Mutual commitment to support exchange: Relation-specific IT system as a substitute for managerial hierarchy

Sung Min Kim, Joseph T. Mahoney

Research output: Contribution to journalArticle

Abstract

This paper examines the effects of information technology (IT) on the governance of vertically related firms. We propose 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 leading to both less vertical integration (i.e., a change in governance mode as a first-order effect) and a smaller number of suppliers (i.e., a change within a governance mode as a second-order effect). As a result, this highly relation-specific IT system (bilateral investment) can be an alternative governance mode of electronic integration that acts as a substitute for managerial hierarchy and vertical financial ownership. From a strategic management perspective, this paper provides transaction costs and resource-based explanations on IT systems' impact on the organizational boundary decision and its impact on the likelihood of the firm achieving sustainable competitive advantage.

Original languageEnglish (US)
Pages (from-to)401-423
Number of pages23
JournalStrategic Management Journal
Volume27
Issue number5
DOIs
StatePublished - May 1 2006

Keywords

  • Electronic integration
  • Mutual commitment
  • Relation-specific IT system

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

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