WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING Anne Parmigiani | Strategic Management Journal (2007)

Anne Parmigiani Associate Professor at Lundquist College of Business, University of Oregon Degree History PhD, University of Michigan, 2003 MBA, Penn State University, 1996 BS, Penn State University, 1987 Research Interests Vertical interfirm relationships, firm knowledge and capabilities, firm boundaries, and the theory of the firm WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Paper Preview Problem: Most theories of the firm view the sourcing decision as a dichotomous choice; the make or buy decision to minimize set-up cost and management cost Research question: Why do firms concurrently source, simultaneously making and buying? Whether concurrent sourcing is a midpoint along the make/buy continuum or whether it is a discrete and distinct choice? Study: Analyzing survey data from small manufacturing firms regarding their sourcing decisions for production tooling and services WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Transaction cost economics Related to concurrent sourcing: continuum view (i.e., linear relationship); minimize the exchange cost Hypotheses 1tce) Moderate asset-specific goods will be concurrently sourced (the greater asset specificity, the higher internal production). 2tce) Goods with moderate volume uncertainty will be concurrently sourced (the greater volume uncertainty, the higher internal production). 3tce) Goods with moderate performance uncertainty will be concurrently sourced (the greater the performance uncertainty, the higher internal production). WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATON OF CONCURRENT SOURCING

Neoclassical economics Related to concurrent sourcing: discrete choice for making and buying ; to reduce uncertainty Hypotheses 2neo) The greater the goods volume uncertainty, the more likely the firm will concurrently source. 3neo) The greater the performance uncertainty of the good, the more likely the firm will concurrently source. 4neo) The greater scope economies for both the firm and its suppliers to produce the good, the more likely the firm will concurrently source. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

The firm capabilities Related to concurrent sourcing: discrete choice for making and buying ; firms different expertise Hypotheses 5cap) The greater the expertise of both the firm and its suppliers, the more likely the firm will concurrently source. 6cap) The greater the goods technological uncertainty, the more likely the firm will concurrently source. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Study Sample: 453 firms (366 in stamping and 87 in power metal) in metal forming industry After on-site interviews, a mail survey was created for measuring sourcing decisions of five production-related goods: die design, die building, die maintenance, end-part machining, and end-part surface coating Dependent variable: sourcing mode choice on the five goods by the scale of 0 to 100 percent (10% cutoff used for determining make, concurrent, and buy) WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING

Study WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING Independent variables: asset specificity (tce), volume uncertainty (tce, neo), technological uncertainty (cap), performance uncertainty (tce, neo), firm and supplier scope economies (neo), and firm and supplier expertise (cap) Controls: number of employees, firm age, unionization, firm type (powder metal or stamping), five goods, volume requirements, scale economies, similarity Methods: An ordered logit model was used for the continuous, transaction cost based hypotheses whereas multi-nominal logit models were used for the discrete choice model.

Summary of predictions and results

Results and discussion All three theories assist in explaining the sourcing choice, but the discrete choice is supported more. Limitations 1) Only small manufacturing firms and fairly low levels of technological changes are investigated. 2) A cross-sectional survey method 3) Respondents are only from sourcing firms. Conclusion 1) Firm boundaries are best investigated using a multi-theoretical approach. 2) Firms make a distinct choice for internal and external sourcing. WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING