Some Make-or-Buy Fallacies
Before detailing the critical determinants of make-or-buy decisions, we need to dispense
with five common, but incorrect, arguments:
1. Firms should make an asset, rather than buy it, if that asset is a source of competitive
advantage for that firm.
2. Firms should buy, rather than make, to avoid the costs of making the product.
3. Firms should make, rather than buy, to avoid paying a profit margin to independent
firms. (This fallacy is often expressed this way: “Our firm should backward
integrate to capture the profit of our suppliers for ourselves.”)
4. Firms should make, rather than buy, because a vertically integrated producer will
be able to avoid paying high market prices for the input during periods of peak
demand or scarce supply. (This fallacy is often expressed this way: “By vertically
integrating, we obtain the input ‘at cost,’ thereby insuring ourselves against the
risk of high-input prices.”)
5. Firms should make, rather than buy, to tie up a distribution channel. They will
gain market share at the expense of rivals. This claim has merit on some occasions,
but it is used to justify acquisitions on many other occasions when it lacks merit.