The co-evolution of knowledge-based resource capability and transaction cost: Explaining the industry dynamics

A systematic understanding of industry dynamics is critical to strategy research because individual firm performance dynamics both reflect and affect change at the industry level. However, there are few explicit studies about the industry dynamics of knowledge based resource capability and transaction cost. Knowledge based resource capability and transaction cost theory assume competitive markets and do not address the industry life cycle. It therefore implies that knowledge acquiring and transaction-cost economizing are a superior firm strategy regardless of the stage of the life cycle. This paper seeks to reconcile these two streams of research by investigating whether knowledge and transactions have a differential effect in industry life cycle. This paper proposes that knowledge and transaction are fundamentally intertwined in the determination of industry dynamics, and identifies the key mechanisms of their co-evolution. There can be four settings of firms from a different knowledge and transaction cost positions; `developing entrants´, `cost explorer´, `knowledge exploiter´ and `developed incumbents´. A demand based view of industry dynamics that is focused on the interaction between knowledge and transaction development and the internal customers demand environment is applied to these four settings. We develop a formal computer simulation model that explicitly considers the influence of heterogeneity in the internal customers demand on firm´s knowledge and transaction choices. The analysis reveals that `developing entrant´, `cost explorer´, `knowledge exploiter´ and `developed incumbent´ show different patterns of industry life cycle. The analysis shows that `developing entrant´ and `cost explorer´ seeks both cost and knowledge improvement until attribute equalization stage, however that `developed incumbent´ and `knowledge exploiter´ seek transaction cost minimization for the time being firstly. However the patterns are much the same between `dev- - eloping entrant´ and `cost explorer´, and between `developed incumbent´ and `knowledge exploiter´, the rate and duration of change are different in each other.