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By Shirish P. Dant, Ritu Lohtia, Shirisli P. Dant and Ritu Lobtia


A fundamental decision that confronts companies in designing organizational structure is to determine which tasks to perform in-house and which to contract to outside agencies through alliances andpartnerships. Interorganizational transactions can be managed using alternative governance mechanisms ranging from markets (independence) to hierarchies (integration). Transaction cost analysis advocates the selection of that governance mode that minimizes the sum of transaction costs and production costs. Though transaction costs have been studied in considerable detail in marketing, the analysis of production costs has been limited. This paper argues that while transaction cost economizing is important, such economizing cannot proceed regardless of production cost ramifications. Transaction cost economizing needs to be located within a larger economizing framework, and the resultant trade-offs between transaction and production costs need to be recognized. Further, this paper posits that the selection of governance modes by a firm are mediated by strategic considerations as well. Any normative implications for designing governance structures should thus be driven by analyzing transaction costs, production costs, and strategi

Year: 2011
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