WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING Anne Parmigiani | Strategic Management Journal (2007) Made by Hyeran Choi ( ) Modified by Minjae Lee ( )

Anne Parmigiani  Associate Professor at Lundquist College of Business, University of Oregon  Degree History PhD, University of Michigan, 2003 MBA, Penn State University, 1996 BS, Penn State University, 1987  Research Interests Vertical interfirm relationships, firm knowledge and capabilities, firm boundaries, and the theory of the firm WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Paper Preview  Problem: Most theories of the firm view the sourcing decision as a dichotomous choice; the make or buy decision to minimize set-up cost and management cost  Research question: Why do firms concurrently source, simultaneously making and buying? Whether concurrent sourcing is a midpoint along the make/buy continuum or whether it is a discrete and distinct choice?  Study: Analyzing survey data from small manufacturing firms regarding their sourcing decisions for production tooling and services WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Transaction cost economics  Minimizing the cost of transaction through market or hierarchy  Related to concurrent sourcing: continuum view (i.e., linear relationship)  Hypotheses H1tce) Moderate asset-specific goods will be concurrently sourced (the greater asset specificity, the higher internal production). H2tce) Goods with moderate volume uncertainty will be concurrently sourced (the greater volume uncertainty, the higher internal production). H3tce) Goods with moderate performance uncertainty will be concurrently sourced (the greater the performance uncertainty, the higher internal production). WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATON OF CONCURRENT SOURCING

Neoclassical economics  Hedging(for volume uncertainty) => H2neo) The greater the good’s volume uncertainty, the more likely the firm will concurrently source.  reducing information asymmetry (caused by performance uncertainty) : Firm’s greater incentive to learn => H3neo) The greater the performance uncertainty of the good, the more likely the firm will concurrently source.  scope economies => H4neo) The greater scope economies for both the firm and its suppliers to produce the good, the more likely the firm will concurrently source. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

The firm capabilities  Fitness of the good with its resource or knowledge base  If the good is a poor fit, it will more efficient to outsource => H5cap) The greater the expertise of both the firm and its suppliers, the more likely the firm will concurrently source.  Incentive to learn better for both sides => H6cap) The greater the good’s technological uncertainty, the more likely the firm will concurrently source. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Study  Sample: 453 firms (366 in stamping and 87 in power metal) in metal forming industry  After on-site interviews, a mail survey was created for measuring sourcing decisions of five production-related goods: die design, die building, die maintenance, end-part machining, and end-part surface coating  Dependent variable: sourcing mode choice on the five goods by the scale of 0 to 100 percent (10% cutoff used for determining “make,” “concurrent,” and “buy”) WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Study WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING  Independent variables: asset specificity (tce), volume uncertainty (tce, ne), technological uncertainty (cap), performance uncertainty (tce, ne), firm and supplier scope economies (ne), and firm and supplier expertise (cap)  Controls: number of employees, firm age, unionization, firm type (powder metal or stamping), five goods, volume requirements, scale economies, similarity  Methods: An ordered logit model was used for the continuous, transaction cost based hypotheses whereas multi-nominal logit models were used for the discrete choice model.

Summary of predictions and results

Results  All three theories assist in explaining the sourcing choice, but the discrete choice is supported more.  Limitations 1) Only small manufacturing firms and fairly low levels of technological changes are investigated. 2) A cross-sectional survey method 3) Respondents are only from sourcing firms.  Conclusion 1) Firm boundaries are best investigated using a multi-theoretical approach. 2) Firms make a distinct choice for internal and external sourcing. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Discussion  Do you agree with the conclusion that ‘Firm boundaries are best investigated using a multi-theoretical approach’ ?  Do you think, especially TCE and NE is complementary? For example, regarding H2 & H3, TCE and NE show different prediction on same phenomenon. -I think NE is speaking similar story to TCE for H2 and H4 in some sense. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Discussion In case of volume uncertainty (H2neo), -NE assumes a robust spot market for the fluctuating additional volumes, so firms may be willing to pay these premiums… (p ), firms can split their production and hedge against uncertainty -This is only possible when we can assumes a robust spot market, and it brings us back to TCE. -We can provide the same story in the opposite case. Ex) Robust spot market for the non-fluctuating volumes and incomplete market for fluctuating volumes WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Discussion In case of performance uncertainty (H3neo) -Suppliers’ incentive for concurrent sourcing is not considered since NE assumes robust market in supplier side In case of scope economies (H4neo), -Scope economies for the firm: integrate -Scope economies for the supplier: outsource -Scope economies for both: concurrent source => If first and second come from TCE, then the third sounds pretty much like the middle point between the continuous two extremes WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Discussion  Regarding uncertainty, concerns of organizational economics are more about integration, disintegration, or hybrid, whereas concerns of contingency perspective in OT is more about centralization or decentralization. Are they talking about the same thing in a different way? If not, can we combine those two theories or perspectives, or at least is it worth to try? WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING