Mutual Commitment to Support Exchange: Specific IT System as a Substitute for Managerial Hierarchy

This paper examines the effects of Information Technology (IT) on the governance structure of vertically-related firms that are applying IT in search of competitive advantage via superior efficiency. By adopting transaction costs and resource-based perspectives on IT and governance, this paper examines how different types of IT systems change the boundary of the firm. It is proposed that a highly relation-specific IT system in inter-firm transactions plays a key role in the resulting inter-firm governance as a mutual sunk-cost commitment, in terms of both less integration (i.e., change in governance mode as a first-order effect) and a smaller number of suppliers (i.e., change within a governance mode as a second-order effect). As a result, this specific IT system can be an alternative governance mode of electronic integration as a substitute for managerial hierarchy. In addition, if a firm-specific IT system improves efficiency of internal transactions complementarily with other firm-specific resources, it can result in a larger scale of operations conducted within the firm as a co-specialized asset. From a strategic management perspective, this paper provides transaction costs and resource-based explanations for the organizational boundary decision and for sustainable competitive advantage of the firm. The strategic intent of searching for improved governance in acquiring and processing information while simultaneously managing economic incentives effectively continues to provide challenges for strategic management By analyzing the effects of a relation-specific IT system on the governance of supplier-buyer relationships, this paper extends studies in organizational economics and strategic management.