Tuesday, October 9, 2012

How Much to Make and How Much to Buy? Explaining Optimal Plural Sourcing Strategies

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Strategic Management Journal 34, 10 (2013) 1145-1161

While many theories of the firm seek to explain when firms make rather than buy, in practice firms often make and buy the same input- they engage in plural sourcing. We argue that explaining the mix of external procurement and internal sourcing for the same input requires moving away from individual transaction level analysis, to a consideration of complementarities across and constraints within modes of procurement. We thus create analytical foundations for making empirical predictions about when plural sourcing is likely to be optimal and the optimal mix of internal and external sourcing. Our framework also proves useful for assessing the possible biases in transaction level make-or-buy studies arising from ignoring complementarities and constraints.