Question

in what ways do transaction costs influence the designs of the most efficient organizational structure

Answer 1

SOLUTION

WAYS AT WHICH TRANSACTION COST INFLUENCE THE DESIGNS OF THE MOST EFFICIENT ORGANIZATIONAL STRUCTURE

Transaction cost analysis can explain the arrangements that emerge to govern and organize service organization - customer exchanges. A typology is offered in which differing governance mechanisms are matched to various levels of transactional cost in service exchanges. The focus is on prescribing governance mechanisms that establish the most efficient boundary between the service organization and the customer, thereby improving service organization effectiveness.

It focuses on the organization of the transaction that occur whenever a good or service is transferred from a provider to the user across the technologically separable interface. When transactions, occur within an organization, the transaction cost can include within monitoring and managing personnel and procuring inputs and capital equipment. The transaction cost of buying the same good or service from an external provider can include the cost of source selection , contract manager, performance measurement and dispute resolution. Thus the organization of transaction effects the transaction cost.

Transactions can be organized under a spectrum of governance structure ranging from pure, anonymous spot market- where the good or service is generic and identifies of buyers and sellers are immaterial to the transaction - to fully integrated firms or organizations , where both the trading parties are under unified ownership and control, and the transaction can be modified by the managerial flat. Between the two poles of the spot market and vertical integration are contracts of increasing duration and mobility. which can include shared ownership of assets.

Simple short term contracts involve customization that requires an exchange of information and terms of payment . For more complex customization , longer - term contracts may be required , including adjustment classes to respond to contingencies over life of the contract . When goods and services cannot be defined in advance, rational contracts may be used. These contracts focuses on the terms of the relationship rather than the scope of work, which may be renegotiated as needed.

Firms rationale to outsource parts of their IT function are mainly based on cost reduction. Many vendors apply a high level of standardization in organizing the services to decrease the cost level. Drawing on the transactional cost , the objective is to examine how environmental uncertainty and asset specificity affect vendors functional organizational structure and in turn influences the ex- post transaction costs. The vendors functional organizational structure can be considered as the mediator in minimizing the ex post transaction cost. Executives and the managers need to be aware that the uncertainty and the asset specificity may lead to an increase of the coordination costs. therefore firms has to re assess their organizational structure regularly and implement adjustments to control transaction costs.