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Governance mechanisms and relationship productivity in
vertical coordination for new product development
Teck-Yong Enga,*, Veronica Wongb,1
aSchool of Social Science and Public Policy, King’s College London, University of London,
Management Department, 150 Stamford Street, London SE1 9NN, UKbAston Business School, Aston University, Aston Triangle, Birmingham B4 7ET, UK
Abstract
This article explores the theoretical explanations of governance mechanisms in vertical coordination between firms over the product life
cycle stages with reference to the high-technology industry. Firms in the high-tech industry face uncertainties of fast-changing environments
such as rapid technological innovations and shortening product life cycles. Drawing on transaction cost analysis in vertical coordination,
conditions under which transactional inefficiencies may arise are analyzed on different stages of product life cycle theory. Theoretical
analysis suggests that interaction patterns over a product life cycle produce differing implications for achieving cost minimization and value
maximization. The implications of this variation in transaction cost inefficiencies suggest that there are different opportunities for enhancing
efficiencies or for creating value at different stages of the product life cycle. The article proposes that by considering the impact of exogenous
factors on the stage of a product life cycle and relationship productivity, high-tech firms operating in volatile markets can safeguard their
exposure to transactional inefficiencies.
q 2004 Elsevier Ltd. All rights reserved.
Keywords: Vertical coordination; New product development; Product life cycle
1. Introduction
In today’s network economy, firms are confronted with
rapid technological changes and global competition. A
formative idea in marketing is that interfirm relations in
marketing channels have gradually moved from transaction-
oriented marketing (e.g. Williamson, 1979) and relationship
management (e.g. Heide, 1994) to emphasize on coordi-
nation between networks of firms (Achrol and Kotler, 1999).
In particular, suppliers of high-tech products often face
technological skepticism frequently exhibited by buyers
who delay or postpone their purchase of the product
(Shanklin and Ryann, 1987) as well as obsolescence and
the threat of competing technologies (Moriarty and Kosnik,
1989). It is therefore not surprising that the productivity of
purchasing ties is particularly significant for vertical
0166-4972/$ - see front matter q 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.technovation.2004.10.015
* Corresponding author. Tel./fax: C44 207 848 4211.
E-mail addresses: [email protected] (T.-Y. Eng), v.w.y.wong@
aston.ac.uk (V. Wong).1 Tel.: C44 121 359 3011; fax: C44 121 333 4313.
coordination between firms in new product development
relationships.
In vertical coordination, buyers and sellers engage each
other in ways that are more intense than simple exchanges
of products for payments (Clemons et al., 1993). This is
pertinent in the relationship quality of new product
development (NPD). Relationship quality has been defined
as a concept that includes conflict, trust, commitment and
the partner’s willingness to invest in the relationship and
expectation of continuity (Kumar et al., 1995). High quality
relationships would have greater trust, commitment, will-
ingness to invest, expectation of relationship continuity and
lower levels of conflict. Consequently, researchers in
marketing have taken an interest in the concept for the
development and management of long-term relationships
such as alliances and partnerships (e.g. Anderson andWeitz,
1989, 1992; Anderson and Narus, 1990; Dywer et al., 1987;
Heide and John, 1990).
While there are models and frameworks for under-
standing working relationships between firms in business
markets, there is little research in governance mechanisms
Technovation 26 (2006) 761–769
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T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769762
of vertically connected NPD ties in volatile or high-tech
industries that often have a direct impact on a product life
cycle as well as the bottom line of buyers and sellers. This
impact is significant to the quality of the relationship due to
the complex nature and volatility of high-tech markets that
contribute to a high perceived risk both on the supply and
the demand side (Beard and Easingwood, 1992). An
understanding of the implications of a product life cycle
for governance mechanisms can help firms add value and
satisfy partners’ requirements and circumstances in vertical
coordination for new product development. It is not
surprising that firms in high-tech industries often engage
in outsourcing to develop fewer but closer value-adding ties
(Clemons et al., 1993; Wilson, 1994).
However, high-tech products have a short product life
cycle that can make relationship investments uneconomical
in vertical coordination. Participants of NPD in high-tech
markets are often confronted with high switching costs as a
result of commitments they have made in a certain
technology or a particular vendor (see e.g. Jackson, 1985;
Wilson, 1994; Heide and Weiss, 1995). The high volatility
of high-tech markets adds to the difficulty in determining the
relationship productivity between partners. Firms in the
high-tech industry operate in a dynamic environment in
which semiconductor production can increase the price/
performance ratio of microprocessor-based computer sys-
tems by 10 times every two and a half years. This gives rise
to discontinuous innovation and shortening product life
cycles and hence businesses are forced to adopt dynamic
paradigms such as competing and collaborating with
competitors (Bengtsson and Kock, 2000) and inviting
suppliers rather than recruit. Also, high-tech firms engage
in a variety of network forms such as vertical networks that
are dynamic and knowledge-rich, which have implications
for generating innovations (Eng, 2004a).
The purpose of this article is to explore the governance
mechanisms for vertical coordination between firms in
NPD. In doing so, research propositions are developed in
relation to understanding the productivity of relationship for
different stages of product life cycle theory. Although there
are many studies on different approaches of relationship
governance in channel management (e.g. Anderson and
Narus, 1984; Gundlach et al., 1995; Andaleeb, 1996), no
particular conceptualization has yet been developed for
explaining the forms of vertical coordination in a product
life cycle of firms operating in high-tech markets. Thus, this
article attempts to fill this gap in marketing literature and
NPD.
2. Governance and vertical coordination
Following Palay’s (1984, p. 265) definition, governance
is defined as the institutional framework in which contracts
are initiated, negotiated, monitored, adapted and terminated.
It encompasses the initiation, termination and ongoing
relationship maintenance between a set of parties. Since the
theoretical backdrop to vertical coordination is in the
transaction cost analysis (TCA) tradition (Heide, 1994),
governance is viewed as mechanisms designed for support-
ing economic transactions. Specifically, governance is
considered with respect to mechanisms for achieving
efficiency over the product life cycle in new product
development.
Transaction cost analysis examines the issue of economic
exchange as a problem of designing efficient relationships
and mechanisms of adaptation to regulate that exchange.
The focus is on minimization of production, organization
and transaction costs (Williamson, 1979, 1985, 1991, 1993;
Alchian and Woodward, 1988). The potential of numerous
firms that could take part in NPD process renders ineffective
coordination of marketing activities between independent
manufacturers and distributors based on arms-length market
relationships (Stern and El-Ansary, 1990). Thus, more
effective coordination can be achieved through vertically
integrated coordination, though that governance mode may
be costly and inflexible (Anderson and Weitz, 1986).
Transaction costs include ex ante and ex post costs. The
former include the out-of-pocket costs of negotiating
contracts (‘ink’ costs), as well as the opportunity cost of
forgone transactions. In NPD, ex post transaction costs in
vertical coordination focus on minimizing costs related to
product design changes, production planning and the like
(Frazier et al., 1988). These ex post transaction costs can
include: the costs of haggling, documentation, renegotiating
margins and costs associated with the new activities being
contemplated (Buvik and John, 2000). It is particularly
relevant for NPD activities, in that the relationship
productivity between partners would be expected to
increase over time on the stages of the product life cycle.
Interestingly, most studies have not yet considered the
effects of vertical coordination in terms of productive
allocation of resources over the stages of product life cycle.
Much of past empirical research on TCA has been
applied to supply chains and strategic partnerships with a
focus on cooperative interfirm ties. This form of partnership
requires integration that entails the process of adaptation to
eliminate inefficiencies. Since it is not possible to foresee
the types of adaptations required in the relationship, TCA
has been expanded to incomplete contracting literature (e.g.
Grossman and Hart, 1986). It is assumed that firms
economize on their limited information processing capa-
bilities (Cyert and March, 1963), which provide a
mechanism for coping with unforeseen contingencies and
adapting to profitable revisions. The difficulty of specifying
a complete contract is particularly pertinent in NPD
activities.
The presence of incomplete contracts can only work
within supportive governance structures such as in verti-
cally coordinated interaction patterns. Vertical coordination
was first elaborated in marketing by Stern and Reve (1980)
in their political economy framework and later
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769 763
operationalized in empirical work by John and Reve (1982)
and Reve and Stern (1986). Buvik and John (2000, p. 53)
define vertical coordination as the purposive organization of
activities and information flows between independent firms.
These activity patterns and information flows possess two
related features. First, they are not enforced through legal
ordering. Second, profits from these patterns and flows are
split up through ongoing adjustments and bargaining rather
than contractually specified ex ante. Both the activity
patterns and information flow aspects of vertical coordi-
nation have been studied in extant work.
Due to the uncertainty of NPD, the interactive patterns of
vertical coordination are important when examining ways to
reduce transaction costs. While relational perspectives or
behavioral factors have been shown to explain relationship
success, exogenous factors influencing managerial choices
in vertical coordination have largely been neglected.
Vertical coordination incorporates hybrid modes that are
similar to markets and could integrate networks of private
rather than legal relationships for achieving economic
efficiencies. As such, the implications of exogenous factors
for vertical coordination between firms as regards a new
product life cycle are likely to be significant. The exogenous
factors related to relationship management have been noted
in previous studies on strategic management of buyer-seller
relationships (e.g. Fiocca, 1982; Campbell and Cunning-
ham, 1983; Eng, 2004b). Fig. 1 presents the common
exogenous factors noted in the literature.
As shown in Fig. 1, endogenous factors are based on a
relational perspective or behavioral factors rather than
Fig. 1. An overview of factors affecting c
transaction costs. Many criticisms of TCA have emerged
from its neglect of the effect and implications of behavioral
factors for the success of relational exchange. Most studies
have argued that TCA is a mere cost-minimization calculus
based on exogenous attributes of an exchange and it
provides little insight into strategic marketing choices that
are grounded in firm-specific differences (Morgan and Hunt,
1994). Essentially, received theory from a relational
perspective suggests that the presence of trust and commit-
ment in relational exchange is essential for building
successful long-term relationships.
However, it can be argued that there are two crucial
differences in high-tech markets as regards vertical
coordination between firms in NPD. First, the firm-specific
differences within the relational perspective take advantage
of differences among firms in competition. As noted earlier,
vertical coordination accounts for uncertainty in hybrid
modes of interaction patterns that could include not only
individual firms but also networks of firms in competition.
The deliberate formation of incomplete contracts of the
TCA perspective provide flexibility in achieving profitable
revisions particularly for firms operating in fast-changing
high-tech markets. Second, high-tech products often have a
short product life span coupled with the need to maximize
profitability of innovations. The over-emphasis of the
relational perspective on commitment and trust may not
always be applicable to volatile markets because exogenous
factors may also influence the development of long-term
relationships. Thus, exogenous factors in Fig. 1 are
conceptualized as demand challenges that are examined
hoice of governance mechanisms.
Table 1
Transactional inefficiencies over a PLC in the context of high-tech markets
Product life
cycle stages
Uncertainty Complexity Asymmetric
information
Opportu-
nism
Introduction High High High High
Growth Medium Medium Low High
Mature Low Low Low Medium
Decline High High Medium Low
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769764
over the life cycle stage of a product in the context of NPD.
There are no presumptions that all products would follow a
typical product life cycle theory or that social factors such as
trust and commitment are less important in volatile markets.
2.1. Relationship productivity over the stages
of a product life cycle
In the context of product life cycle theory for new
products, there is a shift of attention from behavioral factors
of governance to demand challenges. Setting aside the
widely discussed relational factors (such as trust and
commitment) that can influence the success inter-firm
relationships, the premise of this article is that an under-
standing of demand challenges affecting the success of new
products over the life cycle stage can enhance efficiency in
vertical coordination. This is particularly evident in high-
tech markets that face rapid technological changes, high
capital investment and short product life cycles but
investment in the relationships can be transient and costly.
Managerial choices regarding the type of appropriate
governance modes would need to be adaptable and flexible.
It can be argued that the analysis of vertical coordination for
different stages of a product life cycle can provide insights
into relationship performance—not only between partners
but also the extent to which new product growth warrants
further commitments in relationship development.
In order to capture the relationship performance, the
demand challenges categorized as exogenous factors of
vertical coordination can be incorporated into a single
construct of relationship productivity. Consistent with prior
work on purchasing ties (e.g. Buvik and John, 2000), the
term ‘relationship productivity’ is used here to emphasize
value maximization and cost minimization. Relationship
productivity encompasses the exogenous factors (see Fig. 1)
that progress from early introduction to decline stage over a
product life cycle. In essence, relationship productivity
stresses on achieving transactional efficiencies concerning
exposure to uncertainty, complexity, asymmetric infor-
mation and opportunistic behavior. The degree of ineffi-
ciencies would vary not only with the adopted governance
mechanism but also with the stage of a product life cycle.
While a transaction is embedded in a specific economic
context, common exogenous factors attributed to efficient
governance play a critical role in developing successful
relationships. Accordingly, the descriptions that follow will
indicate that these exogenous factors are considered in the
function of relationship productivity.
It is first appropriate to examine the exposure of new
products to transactional inefficiencies over a product life
cycle. The effects of transactional inefficiencies are framed
in vertically coordinated partnerships between firms that are
susceptible to complex environmental demands such as
rapid technological changes. Firms in high-tech markets
have often organized themselves in vertically disintegrated
production structures to take advantage of localized
competence and rapid flows of knowledge (Eng, 2004a).
Although the focus of this article is on the exposure of new
products to transactional inefficiencies over a product life
cycle in the high-tech industry, transactional efficiencies are
also important in less volatile markets. In this article, the
main differences between volatile and less volatile markets
are that the former are confronted with high perceived risks
and more frequent exposure to transactional inefficiencies
than stable markets.
Table 1 provides an overview of the four stages of a
product life cycle vis-a-vis the four conditions under which
transactional inefficiencies may arise. For the purpose of
this article, they are examined in relation to the presence of
interdependence between exchange parties in NPD and the
potential contributions of vertical coordination in achieving
additional economic value. TCA suggests that value
creation can derive from the attenuation of uncertainty,
complexity, information asymmetry and opportunism in
small numbers.
In stage one of product introduction, all four conditions
of transactional inefficiencies have a strong influence on
inter-firm relationships. Due to the high level of uncertainty
in the demand side of new product introduction, a firm’s
investment in specific assets is exposed to external threats,
particularly information asymmetry and short-term gains
from opportunistic behavior. Although all the industries are
exposed to these conditions of transactional inefficiencies,
high-tech firms are frequently launching new products and
are susceptible to a high risk associated with investment in
new technologies. There is high complexity in the early
stage of product introduction due to the need to educate the
market and diffuse new technologies. For instance, high-
tech firms often test launch their new products to avoid
product re-calls. The exposure to opportunism is also high
as high-tech firms constantly attempt to innovate and
improve current technologies. The novelty of the product
contributes to high asymmetric information between firms.
Many high-tech firms in the industry form collaborative
relationships to exchange technologies and reduce per-
ceived risks through closer ties and vertical integration.
Within the networks of vertically connected relationships,
firms could reduce the exposure of assets to opportunism by
exploring and accessing opportunities beyond contractually
mandated actions. For example, strategic networks have
been noted to provide sources for achieving enhanced
efficiencies (Zander, 1999). Networks can dampen turbu-
lence by moving information efficiently through loosely
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769 765
coupled relationships (Weick, 1976), thus reducing dis-
continuities and enabling members to adapt more or less
continuously to change (Achrol and Kotler, 1999).
Proposition 1. In the introduction stage of a product life
cycle of the high-tech industry, a firm’s sources of
transactional efficiencies are low within contractually
determined outcomes. At this stage, a firm’s interdepen-
dence between exchange parties in business networks
provides the opportunities for developing joint cost
minimization initiatives.
Stage two of a product life cycle presents ample
opportunities for gaining further efficiencies mainly through
market feedback on customer needs and technological
trends. For instance, exposure to transactional efficiencies of
uncertainty and complexity is average as firms begin to
realize the success of their investment in specific assets, e.g.
new products. Clearly, new products may also fail but firms
could learn from the market and adapt their products.
Strategic actions and outcomes are more transparent
through growing acceptance of the new products and
hence, asymmetric information is low between partnering
firms. For example, high-tech products may experience a
short phase of growth due to new innovations. There is high
opportunism as competitors and/or partners in the industry
are attracted to the growing product. Also, consistent with
the reduction of perceived risks, the level of interdepen-
dence becomes lower; but this increases the potential of
opportunism through strategic pursuits of individual inter-
ests. In the context of hierarchies and markets, firms can
explore opportunities (reduce costs) beyond their existing
partnerships, for example, through vertical networks.
Achrol and Kotler (1999, p. 148) note that vertical networks
maximize the productivity of serially dependent functions
by creating partnerships among independent skill-special-
ized firms.
Proposition 2. In the growth stage of a product life cycle of
the high-tech industry, a firm has choices for gaining
efficiencies through received wisdom about the markets. As
interdependence decreases, individual partners in NPD
relationships could form vertically coordinated relation-
ships with external markets.
In Table 1, the mature stage three of a product life cycle
suggests that transactional inefficiencies should be low or at
a minimum. As operational procedures are institutionalized
over time, there are opportunities for firms to reduce
operational costs within the firm as well as between firms.
There is low uncertainty as far as the viability of the product
is concerned in terms of phasing out and/or being replaced
by more advanced technologies. It is noted that an average
degree of opportunism exists, as partnering firms in
developing the new product may begin contemplating exit
strategies based on individual self-interests. For example,
high-tech firms may form new partnerships to learn and
acquire knowledge of new technologies. In vertically
coordinated structures, this stage allows firms with hybrid
modes to create value from: (1) product standardization as
complexity and information asymmetry is low and hence
low requirements for adaptation, e.g. standardization of
mobile telecommunications technologies. (2) Product
expansion to new markets with lower uncertainty as the
product has been tested in existing markets, e.g. mature or
stable technological products are exported from developed
to developing and third-world countries. (3) Product
innovation through accessing and developing new knowl-
edge from business networks such as joint development of a
new technology between firms.
Proposition 3. In the mature stage of a product life cycle of
the high-tech industry, a firm’s avenues for gaining
transaction efficiencies reside mainly in operational and
external vertical coordination structures. External business
networks, those outside existing partnerships or indirectly
connected relationships, offer the opportunities for product
expansion and innovation.
The final stage of decline in a product life cycle theory is
rather complicated as investment in specific assets is
confronted with a high level of uncertainty and complexity.
Return on investment for products at this stage would be
low. Since there is a high level of perceived risk of investing
resources to maintain the product in the marketplace, firms
are likely to act independently in order to reduce investment
in assets with depleting market value. This may complicate
inter-firm partnerships that were formed without specific
contractual bindings. Also, the market value of high-tech
products at the decline stage could experience a drastic fall
due to obsolescence. Although information asymmetry is
not high, perceived risks by firms are high in terms of the
product contributions to profitability. In this instance,
exposure to transactional inefficiencies of opportunism is
low. But the cost of divestment may be higher than
maintaining the shelf life of the product. For example,
many obsolete technologies are not phased out in the
marketplace. In the context of low interdependence between
firms, vertically coordinated structures can be terminated to
reduce further exposure to high inefficiencies particularly
for products with low strategic market significance.
Additionally, to prolong the transactional value of a product
in the decline stage, firms can manipulate the conventional
marketing mix such as by lowering prices, using different
distribution channels and re-branding the product. These
approaches provide an alternative to minimize transaction
costs by lowering the product’s strategic priority, e.g. use
limited distribution channels for the product and price
reduction to salvage further loss. Importantly, the cost-
benefit of such tactical approaches needs to be considered.
Proposition 4. In the decline stage of a product life cycle of
the high-tech industry, a firm’s exposure to transactional
inefficiencies is high in terms of the low returns from
maintaining the product’s existence. The effects on exposure
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769766
to prolonged inefficiencies are related to the cost-benefit of
salvaging and/or terminating the product.
3. Discussion
As discussed above, the four stages of a product life cycle
have implications for governance modes with respect to
transactional inefficiencies. But there is little guidance for
managerial choice in terms of the implications of cost
minimizing pursuits for a firm’s relationship. This is
because individual firms may choose expected governance
modes based on self-serving purposes to achieve short-term
transaction efficiency—without consideration of relation-
ship-based exogenous factors. Also, governance mechan-
isms for different product life cycle stages are not restricted
to investment in specific assets but may include business
networks such as other industries, and network relationships
and resources. It can therefore be suggested that the
relationship productivity construct is a function of con-
textual and relationship-based exogenous factors. Given
the factors identified in Fig. 1, the relationship productivity
is a function of six factors: (1) technology transfer;
(2) technology sophistication; (3) skills and knowledge
transfer; (4) cultural compatibility; (5) relationship age; and
(6) significance of partner’s contributions to NPD success.
These variables have been commonly noted in the high-tech
industry and previous empirical studies. They have a
positive effect on the value of relationship productivity
between firms, e.g. the relationship productivity of Mi and
Bq between a manufacturer and buyer in NPD has a positive
relationship with the extent of skills and knowledge transfer
in the relationship. Thus, the relationship productivity of
any relationship (iKq) can be expressed as
RPi Z f ðTq; Sq;Kq;Cq;Aq;PqÞ
where RPi is the relationship productivity to the firm that
engages in NPD with other parties (e.g. buyer, wholesaler),
Tq is the extent of technology transfer in the relationship, Sq
is the level of technology sophistication between firms, Kq is
the extent of skills and knowledge transfer in the
relationship, Cq is the extent of cultural compatibility
between firms, Aq is the length of the relationship, and Pq is
the extent of partners’ contributions to the relationship. An
assessment of the relationship productivity captures the
extent of the significance of the vertical coordination
between firms over a product life cycle and its strategic
importance for developing successful relationships.
3.1. Relevance to theory
The variables for the function of relationship pro-
ductivity can be examined. Vertical technology transfer
occurs when a product is moved from development to
production (Kogut and Zander, 1992). This is facilitated by
shared codes of functional groups in a firm or between firms
that require mutual adaptation in the process of knowledge
codification (Leonard-Barton, 1988). For example, collec-
tive learning between high-tech firms in regional clusters
have been noted to provide firms with a competitive
advantage to learn from partners with complementary assets
that are necessary to enhance innovation compared to their
counterparts located elsewhere (Malecki, 1986). They gain
economic efficiencies through established conventions that
relate to the technologies used and the resources mobilized
in relationships. Boyer and Orlean (1992) define conven-
tions as norms, rules and practices with respect to
production systems within a cluster, which help establish
trust between firms and allow firms to co-operate in
particular projects.
Technology sophistication in relationship productivity
function is concerned with access to superior technology
that could add value to the relationship. For example, high-
tech firms often combine technology resources for the
development of new products such as the relationship
between Sony and Ericsson. This is because high-tech firms
tend to be specialized but have flexible production systems
that engage a network of sub-contracting and outsourcing
relationships with other firms. Such relationships are
characterized by complementarity, mutual dependency
and reciprocity (De Propris, 2001). They render efficiency
for the firms to acquire and enhance the technology
resources that are critical for positioning products (Ghosh
and John, 1999).
Kogut and Zander (1992, p. 387) note that the persistent
of differentials in firm performance lies in the joint problem
of the difficulty of transferring and imitating knowledge.
The ability of firms to learn and acquire knowledge and
skills has been noted as an important source of core
competence in strategic management literature (e.g. Hamel,
1991). High-tech firms often engage in vertical coordination
such as through industrial concentration and specialization
(Krugman, 1991) that could benefit from knowledge
spillover (Freeman, 1991; Storper, 1992). Since complex
technology knowledge of a firm is not necessary amenable
to codification, the transfer of complex skills and knowledge
are most likely to be characterized by repeated and close
interactions with other firms. For example, firms that engage
in external partnering are expected to exhibit better
innovation performance than their counterparts (Greis
et al., 1995).
It has been noted that a shared socio-cultural context
generates variety and diversity that provide the scope for
learning between firms (Lundvall and Johnson, 1994). Large
cultural differences will not only prevent communication
and exchange of information but also will result in a lack of
trust between the firms. The differences in languages,
customs and work practices may hinder efficient flow and
exchange of both information and knowledge. In addition,
the extent of cultural compatibility between the parties
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769 767
involved in NPD activities may affect transactional
efficiency and relationship productivity.
In business marketing literature, the age of a relationship
has been shown to influence choice of business partners and
resource commitments (Campbell and Cunningham, 1983;
Eng, 1999). While the length of time may affect the
relationship age, it is the level of formal and informal
adaptations between the firms that provides an assessment
of the relationship age. For example, a long established
relationship would be demonstrated by substantial informal
and formal adaptations. The age of a relationship does not
necessarily follow a product life cycle as the firm may have
an established or old relationship with its partner at all
stages of the product life cycle. Consequently, there is less
uncertainty, complexity, asymmetric information and threat
of opportunism for established than new relationships.
High-tech firms that engage themselves in many NPD
projects are constrained by scarce organizational resources
for both NPD activities and management of relationships.
Different relationships often contribute differently to the
development of a new product and require different levels of
investment. Generally a partner that contributes signifi-
cantly to NPD success such as with both high returns on
investment and fast new product acceptances in the market
is more important than otherwise (Souder and Song, 1997).
This minimizes transaction costs associated with the
uncertainty of NPD and maximizes the firm’s utilization
of resources.
3.2. Relevance to practice
A common practice in the high-tech industry is that firms
form collaborative partnerships without specific contractual
safeguards. This practice of vertical coordination is gaining
popularity in various industries (e.g. supplier involvement,
vendor partnership) but empirical research has shown that
information exchange and planning improved gains from
trade only when large uncertainties placed a premium on
adaptation (Noordewier et al., 1990). Buvik and John (2000)
also note that gains from vertical coordination occur only
when (1) specific investments are modest and (2) high
environmental uncertainty is present. This article suggests
that high-tech firms operating in volatile markets can
safeguard exposure to transactional inefficiencies and
improve relationship productivity by considering the impact
of exogenous factors over the stages of a product life cycle
and along with the proposed relationship productivity
function.
High-tech firms that consider the governance of new
products as consisting of exposure to different conditions of
transactional inefficiencies over a product life cycle could
reduce the risk of substantial asset specific investments
particularly in new technologies. Although not every
product would follow a typical product life cycle, an
understanding of the types of transactional inefficiencies at
each of the four stages of the product life cycle may help
managers in allocating scarce resources. As noted in Table 1
and the propositions, managers can be better informed of the
choices available from creating vertical partnerships of
independent skill-specialized firms to counter the perceived
risks associated with exchange parties in NPD. Added to
this, managers with an understanding of governance
mechanisms and transaction efficiency over the stages of
the product life cycle could extend knowledge of social
behavioral factors of inter-firm relationships. It is also
possible that transactional inefficiencies in the early stage of
a product life cycle manifest themselves in the later stages,
to the extent that there are not immediately apparent and
have implications for the success of the relationship.
The analysis of product life cycles in relation to the
productivity of a relationship provides managerial guidance
in resource allocation for achieving transaction efficiency.
Relationship productivity has been conceptualized as a
function of six exogenous factors: technology transfer,
technology sophistication, skills and knowledge transfer,
cultural compatibility, relationship age and significance of
partner’s contributions to NPD success. Given the difficulty
of balancing between exposure to different conditions of
transactional inefficiencies over the product life cycle and
safeguarding opportunistic behavior in vertical coordi-
nation, managers can use the relationship productivity
function for a more objective evaluation of exogenous
impacts. The relationship productivity function provides a
different perspective to the evaluation of transaction
efficiency. It may also help detect opportunism (through
the product life cycle) and moderate the deterministic view
of product life cycle theory and the complete reliance on
subjective social factors (such as trust) in inter-firm
relations.
4. Conclusion
Although the study of relationship governance phenom-
ena has been influenced profoundly by TCA, its contri-
butions to choice of governance mechanisms for vertical
coordination between firms has not yet been conceptualized.
This article illustrates the governance structures of vertical
coordination in the context of the high-tech industry and
NPD by examining their influence on product life cycle
stages and relationship productivity. As shown in Fig. 1,
consideration of exogenous factors includes attributes noted
in marketing literature for efficient governance. By
combining these exogenous factors, it is possible to account
for both implications of transactional inefficiencies over the
product life cycle as well as relationship-based factors in the
relationship productivity construct for gaining a better
theoretical insight and managerial understanding.
In Table 1, four major themes emerged from the TCA
perspective of vertical coordination over the product life
cycle stages; first, a firm’s investment in specific assets are
exposed to different degrees of transactional inefficiencies
T.-Y. Eng, V. Wong / Technovation 26 (2006) 761–769768
on different stages of a product life cycle. The implications
of this variation in transaction cost inefficiencies suggest
that there are different opportunities for enhancing efficien-
cies or developing value at different stages of the product
life cycle. Second, complete, contingent contracts are of
little relevance in vertical coordination of partnership
between firms in NPD activities. Within each of the
different stages of a product life cycle, firms have the
opportunities to shift or revise activities to lower transac-
tional inefficiencies. Coordinated interaction patterns have
been noted to produce better adaptation (Lusch and Brown,
1996). Third, though a firm can profit from its actions in
response to transactional inefficiencies for the firm’s own
purposes, tactical manipulations may expose the other
party’s assets to inefficiencies. Buvik and John (2000)
contend that fast changing demand conditions and rapid
technological changes provide greater opportunities for
appropriating exposed assets. Close ties in vertically
coordinated patterns are not limited to competition among
firms but may include business networks. Fourth, while a
firm’s own strategy may expose the other party’s assets or
create additional opportunities, vertical interaction patterns
are also subject to contextual and relationship-based
exogenous factors. It is suggested that these factors can be
examined using the relationship productivity construct.
Within the context of highly volatile markets such as the
high-tech industry, fast changing supply and demand
conditions have a profound impact on the relational
approach to building long-term relationships. The present
article set out to examine the implications of these
exogenous factors with regards to the form of governance
mechanisms in vertical coordination for new product
development activities. It has been shown through theoreti-
cal analysis that interaction patterns over a product life cycle
produce differing implications for achieving cost minimiz-
ation and value maximization. The lack of systematic
empirical work on these issues means that the analysis was
largely based on theoretical reasoning and explanation.
Finally, it is hoped that the refutable propositions and
implications put forward in this article would encourage
further research in this area.
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Teck-Yong Eng is Senior Lecturer in
Marketing at University of London,
King’s College London, UK. He gained
a PhD in Business-to-business Marketing
from the Manchester School of Manage-
ment, UMIST. His teaching and research
interests include industrial marketing, new
product development and supply chain
management.
VeronicaWong is Professor of Marketing
and Head of the Marketing Group at Aston
Business School, UK. Her research inter-
ests include new product management,
international product launch, and inno-
vation management. She has published
widely in academic and business journals
including Journal of International
Business Studies, Journal of Product
Innovation Management, and Industrial
Marketing Management, among others.
