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Asset specificity in make or buy decisions for service operations. An empirical application in the Scottish hotel sector

Espino-Rodríguez, Tomás F. and Lai, Pei-Chun and Baum, Tom (2008) Asset specificity in make or buy decisions for service operations. An empirical application in the Scottish hotel sector. International Journal of Service Industry Management, 19 (1). pp. 111-133. ISSN 0956-4233

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This work analyses make or buy decisions from the transaction cost economics perspective and the resource-based view of the firm. The aim is to analyse the extent to which the presumptions of the two theories are valid in the service sector in terms of specific assets. The study was conducted on a representative sample of hotels in Scotland, UK. Each of the surveyed hotels was asked for information about 13 operations or hotel processes. A comprehensive model is developed that establishes the relationship between asset specificity and operation performance and hotel or business performance, moderated by the form of governance (make or buy). Moreover, the relationship between asset specificity and outsourcing in the hotel sector is also examined. The different hotel processes are classified according to the asset specificity. The factors that could lead to an increase in the outsourcing strategy are also analysed. The results indicate that, the relationship between asset specificity and operation performance is weaker when the operations are executed in-house. In the case of the relationship between specific assets and performance, the findings regarding non-financial performance are not contradictory since it is slightly higher when the operation is outsourced. The factors determining an increase in outsourcing would be those related to the quality of the operation and to non-financial performance. Previous studies have not considered the relationship between specificity and business performance, which gives extra incentive to complement and expand the literature on service operations. Future research should analyze other theories on organisations and outsourcing. The findings should also be tested in other geographical regions and use sources of information other than the hotel managers. The work generates knowledge and aids managers in their 'make or buy' decisions for the principal processes in the hotel industry according to the asset specificity. The paper develops a specificity-outsourcing matrix and identifies each of the hotel operations. Apart from testing the model in the hotel sector, which is an important sector of the service industry, the work offers a better understanding of outsourcing decisions based on the two basic theories used in the literature on services management. The paper also makes an innovative contribution by analysing relationships between operation specificity and performance that are previously untested in the service sector.