Conceptualizing co-ordination and competition in supply chains as complex adaptive system

A model has been developed to explore the dynamics of outsourcing strategies and specialization effects. Using transaction cost economics the literature showed that IT investments can create an incentive for a firm to pursue a specialization strategy, spinning off and outsourcing peripheral activities to focus on its core competence. Web services technology, for example, which has been explicitly designed to facilitate inter-operability of machine-to-machine communication, is expected to support such strategy. We extend this analysis proposing a research model that explicitly recognizes industry-level feedback. While specialized firms can enjoy lower production cost they are also more reliant on market conditions and interaction. This dependence exposes a specialized firm to the risk of market failure or vertical foreclose, all of which increase transaction cost. The complication from a modeling perspective has been to properly recognize industry structure and transaction cost as endogenous variables. As a solution we propose formalizing this problem as a complex adaptive system. We present a model with the firm as unit of analysis and its behavior based on micro-economic cost theory and the theory of noncooperative games. The paper follows Zmud’s concept of a “pure theory” manuscript adapted from the Academy of Management Review (1998).