Transaction cost theory TCE and PA theory adds significant explanatory power to pridiction of a direct sales force. A company will always try to maximise profits by choosing the boundaries of the firma and the degree of forward integration depending on efficiency of a direct sales force or an independent sales representative. Substantial research and recent practise has shown that outsourcing the sales function can reduce the cost of selling and improve sales efficiency. However, the problem is that no transaction is costless, and not all outcomes can be described in a sales contract because of bounded rationality. Further information is costly to obtain about the sales people and costly to process which limits the search for additional information. Opportunism among sales people and reps imply that contractual hazard is an everpresent threat. Thus, when transactions are complex and have multiple attributes the contract will be incomplete and open o contractual hazard. Anderson 1985 H1: Transaction specific assets. + The greater the potential transaction specificity of assets, the greater the likelihood of using a direct sales force. H2: Difficulty of evaluating performance. + The more difficult it is to evaluate sales performance, the more likely the use of a direct sales force. H3: Environmental unpredictability. + The higher the combination of environmental unpredictability and the transaction specific assets, the higher the likelihood of a direct sales force. H4: Travel requirements. + The greater a district’s travel requirements per unit of sales potential, the less likely a direct sales force. H5: Attractiveness of the product line. ? The more favourable a firm’s price/quality combination relative to competition in a district, the mre likely a direct sales force H6: Company size. ? The larger the firm, the more likely a direct sales force. H7/H8: Time horizon. + The greater the importance of nonselling activities – direct sales force. The longer the time span to feedback (selling cycle) – direct sales force. Masten 1989
Transaction specific human assets rather than physical assets play a more influential role in the decisions to bring production and sales within the firm. P. 266 Inflexibility during the term of the contract and the prospect of holdup problems at renewal intervals make contracting potentially hazardous. P. 266 The greater the investment in transactionspecific capital, the type of integration employed will tend to be related to the type of capital involved. In particular, if assets ownership sufficiently satisfies problems of opportunism associated with physical capital, full integration will more closely correlate with the need to invest in specialized human assets. P. 269 If the physical assets involved in selling demand a high degree of human specific capital, the company is better off integrating the sales function. Williamson 1998 Bounded rationality = behaviour that is intendedly rational but only limited so. Further see p. 53 conclusion on what is transaction cost economies.