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 - Hypotheses H1/r1 Volume uncertainty leads to making rather than buying a component H2/β1 Technological uncertainty increases the likelihood of a make rather than a buy decision. H3/β2 The higher the supplier production cost advantage, the more likely the firm is to buy rather than make a component. H4/r2 The competitiveness of the supplier market increases the production cost advantage of suppliers over buyers. H5/r3 Greater supplier market competition should lead to buying the component. H6/r4 The experience a buyer has in producing a component reduces the production cost advantage of the supplier over the buyer. H7/r5 Buyer experience in producing a component increases the likelihood of a buy decision. H8/r6 Buyer experience in component production reduces technological uncertainty associated with the component.

Model in This Paper - Indicators

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

Model in This Paper - Results Supplier Competition (reverse scale) Supplier Production advantage -.315* -.198 Buyer experience Technological uncertainty .862* -.316* .155 .205* .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

Thank You！