WHY DO FIRMS BOTH
MAKE AND BUY?
AN INVESTIGATION OF
CONCURRENT
SOURCING
Made by Hyeran Choi (2012. 9)
Modified by Minjae Lee (2014. 9)
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
 Minimizing the cost of transaction through market or hierarchy
 Related to concurrent sourcing: continuum view (i.e., linear
relationship)
 Hypotheses
H1tce) Moderate asset-specific goods will be concurrently sourced
(the greater asset specificity, the higher internal production).
H2tce) Goods with moderate volume uncertainty will be
concurrently sourced (the greater volume uncertainty, the
higher internal production).
H3tce) 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
 Hedging(for volume uncertainty)
=> H2neo) The greater the good’s volume uncertainty, the more
likely the firm will concurrently source.
 reducing information asymmetry (caused by performance
uncertainty) : Firm’s greater incentive to learn
=> H3neo) The greater the performance uncertainty of the good,
the more likely the firm will concurrently source.
 scope economies
=> H4neo) 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
 Fitness of the good with its resource or knowledge base
 If the good is a poor fit, it will more efficient to outsource
=> H5cap) The greater the expertise of both the firm and its
suppliers, the more likely the firm will concurrently source.
 Incentive to learn better for both sides
=> H6cap) The greater the good’s 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
 Independent variables: asset specificity (tce), volume uncertainty
(tce, ne), technological uncertainty (cap), performance
uncertainty (tce, ne), firm and supplier scope economies (ne),
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.
WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING
Summary of predictions and results
Results
 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
Discussion
 Do you agree with the conclusion that ‘Firm boundaries are best
investigated using a multi-theoretical approach’ ?
 Do you think, especially TCE and NE is complementary? For
example, regarding H2 & H3, TCE and NE show different
prediction on same phenomenon.
- I think NE is speaking similar story to TCE for H2 and H4 in
some sense.
WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING
Discussion
In case of volume uncertainty (H2neo),
- NE assumes a robust spot market for the fluctuating
additional volumes, so firms may be willing to pay these
premiums… (p290-291), firms can split their production and
hedge against uncertainty
- This is only possible when we can assumes a robust spot
market, and it brings us back to TCE.
- We can provide the same story in the opposite case. Ex)
Robust spot market for the non-fluctuating volumes and
incomplete market for fluctuating volumes
WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING
Discussion
In case of performance uncertainty (H3neo)
- Suppliers’ incentive for concurrent sourcing is not considered
since NE assumes robust market in supplier side
In case of scope economies (H4neo),
- Scope economies for the firm: integrate
- Scope economies for the supplier: outsource
- Scope economies for both: concurrent source
=> If first and second come from TCE, then the third sounds
pretty much like the middle point between the continuous two
extremes
WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING
Discussion
 Regarding uncertainty, concerns of organizational economics are
more about integration, disintegration, or hybrid, whereas
concerns of contingency perspective in OT is more about
centralization or decentralization. Are they talking about the
same thing in a different way? If not, can we combine those two
theories or perspectives, or at least is it worth to try?
WHY DO FIRMS BOTH MAKE AND BUY? AN INVESTIGATION OF CONCURRENT SOURCING