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

2. 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

3. 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.

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

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

6. 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

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

8. 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.

9. 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

10. 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

11. 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

12. 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

13. Empirical Results

14. 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

15. 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?