Make-buy decision making: A multi-theoretical examination

How organizations secure resources has occupied the attention of management scholars throughout the history of the discipline. The question addressed by this research is what factors are important in the decision to make, versus buy a component? The outcome of this decision can be seen as defining the boundaries of the firm. Four theoretical perspectives, transaction cost economics, strategic choice, resource dependence and institutionalism offer varying explanations as to the conditions that predict the outcome of the make-buy decision. Transaction cost and strategy are economic perspectives that suggest that a certain calculus among a limited number of variables will dictate sourcing decisions that will produce efficiency maximizing results. Resource dependence and institutional perspectives are effectiveness approaches that suggest that make-buy decision making is embedded in social structures that have a profound effect on the decision. This research is unique in that four make-buy perspectives were tested simultaneously. Previous studies may have found significance for a specific theoretical perspective simply because that was the only one for which variables were operationalized. Including variables that represent four perspectives remedies that weakness. Eight hypotheses were proposed to test the principle variables of each of the four perspectives.; The hypotheses were tested using data collected from purchasing buyers from a large midwestern manufacturer. Surveys containing 60 objective items were used to collect 165 useable responses from a response population of 647 personnel. Principle components analysis was used to develop a ten-factor measurement model. Logistic regression was subsequently used to regress the outcome of make-buy decisions on the variable sets representing the four perspectives. Tests of a model that included all four theoretical perspectives found support for only hypotheses representing institutionalism. Specifically, the influence of local and national unions was found to overwhelm all other factors in the make-buy decision. The results can be explained from both institutional and resource dependence perspectives. The study underscores the importance of conducting research from multiple perspectives. Further, it highlights the theoretical overlaps between institutional and resource dependence perspectives and the undersocialization of efficiency perspectives. Implications for industry and future research are discussed.