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
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When does vertical integration take place?
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Conventional approach
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What is new?
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Company size model
Focus on manufacturing – physical assets valuation oriented
Human assets and vertical integration
Empirical verification of TCE approach
How?
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Direct salesperson vs. Representative agency
Logistic regression analysis
Problem: “Rep” vs. “Direct”
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Representative agency (“Rep”)
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Direct sales people
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Independent of multiple manufacturers that it represents
market governance mode
Employees of one manufacturer
hierarchical governance mode
Industry practices
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Rep accounts for only 10% of U.S. dollar volume (as of 1977)
Proposition 1: Asset specificity
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Fungible assets
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Relationship specialized assets
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Economies of scale, risk-pooling
Rep is preferable
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
Proposition 2: Uncertainty
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Environmental uncertainty (Williamson, 1979)
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Difficulty of performance evaluation (Williamson, 1981)
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Unforeseen environment shifts result to incomplete contracts
Direct is more suitable under high uncertainty because of
easier adaptations, provided that assets are company specific
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
Proposition 3: Frequency
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Tradeoff – overhead and opportunism
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Measurability of transaction frequency
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Specialized governance needs setup and maintenance costs
Market governance incurs opportunism and inflexibility
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
Empirical model: data collection
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Industry : Electronic components manufacturing
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Unit of analysis
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“… its variety makes it a microcosm of American business …”
Product line of a given company in a given (set of) territory
Survey respondents
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Territory sales managers
Empirical model: logistic regression
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Explanatory variables
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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
Empirical results (1)
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Empirical results (2)
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Coefficient of determination
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To evaluate the contribution of the set of transaction-cost
variables over SIZE alone
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Both coefficient significance test and predictive effectiveness
test indicate that TC variables significantly explain the
likelihood of vertical integration
Conclusion
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Some TC variables are crucial for vertical integration
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Asset specificity
Performance immeasurability
Limitations
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Specificity/uncertainty interactions were not found
Effect of density turns out to be insignificant
Findings are limited to one type of integration and industry