in transaction costs will lead to changes in transformation costs and vice versa. For example, a rise in the price of a transformation input will lead, ceteris paribus, to an increase in the use of transaction inputs, except in the case of gross complements
        
        Second, transaction costs are transaction costs whether they are incurred inside or outside of the firm. For example, a firm may purchase an input through a market specialist (a middleman) or directly from producers through its own procurement division
      - Williamson 1985
        
        “production of a final product can be split into a series of technological separate stages... each stage organized around a simple hierarchy, each of which exhaust scale economies. The question to be addressed [is]...when will the production of components by such technologically separable unites be exchanged within a firm rather than across an intermediate product market” (Williamson 1975, p. 82).
        
        Hold up problem
        
        Write enforceable contracts?
        − Bounded rationality may make contracts incomplete
        
        Organizing a satisfactory split of the gains is non-trivial: − Ex ante contracting costs − Ex ante under-investments − Ex post enforcement and haggling costs
        
        Firms are self-interested, (Some) firms are willing (sometimes) to behave opportunistically
        
        Firms make partner specific investments in order to create superior value (e.g., cost reductions or end-product enhancements) - investments whose value are limited outside of the focal relationship
        
        Adaptation provblem
        
        Circumstances may require parties to change
        previously planned courses of action (i.e., uncertainty). E.g., changing customer preferences and changing moves by
        competitors. E.g., changing customer preferences and changing moves by
        competitors
        
        Organizing for adaptation (e.g., contingency contracts)
        is non-trivial: Ex ante contracting costs (bounded rationality), Opportunity costs (lost value) from failure to adapt, and Ex post haggling costs (opportunism)
        
        Hierchial governance
        
        Cost of contracting (including opportunity costs) may make hierarchical governance the preferred organizational response (despite it’s inefficiency)
        
        Hierarchical governance: −Ownership grants authority −Ownership increases detection ability (behavioral control) −Ownership creates “atmosphere”
        
        Three key steps
        
        Explicate the principal dimensions with respect to which transactions differ (e.g., asset specificity, uncertainty). 2. Explicate the principal attributes for describing governance structures (formal and informal rules of exchange; e.g., markets, firm...). 3. Effect a discriminating match according to which transactions are aligned with governance structures so as to promote cooperation (and minimize costs)
        
        transaction cost:
        
        do the parties to the exchange operate harmoniously, or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions
        
        Transaction cost analysis supplants the usual preoccupation with technology and steady-state production (or distribution) expenses with an examination of the comparative costs of planning, adapting, and monitoring task completion under alternative gov- ernance structures
        
        Can we identify the factors that permit transactions to be classified as one kind or another? Can we identify the alternative governance structures within which transactions can be organized? And can we match governance structures with transactions in a discriminating (transaction-cost-economizing) way
        
        As set out elsewhere (Williamson 1979b), the critical dimensions for de- scribing transactions are (1) uncertainty, (2) the frequency with which transactions recur, and (3) the degree to which durable, transaction- specific investments are required to realize least cost supply.
        
        The treatment of efficient boundaries in this section deals with only a part, albeit an interesting part, of the full set of organizational issues. Only two organizational alternatives are considered: either a firm makes a component itself or it buys it from an autonomous supplier. Thus mixed modes, such as franchising, joint ventures, etc., are disregarded . I also take the core technology as given and focus on a single line of commerce- say the activities of a particular manufacturing division within a larger industrial enterprise. The object is to describe how the economizing deci- sions which define the outer boundaries of this division are made.
        
        Transaction costs are the costs of the land, labor, capital, and entrepreneurial skill required to transfer property rights from one person to another
      - Alliance Termination and Firm Idiosyncratic Risk:
        The Role of Governance Misalignment (Koval, Wathne, Hunneman & Wuyts 2021).
      - Franchisor–Franchisee Bankruptcy and the
        Efficacy of Franchisee Governance (KERSI D. ANTIA, SUDHA MANI, and KENNETH H. WATHNE*)
      - Agency Relationships in Marketing: A Review of the Implications and Applications of Agency
        and Related Theories(Mark Bergen, Shantanu Dutta and Orville C. Walker, Jr.)
        
        A principal faces two problems when entering into a
        relationship: Pre-contractual problem (during relationship initiation):
        Hidden information/Adverse selection and Post-contractual problem (after the relationship is
        established): Hidden action/Moral hazard
        
        Both problems are rooted in information asymmetry
        (what Williamson refers to as behavioral uncertainty)
        
        Hidden information:
        
        Potential partners may lie/misrepresent their abilities
        
        Hidden information refers to the situation where the agent has better knowledge about the decisions he/she is taking on behalf of the principal
        
        Strategies to reveal agent’s characteristics:
        
        Screening
         When it is “easy” to evaluate agents (e.g., inspection, talk to customers, etc..)
        
        Examine signals from agents
         It must be most costly for agents that do not have the characteristics needed (e.g., up-front investments, low-introductory price, warranties)
        
        Provide opportunities for self-selection
         Expensive pre-qualification process (e.g., certification)
        
        Hidden action: - Partner may cheat/shirk and behave contrary to the principal’s goals
        
        Hidden actions are actions taken by one side of an economic relationship that the other side of the relationship cannot observe
        
        Strategies to reveal agent’s motivation and behavior:
        
        Monitor and reward outcomes (output), • Monitor and reward behavior (input), • Third-party monitoring of outcomes and/or behavior and Reputation
        
        Strategies to reveal agent’s behavior, cont.:
        
        Monitor and reward outcomes (e.g., sales, product quality, delivery timeliness)
        
        “Market control” (price – pay for performance)
        
        Aligns the interests of the agent with those of the principal
         The harder the agent works, the more s/he will get paid!
        
        The agent is left alone to perform, using his/her own strategies
         Least costly form of control as long as agent can control outcome (high competitive or technological uncertainty, reduced control), Efficient unless outcome can be easily manipulated (misdirected efforts). E.g., distributors can increase sales by pushing products onto the customer, and ultimately reduce satisfaction; distributors can also increase sales by decreasing service and price, and ultimately manuf. margins
        
        Monitor and reward behavior (e.g., time spent on selling, service)
        • “Hierarchical control”
        
        The principal has a well-defined idea of what s/he wants the agent to do (behaviors can be defined)
        
        Curb opportunism by getting informed about what the agent is actually doing, through:  Economic incentives and  Social pressure
        
        Least costly when agent cannot control outcome:
         When factors outside the control of the agent determine outcomes (agents are assumed to be more risk averse than principals, thus transferring risk onto the agent is costly)
        
        Third-party monitoring of outcomes and/or behavior (e.g., customer
        satisfaction surveys, reputation systems)
        
        Both examine transaction-cost and human characteristics which make market contracting more costly than internal production (despite efficiency loss):
        
        Both assume that economic actors are motivated by self-interest, and can act opportunistically towards each other when such behavior is possible and profitable
        
        Both assess the impact of information asymmetry (behavioral
        uncertainty) and environmental uncertainty
        
        Based assumption (problems)
        
        Pre-contractual problem (during relationship initiation):
        Hidden information/Adverse selection
        
        Adverse selection: Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller
        
        Post-contractual problem (after the relationship is
        established): Hidden action/Moral hazard
        
        Moral hazard: Moral hazard is the risk that one party has not entered into the contract in good faith or has provided false details about its assets, liabilities, or credit capacity
    - - “A self-enforcing agreement so rooted in the parties’ particular circumstances that the agreement cannot be enforced by a third-party such as a court” (Gibbons 2005)
      - Robert Gibbson
        
        What makes a relational contract credible:
        
        Tradeoff: a party will only cooperate if the net present value of the long-term income from cooperation is greater than the net present value of the incomes resulting from defection and punishment.
        
        The net present value from cooperation.
        
        The net present value from defection.
      - Macaulay
        
        A (legal) contract is a devise to conduct exchange
        
        A contracts involves two distinct elements:
        
        Rational planning of the transaction with careful provision for as many future contingencies as can be foreseen
        
        The existence of use of actual or potential legal sanctions to induce performance of the exchange or to compensate for non-performance
        
        Transactions can be described relatively as involving a more contractual or less contractual manner on both elements
        
        What do firms do?
        
        Businessmen often enter contracts with only a minimal degree of advance planning. - Businessmen desire to “keep it simple and avoid red tape” even when large amounts of money and significant risks are involved. They often prefer to rely on “a man’s word” in a brief letter, a handshake, or “common honesty and decency”. • It is more likely that businessmen pay more attention to describing the performances in an exchange than to planning for contingencies or defective performances or to obtaining legal enforceability of their contracts (the latter, i.e., legal sanctions, is least likely to happen).
        
        The creation of exchanges (which is fairly non-contractual) usually is actually more contractual than the adjustment of such relationships and the settlement of disputes. • Disputes are frequently settled without reference to the contract or potential or actual legal actions. • There is a hesitancy to speak of legal rights or to threaten to sue in these negotiations. • Even where the parties have a detailed and carefully planned agreement which indicates what is to happen, if, say the seller fails to deliver on time, often they will never refer to the agreement but will negotiate a solution when the problem arises apparently as if there had never been any original contract.
        
        Exchanges are carefully planned when it is thought that planning and a
        potential legal sanction will have more advantages than disadvantages.
        
        Contract planning is common when there is a likelihood that significant problems will arise • Complexity of the agreed performance over a long period • The degree of injury in case of default is thought to be potentially great • Differences in bargaining position and relative power of the parties to the relationship
        
        Legal sanctions are used when no other device will work and when the gains are thought to outweigh the costs (e.g., wrongful termination of a dealer’s franchise by a manufacturer)
        
        Contract planning may serve the internal needs of an organization involved in a business exchange. A fairly detailed contract can serve as a communication devise within a large corporation.
        
        What males a relational contract credible:
        
        Reputation, -Reserves for bad debts, Multiple sourcing/dual distribution, Norms – one ought to..., Personal relationships, “Shadow of the future”, Withholding part of payments, Threat of cancellations (loss of investments), Down payments and Lack of alternatives/switching costs
        
        Mutual understanding of obligations – “clarity”
- - - - Collaboration can increase value creation by expanding the availability and use of relevant knowledge and other resources. Collaboration has been shown to reduce risk, speed products to market, decrease the cost of product development and process improvement, and provide access to new markets and technologies (Eisenhardt and Schoonhoven, 1996; Hage-doorn, 1993; Kogut, 1988; Wheelright and Clark, 1992).
      - Extended to complex systems and organizations,
        architecture can be defined as the fundamental organization of a system embodied in its components, their relationships to each other and to the environment, and the principles guiding its design and evolution
      - As discussed by Barnard (1938), an effective organization is one that has been designed in a coherent manner.
      - internal fit (alignment of strategy
        and structure). external fit (alignment of strategy
        and environment). Dynamic fit (maintenance and improvement of internal and external fit over time).
      - To achieve integration, organizations employ a variety of mechanisms, including planning, supervision, standardization of processes and skills, and devices for mutual adjustment such as liaison personnel and cross-functional teams
      - Common to all of the new designs is that the locus of control and coordination mechanisms is the organizational actor. Such organization designs can be understood by applying the actor-oriented architectural scheme. This scheme represents a change from expressing organizational architecture as specific organization structures to expressing it as principles by which actors engage in organizational relationships. Such a change provides a truly dynamic perspective of organizational adaptation to continuously changing environments.
      - actor-oriented schemes is universally applicable. As exemplified by the cases, actor-oriented designs currently are being used to organize operational, administrative, and strategic activities within a variety of organizations. Moreover, such designs are found across different sectors of society, though the early adopters are found in complex, dynamic sectors where the costs of hierarchy — inflexibility, filtering, and delay — are high.
        
        The actor-oriented scheme is particularly well suited to the design of organizations tackling ill-structured or unstructured problems characterized by uncertainty about both ends and means such that a high degree of mutual adjustment among changing sets of actors is needed in order to (1) anticipate the shape of an unknown future, (2) generate alternatives for operating effectively in dynamic and uncertain environments, and (3) implement chosen strategies rapidly and efficiently (Simon, 1973, 1993).
        
        The actor-oriented architectural scheme is consistent with core properties of organization theory. North (1990) shows how political and economic institutions, along with infrastructures for exchange, enable sustained macro-level value creation and growth. The four cases we have discussed may be seen as having internal institutional mechanisms analogous to the macro-level instittions and services described by North. Williamson (1975, 1985) shows how institutions affect the organization of inter-actor relationships. Consistent with Dyer and Singh (1998), the actor-oriented scheme provides mechanisms for knowledge sharing and the identification of complementary resources and collaborators.
        
        Mechanisms that constrain actor opportunism and excessive value appropriation, such as transparency, shared values, norms of reciprocity, and altruism (Milgrom, North, and Weingast, 1990; Ostrom, 1990), enable actors to overcome the tragedy of the commons (Hardin, 1968) and thereby enjoy the benefits of joint value
        creation.