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The interplay between product architecture (PA) and a firm’s strategic make vs. buy decision has been a subject of much interest in contemporary industrial practice and academic research. It is interesting to note that much of the existing empirical research follows the integral-to-modular PA change direction observed in the PC industry example and the subsequent effect of this shift on firms’ make or buy decisions. Although several industries have demonstrated a shifting of PA from modular to integral form as a result of architectural (or radical) innovations (such as the disk drive, notebook computer, and Swiss watch industries),much of the existing literary works reflect a progression of PA in the integral-to-modular direction accompanied by firms’ decisions to change from a make to a buy strategy. Given that much of the previous scholarly work has dealt with primarily one evolutionary direction, this study’s interest lies in the opposite direction. Different from most previous literature viewing the sourcing decision as a make-buy dichotomous choice, the purpose of this study is to examine the impact of the make/buy with KC/buy strategy on financial performance in an industry where PA distinctively changes from modular to integral form. Specifically explaining each sourcing strategy, a pure buy strategy is one that a firm outsources not only the manufacturing but also the design of its components to an external supplier. Another one is a pure make strategy that a firm both designs and manufactures all of the relevant components in-house. The last is a buy with KC strategy where a firm outsources the component manufacturing but keeps relevant knowledge regarding outsourced components in-house. This study draws on transaction cost economics and the firm-knowledge boundary literature within the frame of the product architecture and make-buy strategy literature. By studying the U.S. bicycle derailleur and freewheel market, this study finds that firms retaining relevant knowledge capabilities in-house while pursuing a buy strategy experience superior financial performance over firms that pursue a pure outsourcing buy strategy. Moreover, firms that retain relevant knowledge regarding outsourced components in-house while pursuing a buy strategy exhibit similar financial performance to firms pursuing a make strategy. The findings highlight an important distinction between the ‘buy with knowledge capabilities’ strategy and the more traditional make-buy strategies that has not been fully explored in earlier works, increasing the understanding as to why firms show heterogeneous behavior with regards to outsourcing decisions in the face of a modular-to-integral PA change.
