TheChoiceofOrganizationalGovernanceFormandPerformance:PredictionsfromTransactionCost,Resource-based,andRealOptionsTheories
MichaelJ.Leiblein∗
FisherCollegeofBusiness,TheOhioStateUniversity,2100NeilAvenue,Columbus,OH43210-1144,USA
Received28February2003;receivedinrevisedform19May2003;accepted21May2003
Thispaperdevelopsanapproachtoorganizationalgovernancedecisionsthatrecognizeshowthechoiceoforganizationalgovernanceformaffectsboththecreationandappropriationofeconomicvalue.Thepaperbeginswithadetailedsurveyofthreetheoreticalapproaches—transactioncosteconomics(TCE),theresource-basedview(RBV),andRealOptionsanalysis(RoA)tothestudyoforganizationalgovernance.Thisreviewservestoprovidebackgroundmaterialoneachtheoryaswellastoidentifythesimilaritiesanddifferencesintheassumptionsunderlyingtheseperspectives.Aconcludingsectionprovidesaseriesofpropositionsforfutureempiricalresearchthatmayhelptointegratethesetheoriesbyincorporatingnotionsofbothvaluecreationandvalueappropriation.©2003PublishedbyElsevierInc.
Thefieldofstrategicmanagementdescribeswhyfirmsdifferintheirinvestmentchoicesandsubsequentperformance(Rumelt,Schendel&Teece,1994).Indeed,muchoftheworkinthefieldcanbecategorizedintostudiesthathaveexaminedfactorsthatinfluenceofoneelementofstrategicchoice,organizationalgovernance,andthosethathaveexaminedhowfirms’governancechoicesaffectperformance.Forexample,aprominentstrandofstrategyresearchhasexaminedtheconditionsunderwhichfirmsaremostlikelytoutilizeorganizationalgovernanceformssuchasmarketsorhierarchies(e.g.,Monteverde&Teece,1982a,1982b;Walker&Weber,1984),hierarchiesoralliances(e.g.,Pisano,1990),orequityornon-equityalliances(e.g.,Oxley,1997).Asecond,distinct,streamofresearchhasdescribedhowthedecisiontomanageaneconomicactivitythroughmarketcontracts,alliances,orhierarchyinfluencesperformanceintermsofindicatorssuchasaccounting
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E-mailaddress:leiblein1@cob.osu.edu(M.J.Leiblein).0149-2063/$–seefrontmatter©2003PublishedbyElsevierInc.doi:10.1016/S0149-2063(03)00085-0
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returns(D’Aveni&Ravenscraft,1994)orstockmarketreaction(McGahan&Villalonga,2003).
Whilethesetwostreamsofresearchbothinvolvethestudyofvariousorganizationalgovernanceformstheyhavelargelybeendevelopedindependentlyfromoneanother.Forinstance,muchoftheextantresearchexaminingwhyfirmschooseaparticularorgani-zationalformfollowstransactioncosteconomictheoryandarguesthattheoptimalformoforganizationisprimarilydrivenbyefficiencyconsiderations(e.g.,Williamson,1975,1985).Incontrast,priorresearchthathasexaminedtheperformanceimplicationsofspe-cificresourceinvestmentshasfrequentlyreliedonresource-basedreasoning(e.g.,Barney,1986;Rumelt,1984;Wernerfelt,1984)todescribethespecificcharacteristicsofresourcesandinvestmentsthataremostlikelytoprovidesustainablesourcesofcompetitivead-vantage.WhileworkusingRealOptionanalysishasrelatedthechoicebetweenorgani-zationalgovernanceformsandoverallfirmperformance(e.g.,Bowman&Hurry,1993;Kogut,1991),littleefforthasbeenputforthtolinkinsightsfromRealOptionanal-ysiswithinsightsfromtransactioncosteconomics(TCE)ortheresource-basedview(RBV).
Theseparationbetweenthesetheoriesoforganizationalgovernanceandcompetitiveadvantageisunfortunateforseveralreasons.First,theimportanceofcommonconceptssuchasboundedrationality,specificinvestment,anduncertaintysuggeststhatimportantconnectionsexistthatmayenhanceourunderstandingoforganizationalgovernanceanditsrelationshiptoeconomicperformance.Whiletransactionscosttheoristsarguethatspe-cificinvestmentcreatesproblemsofopportunismthatmayfrequentlyberesolvedthroughgovernancechoices(Williamson,1985),transaction-orfirm-specificinvestmentsareoftenrequiredtocreatethetypesofresourcesmostlikelytogenerateabovenormaleconomicperformance(e.g.,Mahoney,2001;McGahan,1996).Second,ifonetakesfirmsasprofitmaximizingentities,itislikelythatfirmswillchoosegovernancemechanismsthatallowthemtoassemblethenecessarybundlesofresourcesandcapturesomeoftheprofitsthataccruefromtheseresources(Riordan&Williamson,1985;Zajac&Olsen,1993).Finally,recentresearchhasdemonstratedthatthefailuretointegratetheoriesoforganizationalgovernancechoicewiththeoriesoforganizationalgovernanceformandperformancemayleadtomisleadingempiricalfindings(e.g.,Leiblein,Reuer&Dalsace,2002;Shaver,1998;Silverman,Nickerson&Freeman,1997).
Thispaperdevelopsaconceptualapproachtostudyorganizationalgovernancedecisionsthatrecognizeshowthechoiceoforganizationalgovernanceformaffectsboththecre-ationandappropriationofeconomicvalue.Thisapproachisbaseduponthreeprominenttheories—TCE,RBV,andRealOptionsanalysis(RoA).Thepaperproceedsasfollows:ThenextsectionprovidesareviewoftheTransactionCost,Resource-basedandRealOptionsliteratureasappliedtodecisionsinvolvingfirmboundaries,theacquisitionanddevelopmentofresources,andeconomicperformance.Thisreviewprovidesanexplicitstatementoftheassumptions,insights,andpropositionsthathavebeenderivedfromeachofthesetheoreti-calperspectives.Thepurposeofthisreviewistoemphasizethesimilaritiesanddifferencesintheassumptionsandpredictionsofferedbyeachtheory.Thepaperthendrawsonthiscomparisontoderiveaseriesofresearchquestionsthatarelikelytoleadtoanintegrationofthesethreeapproaches.Aconcludingsectiondiscussesopportunitiesforfutureresearchtodevelopamorerobust,integratedtheoryoforganizationalgovernance.
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TransactionCostEconomics
Overview
Overthelasttwentyyears,thestandardframeworkforanalyzingquestionsregardingthechoiceoforganizationalgovernanceformhasbeentransactioncosttheory(Williamson,1975,1985).Asopposedtotheneoclassicaleconomicconceptionofthefirmasaproduc-tionfunctionthatrelatesafirm’slevelofcapitalandlabortoitsproductiveoutput,TCEdescribesthefirmasanefficiency-inducingadministrativeinstrumentthatfacilitatesex-changebetweeneconomicactors.Inthisrespect,TCEfollowsHayek(1945)andBarnard(1968)inassertingthatadaptationisthecentralproblemofeconomicorganization.How-ever,incontrasttoHayek’s(1945)emphasisonthe“marvelofthemarket”whichallowsefficientcoordinationautonomouslybetweenpartiesofaneconomictransactionthroughthepricemechanismandBarnard’s(1968)emphasisonthedeeperandmorecooperativere-sponsesthatareavailablethroughconscious,deliberate,andpurposefulcoordinationwithinafirm,TCEputsforththenotionthatefficientorganizationnecessitatesmatchingtrans-actionswhichrequirehigherlevelsofcoordinationwithorganizationalgovernanceformswhichprovidethenecessarylevelsofcoordinationinacosteffectivemanner.ExcellentreviewsofthetheoryanditsapplicationareprovidedbyJoskow(1988)andBoernerandMacher(2003).
Thetwoprimaryconceptualinsightsprovidedbytransactioncosttheoryarethatthegovernanceofexchangeagreementsbetweeneconomicactorsiscostlyandthatgover-nanceformsvaryintheirabilitytofacilitateexchangedependingontheattributesinthetransactionalenvironment.Thechoiceoforganizationalgovernanceformisseenasacen-tralmeansthroughwhichmanagementaffectsthecostsofmonitoringandadministrationor,morespecifically,thecostsofnegotiatingandwritingcontractsandmonitoringandenforcingcontractualperformance(Williamson,1975).AlthoughTCEadvocatesselect-ingagovernanceformthatminimizesthesumoftotalproductionandtransactioncosts,itsapplicationhasemphasizedtheimportanceofthecostsassociatedwithgoverningandmonitoringtransactions.Duetotheeconomiesofscaleandspecializationavailableinthemarketplace,aswellastheadministrativeandincentivelimitsassociatedwithmanagingeconomictransactionswithinafirm(i.e.,hierarchicalgovernance),thetheorygenerallyassumesthatsimplemarketcontractsprovideamoreefficient,orlowercost,mechanismformanagingeconomicexchangesthanhierarchicalorganization.Giventhatmostcom-plexcontractsareincomplete,thetheoryholdsthatincertainsituationsthecostsofmarketexchangemayincreasesubstantiallyandsurpassthetechnicalefficienciesprovidedbythemarket.
PrimaryAssumptions
TherearetwomainassumptionsunderlyingtheTCEperspective.First,individualswithinafirmareassumedtobeboundedlyrationale(Cyert&March,1963;March&Simon,1958;Nelson&Winter,1982).Inspiteoftheirbesteffortstodealwiththecomplexityandunpre-dictabilityoftheworldaroundthem,theyarelimitedintheirabilitytoplanforthefutureandtoaccuratelypredictandplanforthevariouscontingenciesthatmayarise.Asaresult,
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itiscostly,bothintimeandresources,forindividualstoacquireandinterpretinformationaboutthecontractingenvironmentandthefirm.ThesecondassumptionunderlyingtheTCEframeworkisthatofopportunism.Theassumptionofopportunismsuggeststhatsomeeconomicactorsare“self-interestseekingwithguile”(Williamson,1975:26)orsubjectto“frailtiesofmotive”(Simon,1982:303).Althoughnotallpartiesarepronetosuchoppor-tunisticbehavior,theassumptionofboundedrationalitysuggeststhatitiscostlytoidentifyuntrustworthyindividualsexante(Williamson,1996).
Therearetwoimportantimplicationsassociatedwiththeseassumptions.First,boundedlyrationalmanagersfinditcostlytonegotiateandwritecompletecontingentclaimscontractsthatfullydescribeeachparty’sresponsibilitiesandrightsforallfuturecontingenciesthatcouldconceivablyariseduringatransaction.Thatis,marketcontractsareincomplete.Thenotionofincompletecontractssuggeststhatwhencircumstancesarisewhicharenotaccountedforintheoriginalagreement,individualswillneedtonegotiaterevisedtermswhichaddressthenewlyuncoveredcontingency.Theserenegotiationsmayleadtocalcu-latedeffortstotakeadvantageofthevulnerabilitiesofone’stradingpartnerinthehopesofachievingamorefavorabledistributionofthejointeconomicprofitsderivedfromtheexchange.Consequently,managerswillfinditvaluabletoinstitutecostlymechanismstomonitorandenforcecontractualperformancethatallowthemtoidentifynon-complianceandcommunicateinstancesofnon-compliancetoanarbiterthatmayprovideenforce-ment.
MainTheoreticalPredictions
TheprimarytheoreticalpredictionputforthbyTCEisthatof“discriminatingalignment.”Thebasicideaputforthistomatchsimpleexchangeswithsimplemodesofgovernanceandmorecomplexexchangeswithmorecomplexformsoforganization.Deviationfromtheoptimalformofgovernance,asdictatedbytransactionalattributesassociatedwithvariouscontractinghazards,ispredictedtoleadtoinefficiencies.Thus,whencontractualsafeguardsareinadequateforthehazardspresentinagivenexchange,thetheorypre-dictsthatmotivationandcoordinationcostswillrise.Typically,thesecostshavebeenassociatedwiththelikelihoodofopportunisticbehavior(Williamson,1975,1985),thepotentialforhold-up(e.g.,Klein,Crawford&Alchian,1978),challengesinmeasure-mentandmonitoring(Barzel,1982),orinsufficientlevelsofcoordination(Alchian&Demsetz,1972).Whenexcessivegovernanceisutilized,thetransactionwillbehinderedbyunnecessarilyweakincentivesandthecostsofadditionaladministration.Normativeimplicationsareoftendrawnfromsuchmodelsundertheimplicitassumptionofthepresenceofaselectionenvironmentthatensuresthatobservedgovernancechoicesareefficient.
Thenotionofdiscriminatingalignmentsuggeststhatbothtransactionsandgovernanceformsdifferinsubstantiveways.InthetheoriesofWilliamson(1975)andKleinetal.(1978),transactionsareseentodifferintermsofmarketcontractinginefficiencieswhichoriginatefromsmallnumbersbargainingsituations.Whilesmallnumbersbargainingsit-uationsmayexistexante,theprimarycontributionofTCEhascenteredonitsabilitytodescribethespecificexchangecharacteristicsthatarelikelytoleadtoexpostsmallnumberssituations.
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TCEmaintainsthatthelikelihoodofexpostsmallnumbersbargainingsituationsandtheresultingpotentialforopportunisticbehaviorismostlikelytooccurineconomicexchangesthatinvolvesignificantspecializedinvestment(Kleinetal.,1978;Williamson,1975,1979).Thepresenceofspecificinvestmentcreatesthreecosts.First,asthelevelofspecializedinvestmentincreases,quasi-rents(thedifferencebetweenearningsandopportunitycosts)arecreatedthatmaybesubjecttohold-up(e.g.,Kleinetal.,1978).Thepresenceofthesequasi-rentsmayresultincostlyopportunisticbargainingandhaggling.Second,inanticipa-tionofthesehold-upcosts,economicactorsmaybackwardinductandengageininefficientpositioningtactics(Grossman&Hart,1986).Forinstance,byreducingtheirlevelofspe-cificinvestment,firmsmaylimitthetotaleconomicvaluecreatedinanexchange.Finally,exchangeswhichrequireoneorbothpartiestomakesignificanttransaction-specificin-vestmentsbenefittoagreaterextentfromcoordinatedadaptation.Asaresult,thetradeoffsbetweenthehigh-poweredincentivesandautonomousadaptationofthemarketandtheaddedsafeguardsandcentralizedcoordinatingpropertiesofinternalorganizationshiftinfavorofmorefirm-likestructures.
Thetheoryindicatesthattheneedforcoordinationandthelikelihoodofopportunisticbehaviormayalsobeaffectedbythelevelofmarket,supplier,ortechnologicaluncertaintyorcomplexityinaneconomicexchange.Byincreasingthenumberofcontingenciesthatmayaffectamarketcontract,uncertaintyraisesthepotentialforopportunisticbehavioraswellastheexpectedcostsofwritingandenforcingacontingentclaimscontract(e.g.,Williamson,1985).Byinhibitingafirm’sabilitytomeasurethecontributionofanyindividualactivity,uncertaintyalsoincreasestheneedforthesuperiormonitoringandadministrativecontrolprovidedbyhierarchy(e.g.,Barzel,1982;Demsetz,1988).
Uncertaintyalsohasasecond,indirect,influenceontheexpectedcostsofexchange.Marketexchangeisnotonlyhazardousinuncertainenvironmentsbecauseitismorecostlytowritecompletecontractsintheseenvironments,butalsobecauseuncertainenvironmentsfacilitatesubsequentcontractualrenegotiationthatcanbehazardousinthepresenceofspe-cificinvestments.Sinceexchangesconductedinuncertainenvironmentsaremorelikelytoencounterunanticipatedcontingenciesthatrequirerenegotiationthanexchangesconductedinmorestableenvironments,marketfailureisparticularlylikelyinsituationswherebothhighlevelsofassetspecificityanduncertaintyarepresent.
Inmatchingtransactionscharacterizedbydifferenttypesandlevelsofexchangehazardswithappropriategovernanceforms,thetheoryindicatesthatsubstantivedifferencesexistacrossorganizationalgovernanceforms.Typically,organizationalformisconceptualizedintermsofthreedistincttypes:unilateralmarketcontracts,intermediateorhybridformsincluding“alliances,”andhierarchical,integratedfirms.Williamson(1991)maintainsthatthesedifferentgovernancestructuresvarydiscretelyintermsofincentiveintensity,admin-istrativecontrols,andcontractlawregime.Ascomparedtomarketcontracts,hierarchicalgovernanceprovidesweakerperformanceincentives.Theseweakerincentivesarethoughttopromoteateamorientation.Firmsprovideaccesstoabroaderandmoreflexiblesetofad-ministrativecontrolsystemsascomparedtomarketcontracts(Holmstrom,1979).Marketcontractsaresubjecttoclassicalcontractlawwheretheidentityofthepartiesisirrele-vantandindividualtransactionsinvolveclear“sharpin,sharpout”exchanges(Macneil,1974).Incontrast,firmsaresubjecttoanimplicitlawofforbearancewherefiatrulestheday.
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AssetSpecificityandOrganizationalForm
ThevastmajorityofempiricalliteratureinTCEhasexaminedthefactorswhichinflu-encethechoiceoforganizationalform.Thefollowingparagraphsbrieflysummarizethemeasurementandfindingsregardingtherelationshipbetweenassetspecificity,uncertainty,andorganizationalform.
Williamson(1996)identifiessixtypesofassetspecificity:(1)site,(2)physicalasset,(3)humanasset,(4)dedicatedasset,(5)brandnamecapital,and(6)temporal.Sitespecificityreferstotheco-locationoffacilitiessoastominimizeinventoryorproductioncosts.Ithasbeenmeasuredintermsofthephysicalproximityofcontractingparties(Joskow,1985).Physicalassetspecificityreferstotheuseofco-specializedassetsthatarecustomizedforaparticularuseorpurpose.Forinstance,theuseofspecializeddiesandequipmentassociatedwiththeuseofthosedies(Walker&Weber,1987).Humanassetspecificityreferstoanemployee’sdevelopmentoffirm-specificskillsorknowledge.Humanassetspecificityhasbeenproxiedbothbythedevelopmentofspecializedknowledgethatoc-cursasanindividualsalespersontailorshisorherworkingrelationshiptoanorganization(Anderson,1985)aswellasbythespecificityofcommunicationbetweensemiconduc-torproductdesignersandmanufacturingengineers(Monteverde,1995).Dedicatedassetspecificityreferstoadditionalinvestmentsinplantorequipmentmadeinordertoselltheincreasedoutputtoaparticularcustomer.Forexample,ithasbeenarguedthatthespecial-izeddurableassetsinJITrelationshipsrepresentaformofspecificdedicatedassets(Frazier,Spekman&O’Neal,1988).Brandnamecapitalspecificityreferstoinvestmentinreputa-tion.GatignonandAnderson(1988)arguefortheuseofadvertisingintensityasameasureofbrandnameequity.Temporalorspatialspecificityreferstoinvestmentsmadetofacilitatethetimelyresponseorcoordinationofhumanassets.Temporalspecificityhasbeenproxiedbytheuseofon-sitehumanassetsinindustriessuchasshipbuildingwherethetimingandcoordinationofconstructionsprojectsiscritical(Masten,Meehan&Snyder,1991).
Empiricalresearchhasprovidedstrongandconsistentsupportforthetheorizedrelation-shipsbetweentransaction-specificinvestmentandgovernanceform.Notablestudiesthatdemonstrateapositiverelationshipbetweenthelevelofspecificityandmoreintegratedgov-ernanceincludeMonteverdeandTeece’s(1982a,1982b)workregardingthegovernanceofautomotivecomponentsintheautomotiveassemblyindustry,Stuckey’s(1983)casestudyofthealuminumindustry,Anderson’sanalysisofthedecisiontoutilizeadirectsalesforceintheelectronicsindustry(Anderson,1985;Anderson&Schmittlein,1984),andMasten’s(1984)workintheaerospaceindustry.Morerecently,Monteverde(1995)findsthatthedecisiontointegrateproductdesignwithmanufacturingisrelatedtothelevelofrequiredinvestmentinspecifichumancapital.Inastudyfocusedonhybridgovernanceforms,Oxley(1997)findsthatmorehierarchicalalliancemodesarefavoredwhenappropriabilityhazardsarehighduetodifficultyinspecifyingorlimitingthescopeoftechnologyunderlyingthealliance.
UncertaintyandOrganizationalForm
Althoughtherelationshipbetweenuncertaintyandfirms’governancedecisionsisalsostressedinmuchoftheexistingliterature,empiricalstudieshaveyieldedfragileandat
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timescontradictoryresults(seeMahoney,1992;Sutcliffe&Zaheer,1998forreviews).Forinstance,empiricalstudiesfocusingononeaspectofbehavioraluncertainty—measurementuncertainty—havedemonstratedapositiverelationshipbetweentheabilitytomeasureanemployee’sproductivityandthedegreeofverticalintegration(Anderson,1985;John&Weitz,1988).Incontrast,researchfocusingontechnologicaluncertainty(e.g.,Balakrishnan&Wernerfelt,1986;Harrigan,1986;Walker&Weber,1984,1987)hasdemonstratedanegativerelationshipbetweenuncertaintyandintegration.Researchexaminingthein-fluenceofdemanduncertaintyhasillustratedbothnegative(e.g.,Harrigan,1986)andpositiverelationships(John&Weitz,1988;Levy,1985;Walker&Weber,1987)withintegration.
AsrecentlypointedoutbySutcliffeandZaheer(1998),empiricalcontradictionsre-gardingtherelationshipbetweenuncertaintyandgovernanceformmaybedue,inpart,tothedifferentsourcesofuncertaintyandvarietyofmeasuresemployed.Forinstance,be-havioralormeasurementuncertaintyhasbeenoperationalizedintermsoftheaccuracyofsalesrecords(Anderson,1985)andasthedifficultyinevaluatingperformance(Anderson&Schmittlein,1984;Poppo&Zenger,1998).Thesebehavioralmeasuresofuncertaintyhavefrequentlybeenappliedwhendiscussingthedirectrelationshipbetweenthecostofmeasuringtheoutputofapartnerandtheoptimalformoforganization.
Incontrast,theconceptofenvironmentaluncertaintyhasoftenbeenappliedtodiscussionswhichemphasizehowunforeseencontingenciesmayaffectmarketcontractsbetweentwoparties.Environmentaluncertaintyhasbeenmeasuredinperceptualtermsregardingthedegreetowhichdemand(Heide&John,1990),technology(Walker&Weber,1984),orsupplierperformance(Walker&Weber,1987)isunpredictable.ObjectivemeasuresincludeBalakrishnanandWernerfelt’s(1986)useoftheaverageageofplantandequipmentasaproxyfortechnologicaluncertainty,Levy’s(1985)useofthesumofsquarederrorsfromaregressionoftherelevantproductmarket’shistoricalunitdemandasameasureofdemanduncertainty,andHenisz’s(2000)useofpoliticalinteractiondatatoderiveameasureofpoliticaluncertainty.
Themarkethazardsthatinfluencegovernancechoicearemostlikelytooccurwhencontractrenegotiationtakesplaceinthepresenceofspecificassets.Thus,marketfailureisparticularlylikelyinsituationswherebothhighlevelsofassetspecificityanduncertaintyarepresent.Empiricalresearchhasprovidedfindingsconsistentwiththisinteractiveeffect(Coles&Hesterly,1998;Leiblein&Miller,2003;Walker&Weber,1987).
Resource-basedView
Overview
TheRBVhasemergedasanimportantexplanationforpersistentfirm-levelperformancedifferences.Incontrasttotheoriesoffirmperformancethatfocusonproduct-marketposi-tionandtheexerciseofmarketpower(e.g.,Bain,1956;Porter,1980),theRBVmaintainsthatfirmsmayenjoypersistentperformanceadvantagesduetotherelativesuperioritywithwhichtheirresourcesaddresstheneedsofcustomers.Earlycontributionsempha-sizedfirms’abilitytocreateandsustaincompetitiveadvantagebyacquiringanddefending
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advantageousresourcespositions.Forinstance,Wernerfelt(1984)notedthatbothproduct-andresource-marketscarcitymightleadtopersistentsourcesofadvantage.Barney(1986)describedhowimperfectionsinthemarketforstrategicfactorsmayaffectafirm’ssubse-quenteconomicperformance.LippmanandRumelt(1982)andRumelt(1984)describedhowambiguityregardingthecauseandeffectnatureoftheresourcedevelopmentprocessmightprovidesustainedsourcesofcompetitiveadvantageunderuncertainty.Thoroughre-viewsoftheresource-basedliteratureareprovidedbyMahoneyandPandian(1992)andBarneyandArikan(2001).
TheRBVprovidestwoprimaryconceptualinsights.First,itrecognizesthatfactormar-ketsexistwhereinfirmsmaydeveloporacquiretheresourcesnecessaryforproduct-marketcompetition.Second,theRBVpointsoutthattheresourceswhichleadtopersistentperformancedifferentialsaremuchbroaderinnatureandmoredifficulttoaccumulatethanthetangibleassetsandfactorsofproductiontypicallyemphasizedinneoclassicaleconomictheories.Forinstance,theresource-basedliteratureoftendrawsuponPenroses’(1959)dis-cussionoftheadministrativeandentrepreneurialskillsoftopmanagementteams,NelsonandWinter’s(1982)notionofroutines,orItami’s(1987)notionofinvisibleassetssuchastechnology,customertrust,brandimage,andcorporateculture.Giventheseinsights,theRBVdescribeshowcompetitionforresourcesmayaffectafirm’sabilitytoimplementvalu-ableproduct-marketstrategies(Wernerfelt,1984)andtocaptureeconomicvalue(Rumelt,1984).
PrimaryAssumptions
ThereareanumberofassumptionsunderlyingtheRBV.Thefirstsetofassumptionsstatethatfirmsareprofitmaximizingentitiesdirectedbyboundedlyrationalmanagers(Conner,1991;Rumelt,1984).Asaresult,managersareassumedtolacktheknowledge,foresight,andskilltoaccuratelypredictandplanforallthevariouscontingenciesthatmayariseintheirsearchforprofitableopportunities.Thesecondsetofassumptionssuggestthatfirms’mustmakeup-frontinvestmentsfortheopportunitytoengageintheprocessofcreatingnewresourceswhoseeventualvalueisinherentlyambiguousanduncertain(Lippman&Rumelt,1982).Theseassumptionsleadtothecriticalconceptsofresourceheterogeneityandresourceimmobility.Theideaofresourceheterogeneityimpliesthatcompetingfirmspossessdifferentbundlesofresources.Theideaofresourceimmobilityimpliesthatmanyoftheseresourcedifferencesmaypersistovertime.MainTheoreticalPredictions
Resource-basedlogichasusedtogeneratefourprimarypredictionsregardingcom-petitiveadvantageandperformance(Peteraf,1993).Thefirstpredictiondescribesthecharacteristicsofresourcesthatprovidetemporarysourcesofcompetitiveadvantage.Forinstance,resource-basedlogicsuggeststhatfirmsmaygaintemporarycompetitivead-vantagesbyleveragingvaluable,rare,andnon-substitutableresources.Valuableresourcesarethosethatenableformstodevelopandimplementstrategiesthathavetheeffectofincreasingcustomers’willingnesstopayorreducingasuppliers’opportunitycost(e.g.,Brandenburger&Stuart,1996).Rareresourcesarethoseforwhichdemandexceedssup-
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ply.Non-substitutableresourcesarethosethat,eitherinisolationorincombination,canbeuniquelyusedtohelpconceiveofandimplementastrategy.
Second,theRBVindicatesthatcompetitiveadvantagemaybesustainableifthereareexpostlimitstocompetition.Incontrasttothebarrierstocompetitionhighlightedintheindustrialorganizationliteraturesuchascapacitypreemption(Dixit,1989),spatialpre-emption(Schmalansee,1978),orcontractualpreemption(Aghion&Bolton,1978),theRBVemphasizeshowcharacteristicsintheresourcedevelopmentprocessmayinhibittheefficientimitationofcriticalresources.BarneyandArikan(2001)catalogueanumberofrationalesforresourceimmobilitythathavebeendevelopedintheRBVliterature.Forin-stance,LippmanandRumelt(1982)indicatethatthepersistenceofresourceheterogeneityacrossfirmsisduetoenforceablerightsfortheexclusiveuseofaresourceorcausalambigu-ityregardingtheapplicationofaresource.DierickxandCool(1989)suggestthatresourcesareimmobilewhentheyaresubjecttotimecompressiondiseconomies,arecausallyam-biguous,arecharacterizedbyinterconnectedassetstocks,orarecharacterizedbyassetmassefficiencies.Barney(1991)suggeststhatresourcesareinelasticinsupplywhentheyarepathdependent,causallyambiguous,orsociallycomplex.Thesenotionsofresourcehet-erogeneityandresourceimmobilityareoftenusedasstartingassumptionsforapplicationsoftheRBVframework(e.g.,Barney,1991;Wernerfelt,1984).
ThethirdpredictionofferedbytheRBVdescribestheconditionsunderwhicheconomicprofitsmaybegenerated.Inorderforafirmtoenjoyaneconomicprofitorrent,itmustgeneratemorevaluefromitsresourcesthanexpectedatthetimeoftheiracquisitionordevelopment.Thus,firmswhichacquireordevelopvaluableresourcesinfactormarketswherethereareexantelimitstocompetitionmaygeneratetemporaryeconomicprofits.Barney(1986),followingDemsetz(1973),suggeststwowaysthatmarketscanbeimper-fectlycompetitive.First,inthefaceofuncertainty,firmscanbeluckyandpurchaseordeveloparesourceatacostbelowitstrueeconomicvalue.Second,itmaybethecasethataparticularfirmhasunusualinsightsaboutthefuturevalueoftheresourcesitisacquiringordevelopinginastrategicfactormarket.Forexample,afirmmaycreateeconomicvaluethroughanacquisitionstrategythatcreatesprivatevalueaboveandbeyondthevaluebroughtbyotherbiddersandleveragesitsownvaluableandcostlytoimitateresources(Barney,1988).Similarly,afirmmaybeabletogenerateaneconomicrentinfactormarketswhereitbidsagainstfirmswhohavelessaccurateexpectationsaboutthefuturevalueofunderlyingresourcesoreconomicfactors(Makadok&Barney,2001).
ThefourthRBVpredictionsuggeststhatfirmsmaygeneratesustainedeconomicprofitsbycontinuouslyleveragingvaluable,rare,andcostlytoimitateresourcesinwaystheircompetitorscannotanticipate.Thisimpliesthatongoingeconomicprofitsaretheresultofafirmmaintainingexcesssupplyincriticalresourceswhicharebothimperfectlymo-bileandgeneralizable.Imperfectmobilityisnecessarytoinsurethattheresourceismorevaluabletothefocalfirmthananyotherpotentialbiddingfirm.Theresourcemustalsobepartiallygeneralizablesothatitcanbeextendedintonewapplications.Whiletheexistingliteratureisrelativelysilentonthecharacteristicsofresourcesthatexhibitthesetypesofcharacteristics,Rivkin(2001)developsapromisingsimulationmodelwhichsuggeststhatsuchresourcesareofmoderatecomplexity.OnemayconsiderNucor’sabilitytorepeatedlystart-upsteelmini-millproductionsites(Ghemawat,1992)orCooperIndustriesabilitytorepeatedlytransformold-linemanufacturers(Collis&Montgomery,1998)asrepresenta-
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tiveofmoderatelycomplexresourcesthatcompetitorshavebeenunabletoduplicateandhavebeenextendedintorelatedapplicationareas.
AlthoughtheprimarypredictionsofferedbytheRBVarewithregardtotherelationshipbetweeninvestmentinresourceswithparticularcharacteristicsandcompetitiveadvan-tageorperformance,theframeworkalsooffersdirectpredictionsregardingorganizationform.Atitsmostbasiclevel,RBVscholarshaveemphasizedhowresourceheterogene-itymayaffecttheimplicitassumptionthattransactioncostsarethedeterminingfactorineconomicorganizationbyarguingthatorganizationalformisdeterminedbyfirms’uniquestrengthsandweaknesses.Forinstance,theRBVsuggeststhattheabilitytoleveragevalu-able,firm-specificresourcesheldinexcesssupplymayleadtoamarginallyhigherlikelihoodthatfirm-hierarchywillbeoptimallychosentomanageaneconomicexchange.Thus,afirmwithauniqueandvaluableproductivecapabilitywillbemorelikelytointernalizethoseactivitiesthatarecomplementarytoitsuniquefeaturesthanfirms’thatlackthiscapability(e.g.,Argyres,1996;Barney,1999;Leiblein&Miller,2003;Quinn&Hilmer,1994).Resource-basedlogichasalsobeenusedtodescribetheconditionsunderwhichitisoptimaltocoordinatespecializedresourceswithinafirm(e.g.,Conner&Prahalad,1996;Liebeskind,1996).Thisworkfocusesalmostexclusivelyontheroleofknowledge,partic-ularlytacitknowledge,inexplainingorganizationalgovernancechoice(e.g.,Grant,1996;Kogut&Zander,1992,1993,1996;Spender,1996).Forinstance,theknowledge-basedapproachemphasizesdifficultiesassociatedwithcombiningresources(Teece,Pisano&Shuen,1997)andproposesthattheuseofafirm—asopposedtojointventures,contracts,orotherorganizationalgovernanceforms—providesasuperiormechanismforcoordinatingeconomicactivitiesrelativetootherformsoforganization.Firmsarearguedtobemoreef-ficientthanothergovernanceformssuchasmarketsatcombininganddiffusingknowledgebecauseoftheirsuperiorcoordinativeattributes(Conner,1991)andinformationprocessingabilities(Gulati&Singh,1998).Itisimportanttonotethatthisargumentisdevelopedindependentofassumptionsregardingopportunisticbehavior.Thus,evenifpartiestoanexchangearepresumedtoactingoodfaith,membersofonefirm“mayquiteliterallynotunderstandwhatanotherfirmwantsfromthem”(Langlois&Foss,1997).Thegeneralpropositionisthatfirmsexistbecausetheyarebetterthanmarketsatcreating,recombining,andtransferringcertaintypesofknowledge(e.g.,Kogut&Zander,1992).ResourcesandCompetitiveAdvantage
Thevastmajorityofempiricalliteratureintheresourced-basedtraditionhasexaminedtheperformanceimplicationsofvaluable,rare,andcostlytoimitateresources.Asthevalueofaparticularresourceiscontextspecific,thisliteraturehasdemonstratedrelationshipsbetweenawiderangeofresourcesandmeasuresofperformance.Forinstance,priorworkhasexaminedthecompetitiveimplicationsofcompetenceinfunctionalareassuchasman-ufacturing(e.g.,Pisano,1994),technologydevelopment(e.g.,Afuah,2000),andmarketing(e.g.,Schoenecker&Cooper,1998).Priorresearchhasalsoexaminedthecompetitiveim-plicationsassociatedwiththeabilitytointegrateknowledgeacrossfunctionalareas(e.g.,Henderson&Cockburn,1994)aswellastheimportanceofmaintaininganappropriatescopeofresources(e.g.,Brush&Artz,1999).Stillotherworkhasstudiedhowafirm’sresourcesaffectitsabilitytointeractwithsuppliers(e.g.,Lorenzoni&Lipparini,1999)or
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toengageinanalliancenetwork(e.g.,Baum&Berta,1999;McEvily&Zaheer,1999).Per-hapsthegreatestvolumeofworkhasfocusedontheimportanceofintangibleresourcessuchasreputationandculture(e.g.,Hall,1993;Rao,1994).MillerandShamsie(1996)suggestapotentiallyusefulcategorizationofresourcetypesintheirstudyoftheUSmovieindustrywheretheyproposeadistinctionbetweenproperty-andknowledge-basedresources.
Thevarietyofresourcesanalyzedinpriorstudiessuggeststheneedtomorecarefullyconsidertherelationshipbetweenspecificcategoriesofresources,product-marketposition,andcompetitiveadvantage(Priem&Butler,2001).Onerecentapproachtothisproblemhasfocusedontheconceptofresourceimmobilityatamorefine-grainedlevelbyanalyzingthebarrierstointernalandexternalknowledgetransfer(e.g.,Rivkin,2001;Szulanski,1996).AnalternativeapproachhasbeenexaminedinarecentpaperbyNickerson,HamiltonandWada(2001)whichdescribestheperformanceimplicationsof“fit”amongstrategicchoicesassociatedwithmarketposition,resourceposition,andorganizationalgovernanceform.ResourcesandOrganizationalForm
Empiricalresearchhasalsoexaminedtherelationshipbetweenthepossessionofparticu-lartypesofresourcesandorganizationalgovernanceform.Thisworkhasprovidedevidenceconsistentwiththepropositionthathighlyspecificresourcesandactivitiesaremosteffi-cientlycoordinatedwithinfirmhierarchies.Forinstance,KogutandZander(1993)havearguedthatfirmsareabletotransferknowledgethatisdifficulttounderstandandcodifyatalowercosttowhollyownedsubsidiariesthantothirdparties.Inasurveyofprojectengineers,ZanderandKogut(1995)presentresultssuggestingthatthetacitnessofmanufacturingin-novationsaffectsthedurationoftimeuntiltheycanbetransferredtothemarket.Consistentwiththisview,arecentstudybyAlmeida,SongandGrant(2002)presentsevidencefromthepatentcitationsofsemiconductorcompaniestosuggestthatmultinationalfirmsaremoreeffectiveattransferringtechnologicalknowledgeoverbothalliancesandmarkets.
RealOptionsAnalysis
Overview
RealOptionsAnalysishasemergedasacompellingapproachforevaluatinginvestmentopportunitiesinuncertainenvironments.TheconceptofrealoptionsanalysiswasproposedbyMyers(1977)whoappliedformatworkonfinancialoptionstoissuesassociatedwithcapitalbudgetingandtheallocationofR&Dresources.Notingthatsomeinvestmentoppor-tunitiesconfertheright,butnottheobligation,totakespecificoperatingactioninthefuture,thisworkemphasizedthemannerinwhichinvestmentscreateeconomicvaluethroughop-eratingflexibility.Abroadvarietyofrealoptionshavebeenstudiedinthefinanceliteratureincludingtheoptiontodeferproduction,theoptiontotemporarilyshutdownproduction,andtheoptiontochangeaproject’soutputmix(e.g.,Majd&Pindyck,1987;McDonald&Siegel,1986;Trigeorgis,1998).Inthemanagementliterature,attentionhasbeenfocusedoncorporategrowthandflexibilityoptionswithnotablestudiesexaminingaspectsofen-trepreneurialfailure(McGrath,1997),investmentinjointventures(Chi&McGuire,1996;
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Folta,1998;Folta&Leiblein,1994;Kogut,1991;Reuer&Leiblein,2000),marketentry(Miller&Folta,2000),andorganizationalgovernance(Leiblein&Miller,2003).Trigeorgis(1998)andCopelandandAnitkarov(2001)providerecentreviews.AdnerandLevinthal(2004)andMcGrath,Ferrier,andMendelow(2004)debatetheboundariesassociatedwiththeapplicationofrealoptionstheorytothefieldofmanagement.
TwokeyinsightsunderlietheapplicationofRealOptiontheorytothefieldofstrate-gicmanagement.First,RealOptionanalysisrecognizesthatthereareopportunitycostsassociatedwithirreversibleinvestmentunderuncertainty.Asaresult,theabilitytode-fercommittingresourcesunderuncertaintyisvaluable(e.g.,McDonald&Siegel,1986).Second,RealOptionanalysisrecognizesthatmanyinvestmentscreatevaluablefollow-oninvestmentopportunities,orgrowthoptions(Bowman&Hurry,1993;Kester,1981;Myers,1984).Takentogether,theseinsightssuggestthatcertainup-frontinvestmentsal-lowmanagementtocapitalizeonfavorableopportunitiesandmitigatenegativeshocksbyproactivelyconfrontinguncertaintyovertimeinaflexiblefashion(Kogut,1991)ratherthanbyattemptingtoavoiduncertainty(e.g.,Cyert&March,1963).Thismanagerialflexibil-itymaybeexploitedwhenthefirmreceivesnewinformationregardingmarketdemand,competitiveconditions,theviabilityofnewprocessestechnologies,andsoforth.PrimaryAssumptions
Twokeyassumptionsunderlietherealoptionperspective.First,RealOptionstheoryassumesthatmanagersareabletowritecontractsthatprovideimplicitorexplicitclaimsonfuture,follow-onopportunities.Thisassumptionimpliesthatmanagerspossessalevelofforesightsufficienttoengageinnegotiationoverthepriceandprovisionsassociatedwithacalloption,exante,thatwillmitigateexpostbargainingcostsandopportunitiesforthesellertohold-upthebuyer(e.g.,Chi&McGuire,1996).Inorderfortheholderofanoptiontocaptureeconomicvalue,shemustbeabletocreateatleastapreferentialclaimthatallowshertobenefitbyexercisingtheoptionwhenuncertaintyisresolvedfavorablyandtolimitdownsideriskbykillingtheoptionwhenuncertaintyisresolvedunfavorably.Second,RealOptionstheoryassumesthat,apriori,itispossibletospecifyadistributionofexpectedreturnsassociatedwithaninvestment.Thisassumptionimpliesthatitispossibletodevelopestimatesofthepotentialvalueassociatedwithvariousoptionstoabandon,defer,orincreaseinvestmentalongaparticularinvestmenttrajectory.ThisassumptionalsoimpliesaconceptionofuncertaintythatisclosertoKnight’s(1921)conceptofrisk,whereprobabilitiesofpotentialoutcomesareavailabletoguidechoicethanuncertainty,whereinformationistooimprecisetobeadequatelysummarizedbyprobabilities.
Therearetwoimportantimplicationsassociatedwiththeseassumptions.First,afirm’svalueconsistsoftwocomponents—thepresentvalueofexistingassetsinplaceandthepresentvaluederivedfromthecreationofdiscretionalfutureopportunities—andthevalueofthesetwocomponentsisestimable(e.g.,Miller&Modigliani,1961).Second,theRealOptionsapproachindicatesthat,foruncertainprojectsoverwhichmanagershavediscretionandcanactflexibly,traditionaltechniqueswilloftenunder-estimatevalue(Myers,1977).Theabilitytoflexiblyupdateaninvestmentplanconditionaluponthearrivalofnewinfor-mationisvaluableandthisvalueisnotaccountedforintraditionaltheoriesofinvestmentorgovernance.Thesetwoimplicationsareimportantforstudiesofcorporatedevelopment
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ingeneralandorganizationgovernanceinparticularbecausetheysuggestthatfirmsmaychoosegovernancestructuresinadynamicfashioninanticipationoffutureopportunities.MainTheoreticalPredictions
TheRealOptionapproachhasbeenusedtogenerateanumberofpredictionsregardingthepotentialvalueassociatedwithinvestmentsthatprovidetheoptionholderwiththeabilitytoimproveperformancebyexpandingintoattractivemarketsortechnologiesaswellastheopportunitytocontaindownsideriskbydeferringinvestment,abandoningoperations,andexpandingorcontractingactivities.Theserealoptionargumentsdescribehowfirmsmaylayclaimtofuturerentgeneratingopportunitiesthroughcurrentinvestments.ThissectiondrawsonLeibleinandMiller(2003)todescribehowoptiontheoreticprinciplesmayinfluencethemannerinwhichexchangeandfirmattributesmayinfluencechoiceoforganizationalgovernanceform.
Thefirstandsimplestmeansthroughwhichorganizationalgovernancedecisionsmaycreatevalueisthroughtheoptiontodeferinvestment.Wheninvestmentsareirreversible,thatistheycannotbefullyrecoveredwithoutincurringsomecosts,andthefuturevalueoftheseinvestmentsisuncertain,RealOptionstheoryindicatesthatcommittingprema-turelymayimposeconsiderablerisks.Inthesesituations,thereisvalueassociatedwiththeoptionofwaitingfornewinformationthatmightaffectthedesirabilityortimingoftheinvestment.Theabilitytodelayordeferanirreversibleinvestmentcanthusbeanimportantsourceofflexibility(McDonald&Siegel,1986;Pindyck,1991)andtheeco-nomicvalueassociatedwiththisflexibilitymaysuggestdeferringinvestmentevenifthestaticnetpresentvalueassociatedwiththeprojectispositive.Forinstance,ifintegrationofproductionentailsgreatersunkcoststhanproductionthroughmarketcontracting,inte-grationwillexposethefirmtotheriskofowningassetsthatmayturnouttohavelittlevalueduetochangesineithertheunderlyingtechnologyorproductdemand.Marketcon-tracting,incontrast,mayincurgreatershort-termmarginalproductioncostsbutprovidethefirmwiththeflexibilitytopursuealternativetechnologiesinthefuture.Realoptiontheoryrecognizestheexpectedvalueassociatedwiththislatterflexibilityandindicatesthat,underuncertainty,itmaybeoptimaltoutilizemarketlikemechanismsthatprovidegreaterflexibility.Thevalueassociatedwiththeoptiontodeferisgreatestwhenuncer-taintyishighandtheimmediatecashflowslostduetopostponinginvestmentarerelativelysmall.
ThesecondmeansthroughwhichRealOptionanalysisinformsorganizationalgover-nancedecisionsisthroughgrowthoptions.Growthoptionsprovidethefirmwiththeright,butnottheobligation,tolaterexpandordeveloparelatedproductortechnology.Growthoptionsareparticularlyvaluableinhigh-technologyindustrieswherethereareoftenweakappropriabilityregimesandinter-generationalknowledgespilloversaresignificant.Inthesecontexts,itwilloftenbedesirabletointernalizeactivitiesassociatedwithearlygenerationsofaproductortechnologyinordertomaintainaclaimontheopportunitytoparticipateinsubsequentgenerationsofthatproductortechnology.Forinstance,inthebiotechnologyindustry,afirmwilloftenhavetoinvestinaninternalpilotproductionprocessinordertodeveloptherequisiteexpertisenecessarytohavetheoptiontosourceorfabricateinternallyatscaleproduction.Thus,evenifitispossibletoefficientlycontractforproductioninthe
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marketplace,itmaybeoptimalforthefirmtointernalizethetransactioninordertomaintaintheoptionvalueassociatedwithsubsequentgenerationsoftheproduct.
Finally,theRealOptionapproachalsohelpsdescribehowfirm-levelcharacteristicsaffectdecisionsregardingorganizationalform.Afirm-levelinfluenceongovernanceissuggestedbytheRealOptiontheorypredicationthatcertainresourcescreateeconomicvaluebypro-vidingtheabilitytoflexiblyswitchuseofassets.Forinstance,KulatilakaandTrigeorgis(1994)describehowfirmsinindustrieswithvolatileproductdemandcanbenefitbyinvestinginplantandequipmentthatallowsthemtoaltertheirmanufacturedproduct-mix.However,othertypesofswitchingoptionsmayalsobecreated.Afirm’sproduct-marketdiversifica-tionstrategymayaffectitsgovernancechoicebetweeninternalandoutsourcedproductionbyalteringitsabilitytoachieveeconomiesofscaleandscopeinproduction.Forinstance,adiversifiedfirmismorelikelytoinvestinagivenprocesstechnologyknowingthatevenifdemandfortheinitialproductfailstomeetexpectation,themanufacturingfacilitymaybeconvertedforuseinoneofitsotherproductmarkets.Thus,product-marketdiversificationprovidesalowerboundontheavailablescaleafirmmayusetojustifyinternalinvestmentinagivenprocesstechnology.Similarly,andofgreaterimportanceintechnologicallyvolatilein-dustries,diversifiedfirmsareabletocontinueutilizingatechnologyafteritbecomesobsoleteinitsprimaryproduct-marketapplicationbyshiftingitsusetoaless-demandingapplication.
OpportunitiesforFutureResearch
QuestionsforDebate
ThesummariesoftheTCE,RBV,andRealOptionsliteraturesofferedintheprecedingsectionsdescribetheconditionsunderwhichitispossibletogenerateeconomicprofitsaswellashowthealignmentbetweenaneconomicexchangeandthechosenmodeofgover-nanceaffectsthedistributionofprofitsacrossfirmsinvolvedinanexchange.Asnotedinthesereviews,thethreetheoreticalstreamsdifferintheirunderlyingassumptions(seealsoSilverman,2001).Thesedifferingassumptionsofferafruitfulsetofquestionsforfurtherdebate.Opportunism
Thefirstissuefordebateisonethathasfrequentlybeenraisedintheliteratureandconcernstheassumptionofopportunism.Towhatextentisthenotionofopportunismnecessaryforatheoryoforganization?Whiletherehavebeensomecritiquesoftransactioncostsrelianceontheconceptofopportunism(Dondaldson,1990;Ghoshal&Moran,1996),resource-basedscholarshavegenerallyarguedthatopportunismissimplynotrequiredforatheoryofgovernance(Conner&Prahalad,1996).Forinstance,onereasonforhierarchicalorganizationmaybetoachieveimprovedcoordinationbetweenindependenteconomicactorsco-location.Ithasalsobeenarguedthatrelationalcontractingmayleadtoalevelof“trust”thatreducesthepropensityforopportunisticbehavior(e.g.,Ring&VandeVen,1992)andactsasasubstituteformoreformalgovernancemechanisms.Byassumingaworldofperfectrationalityandcontractingwithexplicitclaimsonfutureopportunities,therealoptionframeworkalsoleaveslittleroomforthenotionofopportunism.
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Insummary,theexistingliteratureoffersanumberofplausibleexplanationsregardingtheexistenceandrelativeimportanceofopportunism,coordination,andtrustindetermin-ingorganizationalgovernanceform.Whatisleftisthedifficulttaskofdevisingempiricalstudiesthatcarefullydisentangletheinfluenceofthesevariablesongovernancechoiceei-therthroughthedevelopmentofconflictinghypothesesordirectmeasurementofabstractconceptssuchasopportunismandtrust.OnepromisingavenueissuggestedbyMayerandBercovitz(2003).Inarecentstudyofcontractsintheinformationtechnologyindustry,theyproposetotestwhetherpriorrelationshipsprovidealeveloftrustthatreducestheneedformoreprotectivegovernanceprovisions(suggestingopportunismisofgreatconcern)orwhetherpriorrelationshipsprovidelearningopportunitiesthatallowtransactingorganiza-tionstoimprovetheirbilateralcoordinationthroughmorerefinedcontractualprovisions.Whiletheresultsofthisstudyvarywiththemeasurementofpriorrelationshipstrength,theirstudyisillustrativeofthetypeofstudythatmayhelptoinformthisdebate.ResourceHeterogeneity
Thesecondissuefordebate,therelativeimportanceofresourceheterogeneity,hasalsobeensubjecttomuchdiscussion.Demsetz(1988,p.147)andWinter(1988,p.175)notethatTCEsuppressesdifferencesinfirms’capabilitiesinfavorofaconcernwithincen-tives.Indeed,ithasbeenarguedthatfirms’governancechoicesarefrequentlydrivenbytheirabilitytoleverageuniquecapabilities(Bettis,Bradley&Hamel,1992;Langlois&Foss,1997;Quinn&Hilmer,1994).Therealoptionframeworksuggeststhatgovernancechoicesmayalsobeshapedbyfirms’uniqueperceptionsregardingfuturevaluegeneratingopportunities.WhileWilliamson(1998,1999)andothersrecognizethevalueassociatedwithembracingsuchresourceandstrategyheterogeneity,theyalsopointoutthesimultane-ousneedtoidentifytheconditionsunderwhichdifferentresourcesareandarenotvaluable(e.g.,Priem&Butler,2001).Assuggestedbelowinthesection“LeveragingCapabilities,”therelativeimportanceoftransactioncostsvisàviscurrentresourcesandinvestmentstakesaimedatgeneratingpotentialopportunitiesisultimatelyanempiricalquestion.RoleofUncertainty
Thethirdissuefordebateinvolvesthemeaningandimplicationofuncertainty.Inclarify-ingtheroleofuncertaintyacrosseachofthesetheoriesitmaybehelpfultorecallKnight’s(1921)distinctionbetweenriskanduncertaintywhereinriskisconsideredmeasurableintermsofstatisticalprobabilitydistributionsregardinganoutcomeortheconsequencesofanoutcome,anduncertaintyisdefinedasthelackofknowledgeregardingfuturestatesoftheworld.
ThedistinctionbetweenriskanduncertaintyprovidedbyKnightandothersprovidestwoinsights.First,thethreeapproachesdifferwithrespecttotheirrelativeemphasisonriskanduncertainty.Forinstance,whileTCEisagnosticwithregardstothedistinctionbetweenthesetwoconceptualizations,theRBVemphasizeshowuncertaintyregardingthevaluecre-atedbyjoiningtwoormoreeconomicactivitiesleadstoheterogeneous,costly-to-imitateresourceprofiles(Rumelt,1984).Inthisview,allagentshaveaccesstothesame,albeitincomplete,setofinformationandfirms’choosegovernancestructuresinaneffortto
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accessanddeveloppotentiallyvaluableresourcebundles.Incontrast,RealOptionstheory,atleastinitsstrictestform,emphasizestheroleofriskinitsattempttovaluetheunderly-ingdistributionoffuturereturnsandfollow-onopportunitiesassociatedwithaparticularinvestment.Second,thethreetheoriesdifferintheimportancetheyplaceonupsideanddownsideoutcomes.TCEemphasizesthedownsideassociatedwithriskoruncertaintyindescribinghowuncertaintyinthepresenceofspecificinvestmentmayleadtomisap-propriationorhold-upproblems(Williamson,1985).Incontrast,boththeRBVandRoAapproachesemphasizetheupsideprofitcreatingopportunitiesassociatedwithuncertaintyandrisk.IntheRBV,earlybetsmadeunderuncertaintyarethoughttoresultinheteroge-neousdistributionofresourceswhichprovidesustainablesourcesofadvantage.IntheRoAapproach,firmsmakeinvestmentssubjecttotheirpriorbeliefsregardingthedistributionofpotentialpayoffs.Indeed,therealoptionsviewofuncertaintymaybelinkedtoPenrose’s(1959,p.56)conceptionofuncertaintyasthelevelofanentrepreneur’sconfidenceinhisestimatesorexpectations.Theseverydifferentconceptualizationsofuncertaintysuggestaneedforadditionalresearchwhichcarefullyexaminestheinfluenceofdifferentdimensionsofuncertaintyonbothopportunismandcurrent/futurerentcreation.DirectionsforIntegration
Asempiricalresearchexistswhichindependentlysupportseachoftheseperspectives,futureadvancesarelikelytorequireacoherentandsystematicprogramthatrigorouslytestspotentialsourcesofintegrationbetweenthesetheoriesoforganizationalformandperfor-mance.LangloisandFoss(1997)proposethatjointapplicationofthetransactioncostandresource-basedapproachesmayprovideamorecomprehensiveanalysisoforganizations.Williamson(1998,1999)suggeststhatadditionalinsightislikelytobegainedbyimprov-ingourunderstandinghowfirmcompetenciesandtransactionalcharacteristicsjointlyandinteractivelydeterminetheoptimalformofeconomicorganization.Barney(1999)offersaseriesofrichexamplesthathelptoclarifythedriversofthecostofopportunisminthemar-ketandthecostofcreatingaresourcewithinthefirm.Morerecently,workhasattemptedtodevelopandtestmodelsthatlinkandintegrateconceptsfromtheseperspectives(e.g.,Argyres&Liebeskind,1999;Kogut&Kulatilaka,2001;Leiblein&Miller,2003;Jacobides&Winter,workingpaper)
Thepurposeofthissectionistoraiseaseriesofspecificquestionsthathighlightoppor-tunitiesforfutureresearchtoempiricallylinktheTCE,RBV,andRealOptionsapproachestoorganization.Inderivingquestionsthatpointtopotentiallinkages,itisinterestingtonotethatmanagersfacetwointerrelatedproblemswhendetermininganoptimalmodeofeconomicorganization.First,theymustidentifyandassembleabundleofresourcesthatcreatesvalue.Second,theymustdecidehowtocapturevaluethroughthegovernanceofthisbundleofresources.WhereastheRBVandRealOptionsapproachesprovideinsightintotheformerquestion,TCEcanprovideinsightintothelatter(e.g.,Chi,1994).Pathdependenceandinterdependence.Atabasiclevel,theRBVandRealOptionsliteraturessuggeststhatTCEdominatedviewsoforganizationmaybeextendedbychangingthelevelofanalysis,bothintermsoftimeandthetransaction.Thevalueofextendingexistingtransaction-levelanalysistoincludetheeffectsoftemporalandtransactionaldependence
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hasbeenacknowledgedbyWilliamson.Forinstance,Williamson(1998,p.43)describeshowafirm’shistoricalpre-commitmentsmaycreatealevelofinertiathatlocksitintoanexistingorganizationalform.Asaresult,existinggovernancealternativeswilloftenbepreferredtonewalternatives.TheroleoftemporalpathdependencealsosuggestsaconnectionbetweenTCEandtheRealOptionsliterature.TCEoftenassumesthatthemostimportantinvestmentsinexchangerelationshipsarespecificand“inflexible”innature.Asaresult,theseinvestmentsmaynotbemodifiedovertimebasedonthefirm’sexperience.Incontrast,theRealOptionsliteraturesuggeststhatastutemanagerswillpurposefullyaltertheirinvestmentprofilesinresponsetopositiveandnegativeshockstotheenvironment.Thus,forinstance,afirmutilizinganoptionsapproachmaybeexpectedtoexerciseanoptionbyshiftingamoderateformoforganizationalsuchasajointventureoralliancetoamorehierarchicalformofgovernanceinresponsetothereceiptofpositiveinformation.Thelongandextensiveliteratureoninertiaattheorganizationallevel(e.g.,Hannan&Freeman,1977,1984)suggestsanumberofwaysinwhichthissimplelogicregardingtheinfluenceofhistoryongovernancechoicemaybeextended.
Afirm’sgovernancechoicesmayalsobeinfluencedbyafirm’sportfolioofcontem-poraneousexchangerelationships.ArgyresandLiebeskind(1999)introducethenotionofgovernanceinseparabilitytodescribesituationswherethereareinterdependenciesbetweenrelatedgovernancedecisions.Intheirmodel,theformalandinformalcommitmentsem-beddedinafirm’sexistingportfolioofcontractualrelationshipsaltertheincentivestructureofsubsequentmakeorbuydecisions.Thus,afirm’spastandcurrentgovernancedecisionsconstraintherangeandtypesofgovernancemechanismsthatitcanadoptinsubsequentexchanges.Totheextentthatresourcesmightfruitfullybeoperationalizedas“clusters”oftransactions,approachesthatconsidermultipletransactionsthroughsomeformofinterde-pendencemayfacilitatetheintegrationofTCEandRBV(Williamson,1999).
Leveragingcapabilities.TheRBVandRealOptionsapproachesmayalsobeusedtoidentifyabroadersetofresourcesandinvestmentopportunitiesthatdirectlyinfluencegov-ernancedecisionsinconjunctionwithexistingtransaction-levelconcerns.Forinstance,Barney(1999)andTeece(1980,1982)describesituationswhereafirm’sgovernancedeci-sionmaybeinfluencedbyitsdesiretoexploitadvantagesintheirexpectedcostofdevelop-ingoracquiringcapabilities.TheseadditionalconsiderationssuggestthevalueinextendingexistingTCE-basedmodelsororganizationalchoicetoincludeadditionalparametersthatcapturethepotentialinfluenceofafirm’suniquecapabilitiesorfollow-onopportunitiesmayhaveoncontemporaneousgovernancechoices.Whiletherelativevarianceexplainedbycapabilityandtransaction-leveltheoriesofgovernancechoiceremainsanempiricalis-sue,itisimportanttopointoutthatextensionsofthistypedonotalterthelogicunderlyingeithertheory.Instead,bringingthetheoriestogetherinthisfashionmerelypointstoanadditional“shiftparameter”(Oxley,1999;Williamson,1991)orcomplementarylinkagebetweentheapproaches.
Empiricalresearchisemergingwhichdemonstratestherelativepredictivepowerasso-ciatedwithvariablesintendedtomeasuretransaction-,resource-,andoption-basedeffects.Argyres’s(1996)casestudyofverticalintegrationdecisionsdescribeshowfirm-specificproductioncapabilitiesandtransactioncostconcernsjointlyaffectgovernancedecisions.Silverman(1999)indicatesthatwhilefirmsaremorelikelytodiversifyintoindustrieswhere
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theirtechnologicalresourcebaseisvalued,theabsenceofmarkethazardsreducesthelike-lihoodofentrythroughfirmgovernanceandsuggeststhattherearecircumstancesinwhichfirmsexploittheirtechnologicalresourcesthroughcontractualmeans.LeibleinandMiller’s(2003)studyofverticalintegrationdecisionsthroughtransactioncost,resource-based,andrealoptionslensesdemonstratesthejointimportanceoftransaction-specificcharacteristicsaswellasfirm-specificproductioncapabilitiesandoptionsinthesemiconductorindustry.TotheextentthattheRBVandrealoptionsperspectivespointoutwhichassetsshouldbejoinedtocreatevalueandTCEpointsouthowtheseassetsshouldbestbegoverned,ajointapproachpromisestoaidinthedevelopmentofstrategicmanagementresearch.
Hazardmitigatingcapabilities.TheRBVmayfurtherbeusedtodevelopargumentsregardingthemannerinwhichresourcesandtransactional-characteristicsinteractivelyaffectgovernancechoice.Forinstance,theRBVmaypointtoresourceswhichprovide“hazardmitigatingcapabilities”(Delios&Henisz,2000)thatallowfirmstoutilizemar-ketcontractsinthepresenceofexchangehazards.AlongtheselinesBarneyandHansen(1994)developresource-basedlogicwhichsuggeststhatfirmswithmanagementteamsthatarebetterabletoanalyzecomplexenvironmentsarebetterabletoanticipatecontractualhazardsandthereforemorelikelytoutilizemarket-likeformsofgovernancethantherelesswell-endowedcompetitors.Reuer,ZolloandSingh(2002)developalearningapproachwhichsuggeststhatpriorinteractionsaidinthecreationofcontractingskillsassociatedwiththeabilitytocraftmorecompletecontracts,betternegotiatemarket-basedexchanges,andtoimprovemonitoringandenforcementofcontractualcompliance.
Resource-basedlogicmayalsobedevelopedwhichsuggeststhatfirms’whicharebetterabletoidentifytrustworthypartnersortodevelopareputationfortrustworthinessmaymitigateconcernsregardingopportunisticbehaviorandthereforebemorelikelytoutilizemarket-likegovernanceforms.Suchtrusthasbeentiedtopersonalexperiencesbetweenindividualsthatshareaprofessionalaffiliation(e.g.,vonHippel,1988),institutionalexperi-encesthatalloworganizationsinaparticularfieldorindustrialdistricttoobservefirmsthathavepreviouslyengagedinsuccessfulpartnerships(e.g.,Saxenian,1990),aswellaspriortiesbetweenfirms(Gulati,1995;Ring&VandeVen,1992).Totheextentthattrustmiti-gatesopportunisticbehavior,partieswilltendtosubstituterelationalgovernanceforformalcontracts(Dyer&Singh,1998).AsGulati(1995,p.93)succinctlyconcludes,“Wherethereistrust,peoplemaychoosenottorelyupondetailedcontractstoensurepredictability.”Coordinatingmechanisms.Thecontentionintheknowledge-basedbranchoftheRBVthatfirmorganizationrepresentsasocialcommunityspecializinginthecreationandtransferoftacitknowledge(e.g.,Kogut&Zander,1996)pointstoanotherpossiblemeansofinte-gratingtransaction-andfirm-leveltheoriesoforganization.Specifically,thesetwostreamssuggestthatthecoordinationmechanismsassociatedwithvariousformsoforganizationmediatetherelationshipbetweenexchangecharacteristicsandgovernancechoice.
Theknowledge-basedviewindicatesthatgovernancechoiceaffectstheeasewithwhichknowledgemaybecreatedandtransferred(e.g.,Kogut&Zander,1993).However,ithasalsobeennotedthattheuseofhigh-bandwidthcommunicationchannelsandidiosyncraticcom-municationcodesaffecttheefficacyofknowledgecreationandtransfer(e.g.,Arrow,1974;Monteverde,1995;Pelikan,1969).Therichercontextualcuesandgreaterinteractionpro-
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videdbyhigh-bandwidthcommunicationchannelssuchasfacetofacemeetings,physicaldemonstrationsfacilitatethedevelopmentandtransferofcomplexanduncertainknowl-edgetoagreaterextentthanlow-bandwidthchannelssuchase-mail,fax,letters,orphonecallswherethereislittleemotionalcontent,redundancy,orinteractivity.Thus,exchangeswhichinvolvehighlytacitand/orcomplexknowledgearefacilitatedbythehigh-bandwidthcommunicationchannelsandidiosyncraticcommunicationcodesassociatedwithfirmor-ganization.However,thespecificnatureofthesesameknowledgetransfermechanismscreatescontractinghazardsemphasizedbyTCE.HeimanandNickerson(2002)havebeguntodeveloplogicconsistentwiththisapproach.
Organizationalformandperformance.Inanemergingbodyofresearch,scholarsarebeginningtoexaminetheperformanceimplicationsofdecisionsregardingorganizationalform.TCEpresumesthatfirmswhosetransactionsareinappropriatelyalignedwillsufferad-verseperformanceconsequencesandeventuallyfail.MuchofthisworkfollowsAnderson(1988),inexaminingtheperformanceimplicationsofthefitbetweenfirms’governancechoicesandasetofspecificattributesofthetransactionathand.Forinstance,PoppoandZenger(1998)examinedtherelationshipbetweentransactionalmisalignmentandonedimensionofperformance,customersatisfaction,andfoundthatmanagersbecomelesssatisfiedwiththecost,quality,andresponsivenessofoutsourcedactivitiesastheseac-tivitiesbecomemorespecific.Leibleinetal.(2002)examinetheeffectsoftransactionalmisalignmentonthetechnologicalperformanceoffirmsactiveintheintegratedcircuitin-dustry.Macher(Georgetown,workingpaper)andSampson(NYU,workingpaper)provideevidencethattransactionalalignmentimprovesmanufacturingandR&Dperformance,re-spectively.Inastudyutilizingthe1980deregulationofthetruckingindustry,Silvermanetal.(1997)examinedthemortalityoflargemotorcarriersintheUStruckingindustryandfoundthatcarrierswhichfailedtoaligntheircapitalstructurewiththenormativepre-scriptionsofferedbyextanttransactioncosttheoryweremorelikelytofailthansimilarcompetitorswhomaintainedalignment.Takentogether,thesestudiessuggestthatfutureresearchwouldbenefitfromtheconstructionofintegratedmodelsoffirms’strategicchoicesaswellasthedriversandperformanceimplicationsofthosechoices.Moreover,thesestud-iesprovideearlyevidenceofthepotentialforstudieswhichexaminehowfirm-specificresources,growthoptions,andgovernancechoiceinteracttoaffectfirmperformance.
Conclusion
ThispaperprovidesasurveyofTCE,resource-based,andRealOptionstheoriesofthefirm.Asillustratedinthereview,thesethreeapproachesarebasedondifferentassumptionsregardingthenatureofeconomicactorsandtheenvironmentandprovidedifferentinsightsregardingtheoptimalnatureoffirmbehavior.Eachtheoryhasundoubtedlybeenshapedbytheeconomicenvironmentinwhichitwasfirstdevelopedand,giventheirdifferentstagesofmaturity,hasbeensubjecttoadifferentdegreeofempiricalscrutiny.Nevertheless,anexplorationoftheresearchonwhichtheseperspectivesarebasedsuggestsanumberofpromisingopportunitiesforresearchthatpushesforwardthefrontiersoforganizationaleconomicsandbridgesitmoreconcretelytootherperspectiveswithinorganizationtheory.
956M.J.Leiblein/JournalofManagement200329(6)937–961
Inaddition,thepapersuggeststhreepotentialwaysinwhichfutureempiricalworkmayproductivelyexaminehowtheresourcesandinvestmentopportunitiesidentifiedbytheRBVandRealOptionsapproachesaffecttherelationshipbetweenexchangecharacteristicsandgovernancechoiceidentifiedbyTCE.
Acknowledgments
ThedevelopmentofthispaperhasbenefitedfromconversationswithSharonAlvarez,JayBarney,TailanChi,JayDial,KonstantinaKiousis,JeffMacher,DougMiller,JacksonNickerson,JeffReuer,Hyung-deokShin,andKarenWruck.IamparticularlyindebtedtoJoMeditorDanielFeldmanforsuggestionsofferedonthispaper.Iamsolelyresponsibleforanyerrorsoromissions.
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MichaelJ.LeibleinisanAssistantProfessorofstrategyandmanagementintheFisherCollegeofBusinessattheOhioStateUniversity.Hisresearchfocusesonthediffusionofnewtechnologiesandtheeffectivecoordinationofresourceswithinandacrossfirms.Hisprevi-ousworkhasbeenpublishedinoutletssuchastheStrategicManagementJournal,theJournalofIndustrialEconomics,theAcademyofManagementJournal,andtheFinancialTimes.
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