The implications of interactions theory and application for value chain management

Abstract

As organisation structures become flexible in the response to market opportunities it is interesting to probe the underlying reasons that have facilitated these developments. It is not the just attraction of low capital intensity and diversified risk that makes the virtual organisation attractive. Transaction economics (Coase: 1937 and Williamson: 1985) identified the choices available to the firm: essentially a comparison between the relative costs of using internal resources and those of external suppliers. If the external sourcing option is lower cost and comparable (acceptable quality etc) the economic solution was to outsource. One of the cost items that influenced the choice was that of assembling the information required to make the decision; another was the process of negotiation, the transaction process required, and any subsequent follow-up activities. The development of information communication technology (its costs, accuracy and accessibility) had a huge impact on the overall costs. What have been described as interactions are the processes that are engaged when organisations relate with each other in sourcing and procurement decisions; interaction costs occur as these processes are engaged. This paper introduces the topic and explores the implications for value production networks.