Does Ownership Affect the Variability of the Production Process? Evidence from International Courier Services

Chihmao Hsieh (), Sergio Giovanetti Lazzarini (), Jackson A. Nickerson () and Márcio Laurini
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Chihmao Hsieh: Missouri University of Science and Technology, Rolla, Missouri 65409
Jackson A. Nickerson: Olin Business School, Washington University, St. Louis, Missouri 63130

Organization Science, 2010, vol. 21, issue 4, 892-912

Abstract: A firm often must ensure that products or services it produces match customer expectations. We define variability as any deviation in a production process yielding products or services whose attributes differ from the firm's stated target specifications. Firms pursuing products marked by low variability are more subject to maladaptation costs if production processes are not adjusted to avoid nonconformities. Furthermore, such adjustments often require idiosyncratic investments (e.g., dedicated information technology systems), thereby creating contractual hazards and potential underinvestment. We hypothesize that ownership of sequential activities in the value chain helps mitigate problems associated with maladaptation as well as suboptimalities in transaction-specific investment, thereby resulting in lower variability. Using data on delivery times from the Japanese international courier and small package services industry, we assess the variability-reducing role of ownership in two complementary ways. The first approach is parametric, allowing us to assess the impact of ownership on the variance associated with delivery time; here we focus on shipments that frequently fail to arrive precisely within the time period initially expected by customers. The second approach is more consistent with the notion of reliability, or the likelihood that shipments will not arrive later than expected: we nonparametrically estimate the distribution of deviations between actual and expected delivery time, and verify how distinct organizational choices change the distribution. Ownership of multiple segments yields a particularly pronounced effect on both variance and reliability. Ownership bestows variability-reducing benefits of ownership, especially when ownership is observed in multiple stages of the value chain.

Keywords: organizational choice; contracting; governance; reliability; variance; variability (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (6)

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