ManagementGovernance Value Analysis and Marketing Strategy.docx

ManagementGovernance Value Analysis and Marketing Strategy.docx

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ManagementGovernanceValueAnalysisandMarketingStrategy

GovernanceValueAnalysisandMarketingStrategy

MrinalGhosh

UniversityofMichigan

and

GeorgeJohn

UniversityofMinnesota

PleaseaddressallcorrespondencetoProfessorGeorgeJohnat:

DepartmentofMarketing

CarlsonSchoolofManagement

UniversityofMinnesota

32119thAvenueSouth

Minneapolis,MN55455

Ph:

6126246841

e-mail:

gjohn@csom.umn.edu

MrinalGhoshisAssistantProfessorofMarketingattheUniversityofMichiganandGeorgeJohnisResearchProfessorofMarketingattheUniversityofMinnesota.Theauthorsthankthetwoanonymousreviewersandtheco-editorsofthespecialissuefortheirhelpfulsuggestionsandcomments.

GovernanceValueAnalysisandmarketingstrategy

Abstract

Weextendtransactioncostanalysis（TCA）intoagovernancevalueanalysis（GVA）frameworkthatextendsthecoreTCAmodeltoaddressmarketingstrategydecisions,especiallywithregardtostrategiesgroundedincooperativerelationships.Toaccomplishthis,weincorporateresourceheterogeneityfromtheresource-basedviewsofstrategy.Wedevelopafour-partmodel.Thecreationandclaimingofvalueareitstwofundamentalprocesses.Weshowthatheterogeneousresources,positioning,theconsequentattributesofexchange,andgovernanceformallinteracttodeterminesuccess.GVAdisclosesthetradeoffsbetweenthesefactors.ThesetradeoffsconstitutethecoreoftheGVAframework.Weillustratesupportforthesetradeoffswithexamples,andspecifyrefutableimplicationswhereverpossible.Finally,wesketchdirectionsforfuturework,andprovideablueprintforimprovingmanagerialdecision-makingbasedontheGVAmodel.

Introduction

Transactioncosteconomicshasbecomethedominantparadigmforanalyzingissuesinseveralareasofmarketing,includinginter-firmrelationships,channelstructure,foreignmarketentryandthelike.Alargenumberofempiricalstudiescorroboratetheprincipalrefutablepredictionsconnectingtransactionattributeslikespecificinvestments,uncertaintyandperformanceambiguitytogovernanceformslikeverticalintegration,andalliances（seeRindfleischandHeide,1997forareviewofTCAworkinmarketing）.Despitethesesuccesses,TCAhasmadelittleheadwayintothemarketingstrategyliterature（anearlyexceptionisDayandKlein,1987）.Indeed,someofthesharpestcriticismofTCAhasemergedfromthestrategy-orientedwork,andtheyconvergeoncommonthemes.

OnestrandcontendsthatTCAisamerecostminimizationcalculusbasedonexogenousattributesofanexchange,andassuch,itprovideslittleinsightintostrategicmarketingchoicesthataregroundedinfirm-specificdifferences.Hence,HuntandMorgan（1995）chargethatTCAessentiallypredictsthatallcompetingfirmsinamarketwillchooseidenticalgovernanceforms（likeverticalintegration）astheyallfacethesameleveloftheexogenousattributesimplicatedinthetheory.Yet,casualobservationshowsthatcompetingfirmsinthesameproductmarketdemonstratestarkdifferencesinundertakingsimilaractivities.Forinstance,intheretailhardwareindustry,DwyerandOh（1988）findthatretailersusingdifferentdownstreampositioningstrategiesexhibitsystematicdifferencesinupstreamchannelstructures.Whydofirmsoperatinginthesameindustrydemonstratesuchsharpdifferences?

Clearly,thecurrentframeworkisunsatisfactoryinthisregard.

AsecondstrandchargesthatTCA'ssingle-mindedfocusoncostminimizationprovideslittleinsightintostrategicmarketingchoicesthatareundertakenprincipallytoenhanceand/orclaimvalue（ZajacandOlsen,1993）.Thisisanalogoustotheeffectivenessvs.efficiencydebatefoundinorganizationaltheory.Surely,alternativesthataremoreeffective（inthesenseofincreasingprofits）couldbeattractivedespiteconcomitantlossesinefficiency.Aclassiccasewouldbeexpenditurestoraiseentrybarrierseveniftheadditionalcostsmeantthatsomemarginallowcostproductshavetobesacrificed.Theseobservationsprovokethequestion:

Howdostrategicfactorslikepositioningandresourcedifferencesinfluencethedesignofsupplychainandendcustomergovernanceforms?

Onoccasion,thesestrandsarejoinedtorejectanybenefitwhatsoevertopracticingmanagerstobederivedfromTCA（e.g.,GhoshalandMoran,1996）.Whenthesecritiquesarejuxtaposedagainstthelengtheningnumberofempiricalstudiesthatlargelycorroboratethecorerefutableimplicationsfromthetheory,itsuggeststhatsomeclarificationandexpansionoftheapproachisinorderatthispoint.

PurposeofPaper

WeproposearevisionandexpansionofthebasicTCAmodeltoenableittospeakmorecloselytomarketingstrategydecisions.Todistinguishourvariant,welabelitGovernanceValueAnalysis（GVA）inthespiritoftheZajacandOlsen（1993）label,"TransactionValueAnalysis".Wegiveequalemphasistoboththerevenueenhancingaswellascostreducingfeaturesofgovernancedecisions.Weincorporateheterogeneityfromtheresource-basedview（RBV）ofstrategy（Peteraf,1993）andaccommodatepath-dependentinfluences（Ghemawat,1991）.DayandKlein（1987）offeredthefirststepinthisdirectionofintegratingstrategyandtransactioncostanalysis.Webuildontheirstartandcapitalizeonrecentconceptualadvancesandempiricalobservationstosupportelementsofourframework.

MARKETINGStrategyFROMAGOVERNANCELENS

TheoreticalfoundationsofTransactionCostAnalysis

Transactioncostsassociatedwitheconomicexchangeincludeexanteandexpostcosts.Exantecostsaretheoutofpocketcostsofnegotiatingcontracts（"ink"costs）andtheopportunitycostofforegonetransactions.Expostcostsaretheoutofpocketcostsofmonitoringandenforcementagreements,andtheopportunitycostsofnotshiftingtomoreprofitableactivities（RindfleischandHeide,1997）.

Howarethesecostsrelevanttomarketingstrategydecisions?

WeturntoWilliamson（1996）whoobservesthatTCAcanbecompactlysummarizedasunpackingtheramificationsoftheCoase"theorem".Accordingly,intheabsenceoftransactioncosts,partiestoanexchangedevisejointprofitmaximizingexchangesregardlessoftheirpowerdifferentialsorresourceendowments.Ofcourse,transactioncostsarenotzerointherealworld.Givenpositivetransactioncosts,thecoreprincipleofTCAisthatpartieswillstrivetoaligngovernanceformswithexchangeattributessoastominimizethetransactioncostsofexchange.Why?

Suchanalignmentgetsthemclosertobeingabletoaccomplishthedesiredgoalofjointprofitmaximization.Noticethelogicconnectingminimizationoftransactioncostswiththemaximizationofjointprofits.TCA'srefutablepredictionsfollowfromthissimplelogic.

Hence,theessentialcriterionforassessingtheefficiencyofamarketingsystemisthejointbenefitstreamthatcanbegeneratedwithinthatsystemofinter-relationships.Webelievethismetricismoreappropriatethantraditionalcriterialikeindividualfirmprofitsordecision-makerutilitybecauseitexplicitlytakesintoconsiderationtheinterestsofalltheplayersinvolvedinaparticularsystemofinter-relationships,includingthefirm,itssuppliers,itscustomers,anditscompetitors.Wernerfelt（1994）illustratesthewide-rangingutilityofthisprincipleinhis"efficiency"approachtodesigningmarketingsystems.Tobeconsistentwithexistingresearch（e.g.,BrandenburgerandNalebuff,1997）,wecallthisjointbenefitstreamasvalue.

RelationshiptoOtherStrategyModels

Contemporarystrategymodelsarecoalescingaroundthecoreprocessesofvaluecreationandclaiming.Toseethis,considerabriefoverviewofprominentmodelsofstrategy.Ghemawat（1991）firstintroducedcreationandclaimingofvalueasthetwofundamentalprocessesthatarenecessaryandsufficienttounderstandstrategy.Creationofvalueisachievedthroughfavorablepositionsthatarecommitment-intensive.Commitmentintensivepositionsare"sticky"choicesinthesensethattheyinvolveinvestingindurableandspecializedassetsthatarenoteasilytradeableinopenmarkets.Theyhenceintroducelock-ineffectsandincreaseswitchingcosts.Claimingthevaluegeneratedfromtheseprospectivelyfavorablepositionsrestsonthese"sticky"factorsbeingscarceandappropriabletoitsowners.

Theresource-basedview（RBV）ofstrategy（e.g.,Peteraf,1993）makesaverysimilarargument.IttakesaRicardianviewofcompetitionwhereingreaterprofitflowtotheholdersofsuperiorproductivefactors.ConsiderasimplestylizedexampleofRicardiancompetition.Supposethatnfirmscompeteinacommoditymarket.Furthersupposethateachfirmpossessesadifferentsetofassets/skillsandisthusabletoproduce（i.e.,createvalue）atadifferentcost（includingcostofcapital）.Denotethesecostsas1,2...nfromsmallesttolargest.Game-theoreticmodelingrevealsamarket-clearingpriceof2（thesecond-lowestcost）.Firm1enjoysaneconomicprofitequaltothedifferencebetweenthetwolowestcosts.Firm2willmakeareturnjustenoughtocoveritscostofcapital.Allotherfirmswillbeunprofitable.

ObservethedifferencebetweenRBVandthecoreroleofmarketpowerembeddedinPorter'searlierfive-forcestrategymodel.RBVinvokesanefficiencyviewofstrategy.Firm1'sprofitsderivefromitsuniqueskillsandassets.Allthefirmsinourstylizedcommoditymarketbehavefullycompetitively,yetprofitdifferencesoccurandpersist.Ofcourse,iftheskilldifferencebetweenFirm1anditsnearestcompetitorerodes,thenpricesfall,andthecreatedvalueisnotclaimed.

Thiscanbeextendedtomorerealisticmarketswithdifferentiatedproductswithnolossininsight.Ricardianprofi