Discussions on vertical integration—about whether products, parts, or services should be produced in-house or outsourced—can often become heated exchanges between managers holding oppos-ing business beliefs. Is it a question of optimizing the cost structure, or destroying jobs? Of making fixed costs variable, or losing knowhow? Of gaining flexibility, or plunging into dependence?

Not surprisingly, the "make or buy" debate almost invariably runs into contentious areas. Some see in it an opportunity to thrust forward into a spectacular hi-tech investment. Others see it as representing a misguided sense of loyalty to the business’s in-house team. Criteria for an objective decision are neither easy to find nor easy to apply, since every case is different.

However, the good news is that make or buy considerations can be expressed in objective terms. What is not such good news is that these considerations have to go much farther and deeper than is normal or convenient. To be useful, changes in a company’s level of integration should make its entire value-added chain more effective—not just consist of spinning off units or adding on operations or processes in a piecemeal fashion. And when we talk of...