INTEGRATION OF THE SALES FORCE: AN EMPIRICAL EXAMINATION Anderson, E.,

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INTEGRATION OF THE SALES FORCE AN EMPIRICAL
EXAMINATIONAnderson, E., Schmittlein D. C.,
Rand Journal
of Economics, 1984

• Youngsoo Kim, BADM 545 Fall 2013

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Overview

• When does vertical integration take place?
• Conventional approach
• Company size model
• Focus on manufacturing physical assets
  valuation oriented
• What is new?
• Human assets and vertical integration
• Empirical verification of TCE approach
• How?
• Direct salesperson vs. Representative agency
• Logistic regression analysis

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Problem Rep vs. Direct

• Representative agency (Rep)
• Independent of multiple manufacturers that it
  represents
• market governance mode
• Direct sales people
• Employees of one manufacturer
• hierarchical governance mode
• Industry practices
• Rep accounts for only 10 of U.S. dollar volume
  (as of 1977)

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Proposition 1 Asset specificity

• Fungible assets
• Economies of scale, risk-pooling
• Rep is preferable
• Relationship specialized assets
• Opportunism, inflexibility
• Direct is more efficient
• The greater the total value of company-specific
  assets, the greater the likelihood of vertical
  integration in the form of a direct sales force

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Proposition 2 Uncertainty

• Environmental uncertainty (Williamson, 1979)
• Unforeseen environment shifts result to
  incomplete contracts
• Direct is more suitable under high uncertainty
  because of easier adaptations, provided that
  assets are company specific
• Difficulty of performance evaluation (Williamson,
  1981)
• Input measures and a subjective judgment are
  preferable to output measures when they are hard
  to assess
• The likelihood of integration should increase
  with two forms of uncertainty

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Proposition 3 Frequency

• Tradeoff overhead and opportunism
• Specialized governance needs setup and
  maintenance costs
• Market governance incurs opportunism and
  inflexibility
• Transaction frequency
• Measurability of transaction frequency
• Can a firm break even on the fixed cost of
  integration?
• Fixed costs / breakeven point estimation is not
  straightforward
• Heuristic geographic transaction density
• As density increases, more use of a direct sales
  force is expected

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Empirical model data collection

• Industry Electronic components manufacturing
• its variety makes it a microcosm of American
  business
• Unit of analysis
• Product line of a given company in a given (set
  of) territory
• Survey respondents
• Territory sales managers

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Empirical model logistic regression

• Explanatory variables
• Transaction specificity of assets (TSA)
• Uncertainty as environmental unpredictability
  (UEU)
• Uncertainty as difficulty of evaluating
  performance (UDEP)
• Territory density (TD)
• Company size (SIZE)
• Asset specificity / unpredictability interaction
  (ZUEUTSA)
• Asset specificity / measurement difficulty
  (ZUDEPTSA)
• Regression model

 
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Empirical results (1)

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Empirical results (2)

• Coefficient of determination
• To evaluate the contribution of the set of
  transaction-cost variables over SIZE alone
• Both coefficient significance test and predictive
  effectiveness test indicate that TC variables
  significantly explain the likelihood of vertical
  integration

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Conclusion

• Some TC variables are crucial for vertical
  integration
• Asset specificity
• Performance immeasurability
• Limitations
• Specificity/uncertainty interactions were not
  found
• Effect of density turns out to be insignificant
• Findings are limited to one type of integration
  and industry