Toward an Economizing Theory of Strategy
Washington University WP OLIN-97-07
Posted: 15 Oct 1997
Date Written: June 1997
Transaction cost economics is an economizing theory of organization, not an economizing theory of strategy. This paper proposes an extension that makes transaction cost economics (TCE) an economizing theory of strategy. In essence, the paper asserts that unbiased weighing of production costs, transaction costs, and demand shifts links the organization of individual transactions to the strategy of the firm. I argue that targeting a specific set of consumers (i.e., the firm's strategic position manifested in product choice), making specific investments or not to support the customer transaction, choosing a production cost technology, and selecting an organizational governance mode--the strategy four-tuple--are interdependent and that a firm's optimal strategy is the four-tuple that generates the greatest net receipts. The suitability of this expanded institutional set-up as a foundation for an economizing theory of strategy is assessed with respect to other efficiency or partial efficiency approaches to strategy, notably Porter's strategic positioning and the resource based view (RBV) of the firm. Four-tuple analysis not only is consistent with the efficiency aspects of these theories, it offers a superior calculus for identifying feasible strategies.
JEL Classification: D23, G30, G32
Suggested Citation: Suggested Citation