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Youngsoo Kim, BADM 545 Fall 2013

INTEGRATION OF THE SALES FORCE: AN EMPIRICAL EXAMINATION Anderson, E., & Schmittlein D. C., Rand Journal of Economics , 1984. Youngsoo Kim, BADM 545 Fall 2013. Overview. When does vertical integration take place? Conventional approach

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Youngsoo Kim, BADM 545 Fall 2013

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  1. INTEGRATION OF THE SALES FORCE: AN EMPIRICAL EXAMINATIONAnderson, E., & Schmittlein D. C., Rand Journal of Economics, 1984 Youngsoo Kim, BADM 545 Fall 2013

  2. 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

  3. 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)

  4. 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 Fungible: able to replace or be replaced by another identical item; mutually interchangeable

  5. 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

  6. 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

  7. 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

  8. 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

  9. Empirical results (1)

  10. 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

  11. 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

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