Transaction Management: Value Creation by Reducing Transaction Costs

In this era of globalization we see an increase in specialization: the production chain is split up in more and more parts and the production of these parts is outsourced to those places in the world where production is relatively the cheapest and most efficient. This implies that transaction costs, associated with the coordination of production and trade in parts and components, become increasingly important. In small open service oriented economies like the Netherlands, transaction costs may amount to up to 50% of total value added. Therefore, the ability and skill of keeping transaction costs low is vital for the competitive position of a firm or country. This is what transaction management is about: create value from these transactions by keeping transaction costs as low as possible. Transaction management is based on modern theories of transaction cost economics, institutional economics, industrial organization and international trade, and making these theories operational for strategic decision making in industry and government. This chapter surveys how transaction management as a practical tool for the organization of production which has been inspired by these modern economic theories.