a transaction cost approach to make-or-buy decisions
DESCRIPTION
A Transaction Cost Approach to Make-or-Buy Decisions. Gordon Walker and David Weber Administrative Science Quarterly, 29 (1984): 373-391. Purpose of the paper. Transaction cost Uncertainty Asset specificity. Make or buy decisions. Production cost. Given moderate uncertainty. Costs. - PowerPoint PPT PresentationTRANSCRIPT
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A Transaction Cost Approach to Make-or-Buy Decisions
Gordon Walker and David WeberAdministrative Science Quarterly, 29 (1984): 373-391
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Purpose of the paper
Make or buydecisions
Transaction cost- Uncertainty- Asset specificity
Production cost
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Asset specificity
Cost
s
Governance cost when AS is lowInternal organization > market
Governance cost when AS is highInternal organization < market
Governance cost difference between internal organization and market
A
Given moderate uncertainty
ΔTC
Proxies for AS- Supplier competition- Buyer experience
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Asset specificity
Cost
s Production cost when AS is lowInternal organization > market
Production cost when AS is highInternal organization > marketBUT get close to each other
ΔPC
Given moderate uncertainty
Proxies for PCSupplier production advantage
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Asset specificity
Cost
s
A
ΔPC + ΔTC
A’
Given moderate uncertainty
Proxies for uncertainty- Volume uncertainty- Technological uncertainty
Make or Buy decision
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Buy decisionVolumeuncertainty
Technologicaluncertainty
negative
negative
UncertaintyHypothesis 1, 2
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SupplierCompetition
Buy decision
SupplierProductionadvantage
Positive
production cost
positive
Hypothesis 3, 4
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SupplierCompetition
Buy decision
Buyerexperience
positive
positive
Asset specificity
SupplierProductionadvantage
Technologicaluncertainty
Negative
Negative
Hypothesis 5, 6, 7, 8
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HypothesesH1/β1 Volume uncertainty leads to making rather than buying a component.
H2/r1 Technological uncertainty increases the likelihood of a make rather than a buy decision.
H3/β2 The higher the supplier production cost advantage, the more likely the firm is to buy rather than make a component.
H4/r2 The competitiveness of the supplier market increases the production cost advantage of suppliers over buyers.
H5/r3 Greater supplier market competition should lead to buying the component.
H6/r4 The experience a buyer has in producing a component reduces the production cost advantage of the supplier over the buyer.
H7/r5 Buyer experience in producing a component increases the likelihood of a buy decision.
H8/r6 Buyer experience in component production reduces technological uncertainty associated with the component.
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SupplierCompetition
Buy decision
SupplierProductionadvantage
Positive
positive
Buy decisionVolumeuncertainty
Technologicaluncertainty
negative
negative
Buyerexperience
positive
positiveNegative
Negative
Full model
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Method and data The data consisted of 60 decisions made in a
component division of a large U.S. automobile manufacturer over a period of three years
The data were analyzed using the unweighted least squars (ULS) procedure
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SupplierCompetition
(reverse scale)
Buy decision
SupplierProductionadvantage
Volumeuncertainty
TechnologicaluncertaintyBuyer
experience
-.284*
.034.155
-.198
-.315*
-.316*
.205*
.862*Results
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Results (Mixed support for Williamson’s theory)
H1/r1 Volume uncertainty leads to making rather than buying a component. Significant effect
H2/β1 Technological uncertainty increases the likelihood of a make rather than a buy decision.
direction opposite to hypothesis; not significant
H3/β2 The higher the supplier production cost advantage, the more likely the firm is to buy rather than make a component.
Strongly supported
H4/r2 The competitiveness of the supplier market increases the production cost advantage of suppliers over buyers.
moderate
H5/r3 Greater supplier market competition should lead to buying the component.
Jackknife coefficient acceptable
H6/r4 The experience a buyer has in producing a component reduces the production cost advantage of the supplier over the buyer.
Jackknife coefficient not acceptable; variance explained low
H7/r5 Buyer experience in producing a component increases the likelihood of a buy decision.
Not significant; small effects
H8/r6 Buyer experience in component production reduces technological uncertainty associated with the component.
Moderate; variance explained low
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Discussion Production costs were likely to be salient in the decision-making process
Transaction costs have small but significant effects
Limitations: -small sample size-data from a single corporate division-relative simplicity of the components