1. A Transaction Cost Approach to Make-or-Buy Decisions
Gordon Walker and David Weber
Administrative Science Quarterly, 29 (1984):

2. Focus of This Paper
This paper focuses on the Make-or-Buy decision as a paradigmatic problem for analyzing transaction costs.

3. 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

4. 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

5. 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.

6. 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

7. 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.

8. Model in This Paper - Indicators

9. 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)

10. Model in This Paper - Results

11. 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

12. 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

13. Thank You！