VERTICAL INTEGRATION OF A MANUFACTURER’S AFTER SALES UNIT A case study on transaction costs

Abstract

Manufacturers are continuously moving towards customers and offering them value-adding services. These services are called after-sales services and they include different kinds of maintenance work and spare-parts delivery. The need for after-sales servicing is usually located outside of the manufacturer’s home country. As the after market is an increasingly important source of revenue manufacturers need to carefully choose how to manage and govern their after-sales operations. The purpose of this thesis is to study the firm, transaction and market specific factors that are most likely to affect the make or buy decision for a manufacturer’s after-sales operations. This study follows the work of Morschett (2006) and Morschett et al. (2008) and analyses five particular after-sales characteristics that are most likely to affect vertical integration, i.e. the choice of governance for a manufacturer’s after-sales operations.

The transaction costs literature provides a powerful tool for analyzing the choice of governance for a manufacturer’s foreign operations. Manufacturers have the choice to internalize the after-sales operations or outsource them trough the markets. The decision to internalize economic activities in the different stages of the value added chain is called vertical integration. This study looks at how after-sales demand, resources requirements, performance evaluability, nature of customer and corporate strategy affects vertical integration positively. The study will add to the theory of internationalization by providing an in-depth case study into the subject of transaction costs in the context of internationalization of after-sales services..

A case study approach is taken in order to get a better understanding the involved transaction costs and the internationalization of the after-sales services. Two Finnish enterprises and one after-sales subsidiary from each company is the subject of the case study. The nature of the AS customer is introduced as a new variable and is believed to have an effect on vertical integration. The findings support Morschett (2006) and Morschett et al. (2008) notions on the effect of strategy, performance evaluability and company size, to some extend, on vertical integration of the AS operations. The concept of demand is redefined and its effect on vertical integration is found to contradict previous findings.