Discussion on Trust as a source of sustained competitive advantage

Trust, in economic exchanges, can be a source of competitive advantage. However, trust in these exchanges is not always a source of competi- tive advantage. Weak form trust is only a competitive advantage when competitors invest in unnecessary and costly semi-strong governance mechanisms. Semi-strong form trust is only a source of competitive advan- tage when a small number of competitors have special skills and abilities in conceiving of and implementing social and economic governance devices, and when those skills and abilities are immune from low-cost imitation. Strong form trust is a source of competitive advantage when two or more strong form trustworthy individuals or firms engage in an exchange, when strong form trustworthiness is relatively rare among a set of com- petitors, and when the individual and organizational attributes that lead to strong form trustworthiness are immune from low-cost imitation.

This analysis has important implications for research in organization theory and strategic management. For example, these ideas can be seen as an extension of transactions cost theory—an extension that makes this form of analysis strategically more relevant. Where transactions cost eco- nomics (TCE) implicitly assumes that the skills and abilities needed to conceive of and implement governance mechanisms are constant across individuals and firms (Williamson 1985), this approach suggests that these skills and abilities may vary in some strategically important ways. Also, where transactions cost theory assumes either that all potential exchange partners are equally likely to behave opportunistically or that one cannot distinguish between those that will behave opportunistically and those that will not behave opportunistically (Williamson 1985), this analysis sug- gests that potential exchange partners opportunistic tendencies may vary and that these differences can be discovered. Discovery of exchange part- ners that will not engage in opportunistic behavior enables firms to gain all the advantages of trade, without the cost of governance.

Thus, consistent with many of the more behaviorally oriented organiza- tional scholars cited earlier, the approach in this chapter rejects both the assumption that all exchange partners are likely to engage in opportunistic behavior and the assumption that it is not possible to know how oppor- tunistic a particular exchange partner is likely to be. However, these trans- actions cost assumptions are not replaced by equally extreme, if opposite, assumptions that most exchange partners are trustworthy most of the time. Rather, the approach adopted here is that the trustworthiness of exchange partners can vary, and that how trustworthy an exchange partner is can be discovered. The adoption of this approach leads to the conclusion that, in some circumstances, trust can be a source of competitive advantage—a conclusion that is not possible if it is assumed that most exchange partners are either untrustworthy or trustworthy.

This analysis also points to two important exchange processes that have not received sufficient attention in the organizations and strategy litera- tures. First, the argument suggests that semi-strong form trust can be a source of competitive advantage if competing exchange partners vary in their skills and abilities in conceiving of and implementing governance mechanisms. What these specific skills and abilities might be, and why they might develop in some economic actors and not others, are unex- plored issues in this chapter. However, casual observation suggests that, for example, some firms seem to be better at managing certain kinds of governance devices than others. Corning seems to be able to manage joint ventures more effectively than, say, TRW (Sherman 1992). Toyota seems to be able to manage complex supply relationships more effectively than GM (Womack, Jones, and Roos 1990; Dyer and Ouchi 1993). How these different skills and abilities evolve, and their competitive implications, are important research questions. In this context, comparative research on semi-strong form governance in different industries and different countries is likely to be very important (Dyer and Ouchi 1993).

Second, the argument suggests that strong form trustworthy exchange partners may be able to discover other strong form trustworthy exchange partners. Once discovered, these kinds of exchange partners can gain important competitive advantages from working with each other. However, much more empirical work needs to focus on the process through which strong form trustworthiness evolves in an economic actor. Such empirical work will establish whether strong form trustworthiness is a relatively sta- ble attribute of economic actors, and whether this attribute can be imitated at low cost. Also, empirical research needs to focus on the process of search- ing for strong form trustworthy exchange partners. In particular, the role of signals of strong form trustworthiness deserves empirical attention. In this context it may be helpful to compare the decisions and behaviors of firms that have been able to develop many strong form trustworthy exchanges (e.g. Corning) with the decisions and behaviors of firms that have been unable to develop these strong form trustworthy exchanges.

By examining the competitive implications of different types of trust in economic exchanges, it becomes clear that extreme assumptions about potential exchange partners—that most are trustworthy and that most are opportunistic—are overly simplistic. Rather, the trustworthiness of exchange partners may vary, and in that variance, the possibility of com- petitive advantage may exist.

Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.

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