Centre for Strategy and Performance

What is a Make-Buy Decision?

Almost any product or service available in the marketplace today involves inputs of one kind or another: raw materials are turned into subcomponents, subcomponents are then assembled to form finished products or are used as an input to some kind of service, etc. However, few companies have all the resources and expertise required to fulfill all of these functions. Sooner or later, a firm generally has to rely on other firms to supply at least some of these inputs. But what tasks and functions should be performed in-house—that is, within the firm—and which ones should be relegated to outside suppliers? And for those tasks that it chooses to outsource to other firms, what type of relationship should be developed with the supplying companies? These questions point to a recurring set of issues that are collectively referred to as "make-buy decisions."

A single make-buy decision in and of itself may not seem to be of great consequence to a company. Among the many components and services that a firm uses to generate revenues, relatively few are singularly of critical importance to the firm’s immediate survival or success. But the aggregate of these decisions effectively defines the scope of what a company is and is not doing. In other words, the resolution of make-buy questions defines the boundary of the firm.

To be sure, quite a bit of research has already been done in the field of make-buy decisions. Dating as far back as 1937, dozens of outsourcing frameworks have been developed for a wide range of industries. Among the broad array of different approaches adopted over the years are valuable ideas like transaction cost analysis and core competencies. Listed below are a few of the more prominent papers on this topic.

(1) Prahalad, C. K., & Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review (May-June), 79-91.

(2) Venkatesan, R. (1992). Strategic Sourcing: To Make or Not To Make. Harvard Business Review (November-December), 98-107.

(3) Quinn, J. B., & Hilmer, F. G. (1994). Strategic Outsourcing. Sloan Management Review (Summer), 43-55.

(4) Fine, C. H., & Whitney, D. E. (1996). Is the Make-Buy Decision Process a Core Competence? (Working Paper # 3875-96). Cambridge, Massachusetts, USA: MIT Center for Technology, Policy, and Industrial Development. This paper is also available from

<http://web.mit.edu/ctpid/www/Whitney/morepapers/make_ab.html>.

 by Rob Perrons, < rkp22eng.cam.ac.uk >