1. Why Do Firms Both Make and Buy?
An Investigation of Concurrent Sourcing
BA549A Session 3: Transaction Cost Economics - Empirical
Anne Parmigiani
Strategic Management Journal (2007)
by Eunkwang Seo

2. Q1. Why would firms both make and buy simultaneously?
AGENDA
Main Question
Q1. Why would firms both make and buy simultaneously?
Q2. Whether is concurrent sourcing a distinct choice or a point at the make/buy continuum?
Three Theoretical Lenses
Transaction Costs Economics
: Asset specificity, uncertainty
Neoclassical Economics
: Uncertainty, economies of scope
Capability-based View
: Expertise, technological uncertainty

3. TCE) Concurrent sourcing occurs at moderate transaction costs.
THEORY & HYPOTHESES
Transaction Costs Economics
The Assumption of a Make/Buy Continuum
“Discrete market exchange at the one extreme to hierarchical organization at the other, which myriad of intermediate modes filling the range in between” (Williamson, 1985)
A linear relationship between asset specificity (or uncertainty) and internalization.
Emphasis on Transaction Characteristics
Firm would never integrate for production cost reasons alone (Williamson, 1985).
This may be true for full integration, but in the case of partial integration (i.e., concurrent sourcing), aspects of production costs such as economies of scale (or scope) might matter.
TCE) Concurrent sourcing occurs at moderate transaction costs.

4. Transaction Costs Economics
THEORY & HYPOTHESES
Transaction Costs Economics
Hypotheses
H1TCE: Moderately asset-specific goods will be concurrently sourced.
H2TCE: Goods with a moderate level of volume uncertainty will be concurrently sourced.
Unpredictability of demand and an accompanying inability to accurately forecast and schedule production
H3TCE: Goods with a moderate level of performance uncertainty will be concurrently sourced.
The difficulty in predicting how a good will perform in the firm’s subsequent production processes (difficulty in output control)

5. Neoclassical Economics
THEORY & HYPOTHESES
Neoclassical Economics
Hedging against Uncertainty
Neither completely making nor completely buying will sufficiently resolve the uncertainty.
A firm can keep its internal plant at full production by using suppliers to handle fluctuating additional volumes.
Aspects of Production Costs (Economies of Scope)
A firm is motivated to make and buy to reduce production costs.
When both the firm and the supplier can reduce production costs through economies of scope, the firms would be motivated to make and buy simultaneously in order to enjoy both lower internal costs and low supplier prices.
NEO) Concurrent sourcing occurs at high uncertainty and production costs.

6. Neoclassical Economics
THEORY & HYPOTHESES
Neoclassical Economics
Hypotheses
H2NEO: The greater the good’s volume uncertainty, the more likely the firm will concurrently source.
H3NEO: The greater the good’s performance uncertainty, the more likely the firm will concurrently source.
Reduce information asymmetry through learning by external sourcing
H4NEO: The greater scope economies for both the firm and its suppliers to produce the good, the more likely the firm will concurrently source.
The difficulty in predicting how a good will perform in the firm’s subsequent production processes (difficulty in output control)

7. Capability-based View
THEORY & HYPOTHESES
Capability-based View
Expertise and Learning
Both the firm’s and the supplier’s expertise matter for concurrent sourcing.
The greater a firm’s (a supplier’s) expertise, the greater its degree of internalization (outsourcing).
Addressing Technological Uncertainty
Learning is imperative when the progress of technology is difficult to predict.
Concurrent sourcing makes the firm ‘ambidextrous’ to predict the technological change more accurately as well as ‘flexible’ by having a real option.
CAP) Concurrent sourcing occurs at high expertise and tech uncertainty.

8. Capability-based View
THEORY & HYPOTHESES
Capability-based View
Hypotheses
H5CAP: The greater the expertise of both the firm and its supplier, the more likely the firm will concurrently source.
Keeping core competences and learning from competent suppliers
H6CAP: The greater the good’s technological uncertainty, the more likely the firm will concurrently source.
Being ambidextrous and having a real option resulting in greater flexibility
Q. Do firms learn from just sourcing supplies?

9. EMPIRICS Methods Research Setting
Metal stamping and powder metal firms for production tooling and services
Consisting of numerous independent, mature small firms & homogenous production process
Data and Sample
After on-site interviews with managers from 11 metal forming firms, she surveyed 453 firms (366 in stamping and 87 in powder metal) to collect data.
193 usable surveys were obtained (43 percent usable response rate)
Five production-related goods
die design, die building, die maintenance, end-part machining, and end- part surface coating
Final sample used in the analysis includes 804 observations.

10. EMPIRICS Methods Measures DV: Sourcing mode
Internally, externally, or concurrently (percentage of internal production)
IV: Asset specificity, Volume uncertainty, performance uncertainty, technological uncertainty, scope economies, expertise
Controls: # of employees, firm age, unionization, firm type, scale economies, volume required, input similarity
Models
Ordered Logit vs. Multinomial Logit
Ordered logit is used when dependent variable is ordinal categories, while multinomial logit is used when dependent variable is distinct choices.
Comparing the fitness of the two models

11. EMPIRICS

12. EMPIRICS
Square
term?
???

13. EMPIRICS

14. CONCLUSION and CRITIQUE
Hybrid Governance Mode
Concurrent sourcing appears to be a distinct choice over making or buying, rather than a linear combination of the two sourcing modes.
By separating plural modes from other types of governance, we can better understand hybrid modes.
Some factors may motivate a firm toward one mode but not necessarily away from another.
Critique
Ideas are very interesting, but empirics are not sufficient to support the ideas.
How much can a firm learn by sourcing supplies?
TC + BC of concurrent sourcing vs. TC or BC of single sourcing.