Vertical Scope Revisited: Transaction Costs vs Capabilities & Profit Opportunities in Mortgage Banking

What determines vertical scope? Transactions cost economics (TCE) has been the dominant paradigm for understanding "make" vs. "buy" choices. However, the traditional focus on empirically validating or refuting TCE has taken attention away from other possible drivers of scope, and it has rarely allowed us to understand the explanatory power of TCE versus other competing theories. This paper, using a particularly rich panel dataset from the Mortgage Banking industry, explores both the extent to which TCE predictions hold, and their ability to explain the variance in scope, when compared to all other possible drivers of integration. Using some direct measures of transaction costs, we observe that integration does mitigate risks; yet such risks and transaction costs do not seem to drive firm-level decisions of integration in retail production of loans. Rather, capability-driven and capacity- (or limit to growth-) driven considerations explain a significant amount of variance in our sample, under a variety of specifications and tests. We thus conclude that while TCE explanations of vertical scope are important, their impact is dwarfed by capability differences and by the desire of firms to leverage their capabilities and productive capacity by using the market.Mortgage Banking; Transaction Costs; Integration; Capabilities; Capacity Constraints; Limits to Growth

The dynamics of wealth, profit and sustainable advantage

This paper shows how idiosyncratic resources can be the basis of sustained profitability and persistent heterogeneity under competitive conditions: Generic inputs purchased in the market become idiosyncratic resources by investments in customization. Analytically, we show how heterogeneous firms co-exist in equilibrium. Computationally, we show that sustainable profits can emerge without monopolistic imperfections. We consider how capability heterogeneity, resource customization cost and ease of expansion interact to drive short-run and sustainable profits. Results illustrate that, in an industry evolution context, sustainable profits may represent a small part of total wealth creation, and that changes in factors shaping a sectors' evolutionary trajectory may be more important than changes in factors that determine profits' ultimate sustainability, thus calling into question the familiar emphasis on sustainable advantage

The Effect of the Dynamics of Knowledge Base Complexity on Schumpeterian patterns of Innovation: the upstream petroleum industry

This paper addresses important changes in innovation patterns in the upstream petroleum industry over the period from the 1970s to 2005. It argues that the shifts in patterns of innovation over that period can be explained by the dynamics of knowledge base complexity (KBC). We develop a quantitative method to explore KBC and show that increasing KBC has shifted innovation patterns, from a broadly Schumpeter Mark I to a 'modified' form of Schumpeter Mark II, led less by the established oil majors, but by a new class of integrated service providers

An evolutionary stage model of outsourcing and competence destruction : a Triad comparison of the consumer electronics industry

Outsourcing has gained much prominence in managerial practice and academic discussions in the last two decades or so. Yet, we still do not understand the full implications of outsourcing strategy for corporate performance. Traditionally outsourcing across borders is explained as a cost-cutting exercise, but more recently the core competency argument states that outsourcing also leads to an increased focus, thereby improving effectiveness. However, no general explanation has so far been provided for how outsourcing could lead to deterioration in a firm‟s competence base. We longitudinally analyze three cases of major consumer electronics manufacturers, Emerson Radio from the U.S., Japan‟s Sony and Philips from the Netherlands to understand the dynamic process related to their sourcing strategies. We develop an evolutionary stage model that relates outsourcing to competence development inside the firm and shows that a vicious cycle may emerge. Thus it is appropriate to look not only at how outsourcing is influenced by an organization‟s current set of competences, but also how it alters that set over time. The four stages of the model are offshore sourcing, phasing out, increasing dependence on foreign suppliers, and finally industry exit or outsourcing reduction. The evolutionary stage model helps managers understand for which activities and under which conditions outsourcing across borders is not a viable option. Results suggest that each of these firms had faced a loss of manufacturing competitiveness in its home country, to which it responded by offshoring and then outsourcing production. When a loss of competences occurred, some outsourcing decisions were reversed

Vertical Scope Revisited: Transaction Costs vs Capabilities & Profit Opportunities in Mortgage Banking

What determines vertical scope? Transactions cost economics (TCE) has been the dominant paradigm for understanding “make” vs. “buy” choices. However, the traditional focus on empirically validating or refuting TCE has taken attention away from other possible drivers of scope, and it has rarely allowed us to understand the explanatory power of TCE versus other competing theories. This paper, using a particularly rich panel dataset from the Mortgage Banking industry, explores both the extent to which TCE predictions hold, and their ability to explain the variance in scope, when compared to all other possible drivers of integration. Using some direct measures of transaction costs, we observe that integration does mitigate risks; yet such risks and transaction costs do not seem to drive firm-level decisions of integration in retail production of loans. Rather, capability-driven and capacity- (or limit to growth-) driven considerations explain a significant amount of variance in our sample, under a variety of specifications and tests. We thus conclude that while TCE explanations of vertical scope are important, their impact is dwarfed by capability differences and by the desire of firms to leverage their capabilities and productive capacity by using the market

Regulating platforms and ecosystems: an introduction

Digital technologies and modular production methods have led to the emergence of a new generation of global leaders which cement their market position by orchestrating digital platforms and ecosystems of complementors, which offer them new ways to create and capture value that often transcend the boundaries of existing sectors. Their business models, built on intangibles such as software code and access to data, support expansion that is both breathtakingly rapid and effectively costless. With capital markets all too willing to invest in these firms’ growth, and regulators unable to rein them in, these firms have been able to accumulate unprecedented power and wealth, with profound implications for competition, the economy, and society itself. This special issue confronts the challenge of regulating platforms and ecosystems head-on, revisiting the economic, strategic, and legal foundations that enable us to detect and redress issues of dominance and competition and address questions of the appropriate conception of and limits of the law. The papers included cover topics including the true nature of competition with an emphasis on dynamics and innovation, new approaches for legal and economic analysis including the alternatives for the “welfare criterion” and the protection of sunk investments, the approaches to take on tech mergers and acquisitions, the virtues and limits of self-regulation, the potential for radical breakups of Big Tech, and the issues of data, when privacy protection and competition steer us in different directions. Contributors also weigh up the case for regulatory intervention, the practical challenges involved, and the future state that we hope such actions will bring about

Ecosystems and competition law in theory and practice

One of the most profound changes in the industrial landscape in the last decade has been the growth of business ecosystems—groups of connected firms, drawing on (digital) platforms that leverage their complementors and lock in their customers, exploiting the “bottlenecks” that emerge in new industry architectures. This has created new asymmetries of power, where the “field” of competition is not the relevant product market, as is usually the case in competition law, but rather the ecosystem of various complementary products and associated complementor firms. These dynamics raise novel concerns over competition. After examining the foundational elements of the ecosystem concept, we review how ecosystems are addressed within the current scope of competition law and identify the gap in the existing framework of conventional competition law. We then move to a critical review of current efforts and proposals in the European Union for providing regulatory remedies for ex ante and ex post resolution of problems, focusing on the current (2020) proposals of the Digital Market Act on ex ante regulation, with its particular focus on “gatekeepers.” We also review recent regulatory initiatives in European countries that focus on ex post regulation and on the role of business models and ecosystem architectures in regulation before providing a deep dive into proposed Greek legislation that explicitly focuses on ecosystem regulation. We conclude with our observations on the challenges in instituting and implementing a regulatory framework for ecosystems, drawing on research and our own engagement in the regulatory process

Global value chain configuration: A review and research agenda

This paper reviews the literature on global value chain configuration, providing an overview of this topic. Specifically, we review the literature focusing on the concept of the global value chain and its activities, the decisions involved in its configuration, such as location, the governance modes chosen and the different ways of coordinating them. We also examine the outcomes of a global value chain configuration in terms of performance and upgrading. Our aim is to review the state of the art of these issues, identify research gaps and suggest new lines for future research that would advance our understanding of how firms are implementing new ways of organizing and managing activities on a global scale

When the default just won't do: resilience as the new driver

This COVID-19 crisis has been a shock to us all. While the epidemiological issues rage on, and economic uncertainties rising, it has become clear that this crisis is much more than a contraction. Even when a vaccine emerges, and economic activity resumes, the old normal is history (Grandori 2020). We will be living in a different world, where only the resilient and the bold can survive – let alone thrive. It will take some concerted effort for to not succumb to their natural proclivity to simply repeat what has always worked for them in the past