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In this study, we extend the analysis of adaptation in theories of economic organization beyond traditional considerations of incentive conflict (hold-up). We conceptualize adaptation as coordinated and cooperative response to change, and define the adaptive capacity of a vertical relationship as the ability to generate coordinated and cooperative responses across procurer and supplier to changes in procurement conditions. We draw on the concepts of differentiation and integration to dimensionalize the adaptive capacity of different modes of procurement. Using data on all component classes procured internally and externally by Ford and Chrysler, we show that different procurement modes differ in terms of their adaptive capacity and performance. We also show that performance differences across modes of procurement arise as a function of the match between adaptive capacity and adaptation requirements associated with the exchange, and not only the match between governance form and transaction hazards. 1 We focus on transaction cost rather than property rights when discussing existing literature on the economic organization of vertical relationships. This is because the empirical strategy and management literature on vertical relationships is much more influenced by transaction cost economics than property rights economics (see Novak and Eppinger, 2001, for an exception).

humanism, economism, management paradigms, sustainability, management theory, business strategy,

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