Ism Lecture 3

Front 1

Explain the Transaction Cost Theory

Back 1

‘Transactions’ can take place in the market or within the organisation. The theory of transaction cost economics (TCE) is dedicated to answering the question of where a transaction should take place: internally(firm), or externally(market).

Front 2

Explain the concepts of market learning and firm learning

Back 2

market learning: from rent to buy

firm learning: form buy to rent

Front 3

What are the two suggestions that TCE makes?

Back 3

1. Activities are internalized when the (transaction) cost of internalization are lower than the costs of outsourcing.

2. Activities are out-sources when the (transaction) cost of
out-sourcing are lower than the costs of internalizing.

Front 4

Which transaction and with what characteristics are best done internally?

Back 4

Transactions with:
- a high degree of asset specificity,
- a high degree of uncertainty / complexity,
- and a high frequency,
…. the costs of market transactions are extremely high – much higher than the costs of internal transactions.
Such transactions tend to be carried out within the organization.
The remainder are rented on the market.

Front 5

Explain the agency theory and the principal-agent problem arising

Back 5

The ‘principal’ is anyone who hires an ‘agent’ to pursue the principals interests, both have different objectives and perspectives.
arises when:
1.the principal pays the agent for performing certain acts that are useful to the principal and costly to the agent. And
2.where there are elements of the performance that are difficult (or costly) for the principle to observe.

Front 6

When do agency costs increase?

Back 6

(1) Information Asymmetry
(2) Uncertainty
(3) Risk

Front 7

What are the solutions to prevent or decrease the principal-agent problem?

Back 7

1. fully specify all contracts
2. monitor all agents of the firm

Front 8

What three options does the firm have to build market presence in a foreign market?

Back 8

#1. Foreign Distributors
#2. Strategic Alliances
#3. Mergers and Acquisitions

Front 9

Explain the concept of Foreign distributor

Back 9

Local distributors have:
-local knowledge of the market, culture and human resources and customers
-renting resources at lower price than buy yourself
-> but there is only a short term perspective

Front 10

Explain the vicious circle of the foreign distrubutor relationship

Back 10

The lack of a long-term commitment, on behalf of the firm --> reduces the abilities and efforts made by the FD -->reduces the probability that entry will succeed.

Front 11

What are the benefits of a Strategic Alliance?

Back 11

They allow the firm to:
(1) share risks and to share costs;
(2) benefit from the partner firms complimentary resources;
(3) allow for the development of capabilities to deliver products and services valued by the market; and
(4) provide access to scarce resources (such as human talent).

Front 12

What are the risks of a strategic alliance?

Back 12

1. absorption and transferring of FSAs,
-affected by the embeddeness and the mobility of the FSAs

2. a learning race

Front 13

What are ASAs?

Back 13

(5) together they can create new FSAs --> called ASAs = alliance specific advantages, these make the alliance more stable

Front 14

When will an alliance be preferred over an acquisition?

Back 14

(1) Each firm needs only a subset of the resources / FSAs held by the partner.
(2) With an acquisition, it would be difficult to dispose of the prospective partners unusable, firm-specific resources

Front 15

When are mergers and acquisitions likely to happen?

Back 15

(1)the firms wants full and direct control the foreign market;
(2) the potential to create new FSA (synergies) is thought to be too high to risk an alliance partner from learning them;
(3) the net (transaction) costs associated with an acquisition are lower than the costs of FDs and SAs,

Front 16

What are the three most common problems of M&As?

Back 16

(1)the costs of integrating the target are often underestimated
(2)The expected benefits from the deal are often over-estimated
(3) Bounded reliability