Make Or Buy Issue

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Long Range Planning, Vol. 19, No. 5, pp. 54 to 62, 1986 Printed in Great Britain

0024-6301/86 $3.00 + .OO Pergamon Journals Ltd.

Make or Buy Issue
David Ford and David Farmer

A Key Strategic

This paper is based upon a research project which examined what are commonly known as industrial *make-or-buy’ decisions. The project stemmed from the simple idea that decisions as to which activities should be carried out within the company and which should be contracted out can be crucial to business effectiveness. In doing this, management faces complex choices as to which elements of its manufacturing, marketing and the services which it needs in its operations should be provided ‘in-house: and which should be bought in. Several case examples illustrate the potential involved.

A Technological

Context

A useful context within which to examine make-orbuy decisions is provided by considering the company in terms of its technology or know-how. A company’s activities can then be expressed in three categories; the acquisition, management and exploitation of technology and know-how. This is illustrated in Figure 1. A company may acquire skills and know-how for its own use by recruiting personnel and through inhouse R & D. Alternatively it may subcontract its R & D or use external personnel on a contract basis. A company must also manage its technology and know-how. It has to convert this know-how into saleable products or services, again either in- or outhouse. It must also provide the support services for this conversion: administrative, security, welfare, pensions, etc. and it has similar choices in providing these itself or in contracting them out. Finally, a

Introduction
Clearly, some make-or-buy decisions may be relatively unimportant in themselves, yet when considered in the light of the business as a whole they may have a considerable impact on the nature and strategy of the company. For example, management has to decide whether a new product should be developed by the company’s own R & D facility or by contracted-out research. Similarly it must choose whether to produce the product in its own factory or in that of an independent supplier. In addition management has to decide whether the product should be marketed through the company’s own salesforce or via an independent agency. Such decisions strongly influence the future of the company’s product and process technology base and will have a considerable impact upon its marketing strategy. The research project was based on the hypothesis that make-or-buy decisions are not generally taken with a strategic perspective, nor within an overall policy. Instead, we hypothesized that make-or-buy decisions are made or confirmed most frequently by default or as a result of subjective opinion, rather than arising from clear analysis or a holistic company-wide view of the implications of individual decisions.

In-house R&D \

Licence-in

Contracted-out R&D

J

Strategy Development Administration Production

/
Direct Sale of Product/ Service

A
Contract-out Marketing

\
Licence-out

David Ford is Lecturer at the School of Management, University of Bath and David Farmer is Professor and Deputy Principal at HenleyThe Management College.

Figure

1. A technological

context

Make company will wish to exploit its technology. It can do this by direct sale of products or licencing of the technology on which they are based. A company can use outside agents to market and distribute its products or carry out these tasks itself. A useful analogy can be drawn between all of these activities and those of a farmer who seeks to exploit his land, while at the same time maintaining and increasing its fertility for future production. All of this means that a company, reduced to its fundamentals, requires a knowledge of an existing or potential market and a strategy for profitably serving that market. Its make-or-buy decisions must therefore be
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