Identify the Key Characteristics of Tce. Analyse the Vertical Boundaries of a Firm by Describing the Critical Role Played by Coordination in a Vertical Chain.
Identify the key characteristics of TCE. Analyse the vertical boundaries of a firm by describing the critical role played by coordination in a vertical chain.
An efficient market will render economic activity within the firm to be vertically integrated with other market firms. Yet many economic activities are still carried out within the firm. Coase (1937)1 in “The Nature of the Firm” raised this question on Transactional Cost Economics (TCE). This essay will explore the key characteristic of TCE, analyzing the vertical boundaries of a firm and examining the key role played by coordination in a vertical chain.
For the purpose of illustration, a bank in Singapore, Bank A, and her relationship with market firms, Market Firm B, will be studied. In 2011, it undertook a massive project to revamp the internet banking website. It had utilized market firms B for system integration, development and web design. Due to confidentiality clause, name of bank, market firm and figures will be withheld.
One of the most common struggles manager face in the make-or-buy conundrum is in the area of how much of economic activity do they define within their vertical boundaries, determined by its cost benefit analysis.
Bank A will need to work closely with Market Firm B in coordinating its activity. It will be inconceivable for Bank A to define the requirements and request for Market Firm B to develop the backend system without a corresponding delivery of the front end design of the web user interface from other market firm. If there were to be any delays in the delivery of the output from any parties, it could lead to a slip in the project timeline. This is the issue of coordination cost when utilizing market firms.
Leakage of private information is an issue. While many firms mitigate the risk by signing Non-Disclosure Agreement (NDA), yet this is not foolproof. Bank A is a listed firm and such information has a bearing on their share prices. The risk of leak in
An efficient market will render economic activity within the firm to be vertically integrated with other market firms. Yet many economic activities are still carried out within the firm. Coase (1937)1 in “The Nature of the Firm” raised this question on Transactional Cost Economics (TCE). This essay will explore the key characteristic of TCE, analyzing the vertical boundaries of a firm and examining the key role played by coordination in a vertical chain.
For the purpose of illustration, a bank in Singapore, Bank A, and her relationship with market firms, Market Firm B, will be studied. In 2011, it undertook a massive project to revamp the internet banking website. It had utilized market firms B for system integration, development and web design. Due to confidentiality clause, name of bank, market firm and figures will be withheld.
One of the most common struggles manager face in the make-or-buy conundrum is in the area of how much of economic activity do they define within their vertical boundaries, determined by its cost benefit analysis.
Bank A will need to work closely with Market Firm B in coordinating its activity. It will be inconceivable for Bank A to define the requirements and request for Market Firm B to develop the backend system without a corresponding delivery of the front end design of the web user interface from other market firm. If there were to be any delays in the delivery of the output from any parties, it could lead to a slip in the project timeline. This is the issue of coordination cost when utilizing market firms.
Leakage of private information is an issue. While many firms mitigate the risk by signing Non-Disclosure Agreement (NDA), yet this is not foolproof. Bank A is a listed firm and such information has a bearing on their share prices. The risk of leak in
References: 1) Coase, R (1937). The Nature of the Firm. Economica (4), 1937, pp. 386 – 405 2) Besanko (2010), Economics of Strategy Fifth Edition. John Wiley & Sons 3) McNutt (2010), Game Embedded Strategy. McGraw Hill 4) Isaccson (2011), Steve Jobs. Simon & Schuster 5) Holmstrom and Roberts (1998), The boundaries of the firm revisted. Journal of Economic Perspectives.