A Transaction Cost Approach to Make-or-Buy Decisions Gordon Walker and David Weber Administrative Science Quarterly, 29 (1984): 373-391
Focus of This Paper • This paper focuses on the Make-or-Buy decision as a paradigmatic problem for analyzing transaction costs.
Structure of This Paper • Reviewing existing theory; • Assumptions for the study in this paper; • Building models for testing the theory Hypothesis; Data; Method; Results • Discussion
Reviewing Existing Theory • Ways of Managing the Buyer-Supplier relationship 1. Ouchi, Harrigan, Blois 2. This paper use “Prototypical choice” • Anderson(1982) and Monteverde & Teece (1982a) 1. Asset specificity; uncertainty 2. Asset specificity on backward integration
Reviewing Existing Theory • Williamson’s Efficient boundaries Framework (1981) 1. The administrative mechanisms whose efficiency is at issue 2. The dimensions of transactions that determine how efficiently a particular administrative mechanism performs 3.
Assumptions • Assume sufficient uncertainty was inherent in all transactions – difficult for buyer to neutralize potential supplier opportunism effectively through contingent claims contracts • Assume different types of uncertainty influenced transaction costs independent of the level of asset specificity • Consider two types of uncertainty – volume (i.e., demand) and technological
Model in This Paper – Data and Methods • 60 decisions; one component division of a large U.S. automobile manufacturer; three years • Un-weighted least squares (ULS)
Model in This Paper - Results Supplier Competition (reverse scale) Supplier Production advantage -.315* -.198 Buyer experience .862* Technological uncertainty -.316* .205* .155 .034 Volume uncertainty -.284* Make or Buy decision
Discussion Limitations of this paper • Small sample size; data from single corporation division – limit the generalizability of findings • Relative simplicity of the components – failure of part of the model For managers’ use: when more information is needed? • Data were available as a base for judgments • Data must be related to more general experience • Manager’s judgment based on extensive general experience rather than specific data For Future Study • Implicit assumption – costs of administering inter-functional coordination within the firm were virtually independent of the transaction costs associated with contracting in the market – Is it valid? Other Discussions