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216 • Part IV Implementing the Performance Leadership Framework
TCE emphasizes the risks of doing business. It describes the concept of “bounded
rationality,” which means that suppliers and customers (contractors) cannot pre-
dict every event and cater for that within a contract. This introduces risk. TCE also
describes “opportunistic behavior”among business partners, and the impact of
those behaviors on cost and pricing. Sometimes, a customer dictates new terms
after the supplier made a specific investment in doing business. If the customer
leaves, the supplier would have to write off the specific asset investment. TCE
refers to customer-specific investments, such as product adaptations, adminis-
tration, machinery, or account management, as asset specificity.
To deal with the risk, precautions need to be taken, leading to transaction costs,
such as search costs, identifying potential partners that the organization feels con-
fident about; contracting costs, negotiating and writing an agreement; monitor-
ing costs, setting up a governance system to ensure obligations are met; and
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enforcement costs, bargaining if the contractual obligations are not met. The
applicability of TCE goes beyond cost, however, to include other areas of value.
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Potential advantages of participation in interorganizational relationships include :
• Access to a particular resource, such as capital, skills, intimate knowledge
of a (foreign) market, production facilities
• Economies of scale, finding partners to expand production volume, and
share risk, and volume
• Codevelopment of a product or service, learning from each other
• Speed to market, involving, for instance, contract manufacturing
• Flexibility compared to one’s own organization
• Collective lobbying power to influence government agencies
• Neutralizing competitors and building combined market power
In transactional relationships, price is the most important component, and
switching costs are generally assumed to be low. For new transactions, new
partners could be contracted. However, an argument can be made for consid-
ering longer-term, less cost-oriented relationships, based on trust, ease of doing
business, competence, speed of delivery, and so forth. More continuous rela-
tionships have a positive effect on transaction costs. A continuous relationship
is often in the best interest of all parties.
Performance Networks
All the examples show that multiple business partners are stakeholders
in business. They have all kinds of different relationships. Some may
be formal, such as joint-venture organizations, most of them will be
more informal, based on agreements that may change over time, or are