A Transaction Cost Approach to MakeorBuy Decisions Gordon
A Transaction Cost Approach to Make-or-Buy Decisions Gordon Walker and David Weber Administrative Science Quarterly, 29 (1984): 373 -391
Focus of This Paper • This paper focuses on the Makeor-Buy decision as a paradigmatic problem for analyzing transaction costs.
Structure of This Paper • Reviewing existing theory; • Assumptions for the study in this paper; • Building models for testing theory Hypothesis; Data; Method; Results • Discussion
Reviewing Existing Theory • Ways of Managing the Buyer. Supplier relationship 1. Ouchi, Harrigan, Blois 2. This paper use “Prototypical choice” • Anderson(1982) and Monteverde & Teece (1982 a) 1. Asset specificity; uncertainty 2. Asset specificity on backward integration
Reviewing Existing Theory • Williamson’s Efficient boundaries Framework (1981) 1. The administrative mechanisms whose efficiency is at issue 2. The dimensions of transactions that determine how efficiently a particular administrative mechanism performs 3.
Assumptions • Assume sufficient uncertainty was inherent in all transactions – difficult for buyer to neutralize potential supplier opportunism effectively through contingent claims contracts • Assume different types of uncertainty influenced transaction costs independent of the level of asset specificity
H 1/r 1 Model in This Paper Hypotheses Volume uncertainty leads to making rather than buying a component H 2/β 1 Technological uncertainty increases the likelihood of a make rather than a buy decision. H 3/β 2 The higher the supplier production cost advantage, the more likely the firm is to buy rather than make a component. H 4/r 2 The competitiveness of the supplier market increases the production cost advantage of suppliers over buyers. H 5/r 3 Greater supplier market competition should lead to buying the component. H 6/r 4 The experience a buyer has in producing a component reduces the production cost advantage of the supplier over the buyer. H 7/r 5 Buyer experience in producing a component increases the likelihood of a buy decision. H 8/r 6 Buyer experience in component production reduces technological uncertainty associated with the component.
Model in This Paper Indicators
Model in This Paper – Data and Methods • 60 decisions; one component division of a large U. S. automobile manufacturer; three years • Un-weighted least squares (ULS)
Model in This Paper - Results
Model in This Paper - Results Supplier Competition (reverse scale) -. 315* Supplier Production advantage Buyer experience Technological uncertainty -. 316*. 155 Volume uncertainty -. 284* . 2 05 * . 862* -. 198 . 034 Make or Buy decision 11
Discussion Limitations of this paper • Small sample size; data from single corporation division – limit the generalizability of findings • Relative simplicity of the components – failure of part of the model For managers’ use: when more information is needed? • Data were available as a base for judgments • Data must be related to more general experience • Manager’s judgment based on extensive general experience rather than specific data For Future Study
Thank You !
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