Ebook Intermediate Structure Economic Dynamics: The Television Industry
What makes firms succeed or fail has preoccupied the strategy field since its inception four decades ago. Inextricably bound up in questions such as why firms differ, how they behave, how they design strategy and how they are managed, the reasons why firms succeed or fail are often raised. Yet, despite the considerable progress in developing static models that explain competitive success, far less developed is our understanding of the dynamic processes by which firms perceive and attain superior competitive positions over time (Porter 1991). The traditional answers of strategy research to why firms succeed or fail embody crucial assumptions about the nature of firms and the business environment. The rationality assumption, for example, used to be the defining characteristic of economics (Lucas, 1986). During the last twenty years, however, at least five monkey wrenches have been thrown at the economist's neoclassical model of the firm. They are: uncertainty, information asymmetry, bounded rationality, opportunism and asset specificity. These phenomena violate crucial axioms in the neoclassical model of the firm a smoothly running machine in a world without secrets, without friction or uncertainty, and without a time dimension (Rumelt, Schendel, & Teece, 1991).
Proponents of the cross-sectional strategy perspective continue framing the determinants of superior firm performance as a static chain causality, assuming that the dynamic processes pertinent to creating competitive positions are logically posterior to such a chain. So, the argument goes, to understand the dynamics of strategy, one must move further back in the static chain of causality. The cross sectional view also highlights the managerial choices often lying behind the initial conditions internal to firms, the distinctive competencies (Selznick, 1957) and competitive positions of which result from past decisions that entail hard-to-reverse commitments (Ghemawat, 1991). Ghemawat posits that the analysis of such decisions should begin with cross-sectional models but, in choosing competitive positions, he stresses the need to examine their sustainability over time as well as the effect of uncertainty on the chosen investments. Ghemawat brings a broader perspective on sustainability than is generally present in, say, game theory models. Brams' (1993) essay is one exception in game theory that interjects time to assess outcome sustainability. Sustainability is relevant to system dynamics because of its proximity to scenario-driven planning, which allows assessing resource investment decisions from a strategic perspective while, at once, bounding strategic uncertainty to create informational asymmetries, ie. good managerial choices (Amara & Lipinski, 1983; Georgantzas & Acar, 1994; Godet, 1987; Porter, 1985).
Changes in the environment, technology and in strategy prompt firms to seek sustainable cooperative relationships with other firms, while mergers and acquisitions (M&As) represent expeditious ways to keeping the pace, particularly when firms need new assets and competencies (Barney, 1988; Lippman & Rumelt, 1982; Singh & Montgomery, 1987). Alternatively, pursuing cooperation because of reciprocal dependencies may cause firms to opt for contract-based governance. The contract-based governance forms which firms use because of reciprocal dependencies include strategic alliances, partnerships, coalitions, franchises, research consortia and network organizations (Jarillo, 1988; Powell, 1990; Ring & Van de Ven, 1992).
Egressing from Williamson's (1975) extensions of Coase's (1952) transaction cost analysis of the firm economists have formed a branch of organizational economics now known as transaction cost economics (TCE). TCE rests on the conjunction of bounded rationality (Simon, 1957), asset specificity and opportunism. It explores governance options, such as discrete market contracts, recurrent contracts, relational contracts and hierarchies (Jarillo, 1988; Lippman & Rumelt, 1982; MacMillan & Farmer, 1979; Powell, 1990; Ring & Van de Ven 1992). Although it operates on the assumption that economy is the best strategy, this does not mean that strategies which distribute risk and deter rivals with clever ploys and postures are unimportant. In the long run, however, the best option is to design efficient strategy and to implement it efficiently (Williamson, 1991). TCE extensions view M&As as a hierarchical response to market imperfections, positing that it is more economical for firms to overcome impediments to market exchange by establishing internal markets than to incur the prohibitive transaction costs of the external one. Among subfields of economics, TCE has the greatest affinity with strategy, partly because of a common interest in governance forms, including the Chandler-Williamson M-form hypothesis, and the shared concern to legitimize inquiry into institutional details. Within strategic management, Rumelt et al (1991) find in TCE the ground where economic thinking, strategy and organization theory meet. Indeed, considerable research was carried out in the '80s on vertical supply arrangements in industries (Masten, 1988; Monteverde & Teece, 1982), multinational firms (Hill & Kim, 1988; Kogut, 1988; Teece, 1982), sales force organization (Anderson & Schmittlein, 1984), joint ventures (Hennart, 1988; Pisano, 1990) and franchising (Klein 1980).
The above arguments support using TCE in evaluating alternative governance options to explore strategic dependencies among firms. Yet, TCE suffers from several weaknesses. Excluding the MNE (multinational enterprise) model of Hill & Kim (1988), TCE analysis is static (Ring & Van de Ven, 1992), paying little attention to the dynamic effects of a firm's internal cost of control on its choice of a governance mode. Also, by focusing on the transaction cost implications of different governance modes, TCE research overlooks the effects of each on revenue and profitability (Contractor, 1984; Teece, 1983). In highly uncertain, risky situations, when reliance on trust is possible, hierarchies begin to look like clans and networks of contracts (Ring & Van de Ven, 1992; Sinchcombe, 1990). The dynamic M&A model developed during the intervention project described here partially overcomes these flaws. The model incorporates organizational innovation and internal control costs, the primary determinants of the M&A activity in the TV-related industry. The following section briefs our intervention in two syndication firms, emphasizing the divergence-convergence sequence of a dialectical-inquiry (DI) interchange that let participants' attention shift from individual cognitive biases to reperceive the structure and implications of their strategic situation. An overview of the TV-related industry follows. Computed scenarios allow assessing the sensitivity of syndicator profitability to M&As. The simulation results show the dynamic evolution of governance forms that might create alternative futures for independent syndication firms competing in the TV-related industry. These results point to the potentially rich contribution of system dynamics to exploring governance forms beyond the ideal-type forms of markets and hierarchies that dominate TCE.
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