Integration of the sales force: an empirical examination Erin Anderson and David C. Schmittlein Rand Journal of Economics(1984) Presented by Nate

Agenda When does vertical integration take place? (Klein, Crawford, and Alchian, 1978; Williamson, 1979) Research Gap Little empirical testing Although it has been recognized that human assets are also relevant (Monteverde and Teece, 1982; Williamson, 1981), less attention has been paid to their role Traditional discussions Manufacturing emphasize on the valuation of physical assets Method Direct salespeople VS Rep Logistic regression

Proposition 1: transaction costs Market governance mode Integrated (Hierarchical) governance mode Fungible/nonspecific Reps more efficient Specific Direct Sales people more efficient Proposition 1: The greater the total value of company-specific assets (on the company and customer sides), the greater the likelihood of vertical integration in the form of a direct sales force.

Relevant transaction costs Firm A Customer Knowledge & Relationship Key accounts $$$ Loyalty Salesperson Asset specificity arises when durable assets become customized to the user

Uncertainty Uncertainty & Asset specificity increase Market governance Integration Uncertainty & Asset specificity increase Fungible/nonspecific Adaptation can be easily achieved (Williamson, 1979)

Proposition 2: Uncertainty Williamson (1979) highlights Environmental Unpredictability (1st form) Environment shifts in unforeseen ways renegotiation  delays  incomplete contracts (fundamental problem under market mode) Market superiority is undisturbed-unless assets are specific to a nontrivial degree Williamson (1981) recognizes Internal Uncertainty (2nd form) why is it difficult to evaluate performance? infeasible to record each salesperson’s results accurately responsibility for a sale may not be assignable to an individual "performance" may not be a simple, readily measurable scalar Proposition 2: the likelihood of integration should increase with the difficulty of monitoring performance

Frequency Transactions recur frequently Potential loss Market governance Integration Transactions recur frequently Potential loss

Proposition 3: Frequency Problems in measurement Can a firm at least break even on the fixed cost of an integrated function Fixed costs are difficult to estimate and the breakeven point (over an arbitrary time span)is unclear Density (the ratio of attainable potential to required travel in a territory) Proposition 3: Since the desirability of integration increases as density increases (though the breakeven point is unascertainable), we expect to see more use of a direct sales force as density increases.

Proposition 4: Company Size Scherer (1980, p. 84) suggests that firm size is also a very important factor size is widely regarded as a pervasive influence on firm behavior (Miles, 1980) and on firm and industry performance for reasons of scale and scope economy, market power aspirations, and the ability to aggregate inputs (Scherer, 1980) Proposition 4: in addition to asset specificity, uncertainty, and frequency, company size is also an important factor

Data Collection One Industry The hypotheses were tested on survey data from the electronic components industry The electronic components industry was chosen because its variety makes it a microcosm of American business The ability to influence electron flows (rather than simply to carry them) is what distinguishes electronic equipment from electrical equipment Components are classified by “Active” or “passive(low-tech/mature)” Three distribution channels Company salespeople Manufactures’ representatives Industrial distributors

Data Collection Data Sample Unit of analysis Survey respondents 16 recognized electronic component manufacturers participated in the study Unit of analysis The product line of a given company in a given territory or set of “territories”(a subset of customers covered by a sales force reporting to a sales manager) Survey respondents Sales managers

The logistic Response Function Explanatory variable Transaction specificity of assets(TSA) Uncertainty as environment unpredictability (UEU) Uncertainty as difficulty of evaluating performance(UDEP) Territory density (TD) Company size (SIZE) Asset specificity/ unpredictability (ZUEUTSA) Asset specificity/ measurement difficulty (ZUDEPTSA) Regression Model

Empirical Results

Conclusion Integration is associated with increasing levels of asset specificity, difficulty of performance, and the combination of these two factors. Neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration. The transaction cost model improves significantly upon the fit of a simple model related integration to company size alone

Discussion Will the result be different if the empirical study focuses on more than one industry? Is it possible that the interactions(specificity/uncertainty) are not found is due to industry difference? In this paper, the effect of density is insignificant, is it possible that the proxy is not very desirable? Is there a better proxy than density? Can we link this empirical study to Mahoney (1992)’s framework for predicting the organizational form?