1. Integration of the Sales Force AN EMPIRICAL EXAMINATION Erin Anderson & David C. Schmittlein, Rand Journal of Economics, 1984 Joshua Downs 9/6/2015

2. Main Points Prior discussions of vertical integration focus on physical assets, paying less attention to human assets. Empirically tests a model of the integration of the marketing function according to the level of asset specificity, the difficulty of evaluating performance, environmental uncertainty, frequency of transactions, and interactions between the variables. Uses sales force decisions in the electronic components industry as its setting. Results show support for Asset Specificity, Internal Uncertainty, and Size as influencing the integration decision inline with transaction costs theory, conflicting findings attributed to measurement error and context limitations

3. Theory: Transaction Costs Asset Specificity ◦Arises when durable assets become customized to the user (non-fungible) Uncertainty ◦Environmental Unpredictability (Williamson, 1979) ◦Complicates ex ante contingency writing into contracts ◦No impact on market superiority save for conditions of nontrivial asset specificity ◦Hierarchy can adapt to conditions without rewriting formal agreements ◦Internal Uncertainty ◦Difficulty in metering individual performance (Alchian & Demsetz, 1972; Williamson, 1981) ◦Imperfect input measures and subjective judgments may be required Frequency ◦Specialized governance involves setup and maintenance costs ◦Losses from opportunism and inflexibility are likely to be lower than incremental overhead in rarely occurring transactions ◦In more frequency, potential losses from not integrating outweigh overhead costs of integration Size ◦Large firms achieve economies of scale in finding, holding, and utilizing management skills (Scherer, 1980)

4. How would theory apply to empirical context of electronic components? Specificity ◦Company and/or customers may have particular needs and formal and informal operating procedures ◦Firm and customer specific relationships formed by salesperson for enhanced customer response and loyalty ◦Salesperson may possess sensitive information ◦Customers vary in degree of importance to firm Uncertainty: Environmental Unpredictability and Difficulty of Evaluating Performance ◦Perceived variation in forecasted and actual results at time of forecasting ◦Infeasible to record each salesperson’s results accurately (Data limited by recording procedures) ◦Responsibility for a sale may not be assignable to an individual (Team sales) ◦Performance difficult to define as a simple measure Frequency ◦Difficult to estimate fixed costs for unclear breakeven point ◦Practitioner: Heuristics employed for decision ◦Density: Ratio of attainable potential to required travel in a territory Size ◦Large firms may be able to get more mileage out of its expenditures on a field sales force and other marketing instruments

5. Hypotheses 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. 2. The likelihood of integration should increase with the difficulty of monitoring performance 3. The likelihood of integration increases with environmental uncertainty 4. The likelihood of integration increases with density (frequency) 5. The likelihood of integration increases with size 6. The effects of internal uncertainty on integration will increase as asset specificity increases 7. The effects of external uncertainty on integration will increase as asset specificity increases

6. Sample and Method 16 Manufacturers in electronic components industry ◦Single industry loses generalizability, gains internal validity by removing industry-specific confounds ◦Active and Passive Components ◦Active: Engineering intensive, customized, highly differentiated ◦Passive: More mature, less product differentiation, intense price competition ◦3 Channel Distribution ◦Company Salespeople: No transfer of title, employees of one manufacturer, salary plus incentives ◦Manufacturer Rep’s: No transfer of title, serve noncompeting & complementing group of manufacturers for commission ◦Industrial Distributors: Take title, less influenced by manufacturers on pricing ◦Survey provided to territory sales managers ◦Logistic Response Function ◦Probability that firm will use a direct sales force or reps in a given territory

7. Sample and Method Variable TypeVariable NameOperationalized by Dependent VariableIntegrated Sales ForceDirect sales force or Manufacturer Reps Independent VariableTransaction Specificity of Assets (TSA) Standardized, average response to 6 survey questions Independent VariableDifficulty of Evaluating Performance (UDEP) Semantic differential in response to 1 survey question Independent VariableUncertainty as Environmental Unpredictability (UEU) Expected deviation between forecast & actual sales next year Independent VariableTerritory Density (TD)Negative of the percentage of salespersons time traveling Independent VariableCompany Size (SIZE)1980 Company assets in dollars Independent VariableSpecificity/Unpredictability interaction (ZUEUTSA) Interacting TSA and UEU Independent VariableSpecificity/Difficulty of Evaluating Performance (ZUDEPTSA) Interacting TSA and UDEP

8. Results

9. Discussion Is there an inconsistency between the abstract and the results regarding the interaction between asset specificity and internal uncertainty? Do you believe the direction and/or magnitude of these effects are generalizable? In what contexts would you expect to see the same or differing results? Do you have any issues with the specification of the model? Do you think that the variables were proxied effectively?

10. Appendix