Integration of the sales force: An empirical examination Anderson, E Integration of the sales force: An empirical examination Anderson, E. & Schmittlein, D.(1984) Rand Journal of Economics, Vol.15, No.3,(Autumn): 385-395 Joon Yeol Lew

Erin Anderson Nov 27, 2007 From: Professor Bart Weitz: It is with extreme sadness that we announce that Erin Anderson, the John H. Loudon Chaired Professor of International Management and Professor of Marketing at INSEAD, died on November 21 at age 52. Erin was a widely respected mentor and scholar whose research made significant contributions to inter-organizational relationship issues.  Her doctoral dissertation examining the effects of transaction specific assets on sales management governance was one of the first empirical tests of Williamson's transaction cost analysis theory. …… A year ago, Erin has a seizure while teaching at the INSEAD-Singapore.  She was diagnosed with an inoperable, malignant brain tumor.  The prognosis was not promising, but she viewed this unfortunate circumstance as another hurdle she was going to overcome, another challenge, another set of negative reviews to address.  While others focused on the downside, she charged ahead and beat the cancer.  Several weeks ago she received the goods news - no more tumor. Unfortunately she did not have much time to savor her latest achievement.

Introduction Research Question Definitions What determines whether to use a manufacturers' sales representative or a direct salesperson, in electronic components industry? (When vertical integration takes place?) Definitions A manufacturers' representative an independent business entity that offers selling services to a manufacturer in return for a commission on any sales realized. the market governance mode Direct salespeople the employees of one manufacturer paid by salary (plus incetives) the integrated (hierarchical) governance mode

Theory & Hypothesis 1 Asset specificity (Williamson, 1975, 1979, 1981) The degree to which durable assets are customized to the user. With low asset specificity, market contracting is preferable scale economies and risk-pooling benefits the threat of replacement disciplines performance With high asset specificity: integration is more efficient unique operating procedure, unique products, distinctive customers, key customer concentration, customers loyalty to salesperson, etc make asset specificity high. opportunism and mal-adaptation are unchecked by market forces integration brings access, audit, and incentive advantages. H1: the greater the asset specificity, the greater the likelihood of vertical integration in the form of a direct sales force.

Theory & Hypothesis 2 & 3 Environmental uncertainty (Williamson,1979) environment shifts in unforeseen ways. the shifting environment forces renegotiation of contract which may lead to delays, under market mode. the integrated firm is better able to cope with the shifting environment since adaptations can be made as needed. H2: the greater environmental uncertainty, the greater the likelihood of vertical integration in the form of a direct sales force. Internal uncertainty (Williamson, 1981) the difficulty of evaluating performance. infeasible to record individual's sales results accurately (ex: selling air freight services) a sale may not be assignable to an individual (ex: team sales) Performance may not be a readily measurable scalar (ex: satisfaction, value of market intelligence provided) when performance is difficult to evaluate, imperfect input measures and a manager's subjective judgment are preferable to defective output measures. H3: the greater the difficulty of monitoring performance, the greater the likelihood of vertical integration in the form of a direct sales force. 5

Theory & Hypothesis 4 & 5 Frequency/ Density of territory specialized governance mechanism involves setup and maintenance costs. need to compare loss from opportunism and inflexibility, and the governance cost from the integration For the comparison, frequency of transaction occurrences is matter Density: the ratio of attainable sales potential to required travel in a territory (geographical coverage of a sales force). H4: the greater the density, the greater the likelihood of vertical integration in the form of a direct sales force. Firm size (Scherer, 1980, Miles, 1980) Economies of scale and scope, market power aspirations, ability to aggregate inputs H5: the greater the firm size, the greater the likelihood of vertical integration in the form of a direct sales force. 6

Data & Measurements Data Measurement Survey data of 145 (172 collected) territory sales managers of the 16 recognized electronic component manufacturers. Measurement Variable Measure Transaction specificity of assets (TSA) nature of the company nature of product confidential information nature of the customer importance of key account customer loyalty Uncertainty as Environmental unpredictability (UEU) Expected deviation between forecast and actual sales in the next year,(percentage) Uncertainty as difficulty of evaluating performance (UDEP) difficulty of measuring the results of individual salesperson equitably Territory density (TD) negative of the percentage of sales persons' time spent driving or flying Company size (SIZE) company assets in dollars ZUEUTSA specificity/unpredictability interaction ZUDEPTSA specificity/ difficulty of evaluating performance interaction

Logistic Regression Result The likelihood ratio test: G2= -2 [(-92.87) - (-85.60)]=14.54 > 12.65 (X 2 (6) at 0.05 level) Akaike’s information criterion: AIC for case1(187.20) < AIC for case2(189.74) Additional 6 transaction-cost variables significantly contribute for the prediction.

Conclusions Transaction costs consideration improves a simple company-size model of vertical integration Difficulty of evaluating performance (measurement uncertainty) is the most strongly associated with the likelihood of vertical integration, followed by transaction-specificity of assets. Difficulty of measuring territorial density (measure of travel time was used as a proxy for the ratio of potential to geographic dispersion) Generalization remains to be established