The co-evolution of capabilities and transaction costs: explaining the institutional structure of production
Article first published online: 23 MAR 2005
Copyright © 2005 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 26, Issue 5, pages 395–413, May 2005
How to Cite
Jacobides, M. G. and Winter, S. G. (2005), The co-evolution of capabilities and transaction costs: explaining the institutional structure of production. Strat. Mgmt. J., 26: 395–413. doi: 10.1002/smj.460
- Issue published online: 23 MAR 2005
- Article first published online: 23 MAR 2005
- Manuscript Revised: 11 NOV 2004
- Manuscript Received: 14 JUL 2003
- transaction costs;
- institutional structure of production
This paper proposes that transaction costs and capabilities are fundamentally intertwined in the determination of vertical scope, and identifies the key mechanisms of their co-evolution. Specifically, we argue that capability differences are a necessary condition for vertical specialization; and that transaction cost reductions only lead to specialization when capabilities along the value chain are heterogeneous. Furthermore, we argue that there are four evolutionary mechanisms that shape vertical scope over time. First, the selection process, itself driven by capability differences, dynamically shapes vertical scope; second, transaction costs are endogenously changed by firms that try to reshape the transactional environment to increase their profit and market share; third, changes in vertical scope affect the nature of the capability development process, i.e., the way in which firms improve their operations over time; and finally, the changes in the capability development process reshape the capability pool in the industry, changing the roster of qualified participants. These dynamics of capability and transaction cost co-evolution are illustrated through two contrasting examples: the mortgage banking industry in the United States, which shows the shift from integrated to disintegrated production; and the Swiss watch-manufacturing industry, which went from disintegration to integration. Copyright © 2005 John Wiley & Sons, Ltd.