Principles of Strategic Management: Strategic Alliances and M&A - Make vs. Buy, Decisions Transaction Cost Economics Core Competency View

What This Is

A Make vs Buy decision is a strategic choice between producing a product or service internally (make) or acquiring it from an external supplier (buy). This decision is crucial for companies to optimize costs, improve efficiency, and enhance competitiveness. For instance, Apple's decision to design and manufacture its own processors, such as the A14 Bionic chip, has enabled the company to control its supply chain, reduce costs, and differentiate its products.

Key Frameworks & Tools

• Transaction Cost Economics (TCE): A framework that explains the costs associated with transacting with external parties, including search, bargaining, and enforcement costs. TCE helps companies decide whether to make or buy by analyzing the costs of transacting with suppliers.
• Core Competency View: A perspective that emphasizes the importance of a company's core competencies in making make vs buy decisions. This framework suggests that companies should focus on activities that leverage their unique strengths and capabilities.
• Make vs Buy Matrix: A simple framework that helps companies evaluate the make vs buy decision based on two factors: the company's core competency and the complexity of the activity.
• Value Chain Analysis: A tool that helps companies identify the activities that add value to their products or services. By analyzing the value chain, companies can determine which activities to make or buy.
• Resource-Based View (RBV): A framework that suggests that companies should focus on developing and leveraging their unique resources and capabilities to create sustainable competitive advantages.
• VRIO Framework: A tool that helps companies evaluate their resources and capabilities based on four criteria: Valuable, Rare, Inimitable, and Organization (VRIO).
• BCG Matrix: A framework that helps companies evaluate their business units based on their market growth rate and relative market share. The BCG matrix can be used to decide whether to make or buy by analyzing the growth potential and competitive position of the business unit.

Step-by-Step Application

1. Conduct a Value Chain Analysis: Identify the activities that add value to your products or services and determine which activities to make or buy.
2. Evaluate Core Competencies: Assess your company's core competencies and determine which activities leverage these strengths.
3. Analyze Transaction Costs: Estimate the costs associated with transacting with external suppliers and compare them to the costs of making the product or service internally.
4. Use the Make vs Buy Matrix: Evaluate the make vs buy decision based on two factors: the company's core competency and the complexity of the activity.
5. Consider the BCG Matrix: Evaluate the business unit's growth potential and competitive position to decide whether to make or buy.

Common Mistakes

• Mistake: Confusing industry attractiveness with competitive position.
• Correction: Industry attractiveness refers to the overall attractiveness of the industry, while competitive position refers to the company's position within the industry. The two are related but distinct concepts.
• Mistake: Using the wrong level of strategy (e.g., using a make vs buy decision for a functional level strategy).
• Correction: Make vs buy decisions are typically used for business level strategies, while functional level strategies focus on optimizing specific functions within the company.
• Mistake: Failing to consider the long-term implications of a make vs buy decision.
• Correction: Make vs buy decisions can have significant long-term implications for a company's competitiveness and profitability.

Case Interview / Exam Tips

• Common question pattern: "Should we make or buy this product/service?"
• Tricky distinction: Differentiation vs low cost (e.g., should we focus on making a product with unique features or buying a low-cost alternative?)
• Framing answer: "To make or buy, we need to consider our core competencies, transaction costs, and the value chain analysis. Based on these factors, I recommend [make or buy]."

Quick Practice Scenario

A company has low market share in a high-growth industry – where does it sit on the BCG matrix?

Answer: The company would likely sit in the "question mark" quadrant, indicating a high growth potential but low market share.

Last-Minute Cram Sheet

• "Stuck in the middle" means trying to do both cost leadership and differentiation without achieving either – not a valid hybrid strategy unless operational excellence is present.
• Make vs buy decisions are typically used for business level strategies.
• Transaction costs include search, bargaining, and enforcement costs.
• Core competencies are unique strengths and capabilities that a company leverages to create sustainable competitive advantages.
• The VRIO framework evaluates resources and capabilities based on four criteria: Valuable, Rare, Inimitable, and Organization (VRIO).
• The BCG matrix evaluates business units based on market growth rate and relative market share.
• Industry attractiveness refers to the overall attractiveness of the industry.
• Competitive position refers to the company's position within the industry.
• Value chain analysis helps identify activities that add value to products or services.