verticalintegration_Presentation - Preview Make or Buy When...

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1 Make or Buy? When should a firm outsource? When should it vertically integrate? Cornel University Preview Today we’ll discuss the make or buy decision and the role of specialized assets. Where does this fit in? Threats to Competitive Advantage sustainability: Imitation (rivals) Substitution (rivals or firms in other industries) Hold Up (buyers and suppliers) Slack (employees) Why does GM make its own engines, but buy tires? Why have Coke and Pepsi bought some bottlers, but not suppliers? Make or buy decisions “By outsourcing an activity, we will eliminate the cost of that activity and thereby increase earnings.” Have to pay someone else to do it “Our firm should backward integrate to capture the profit of our suppliers for ourselves.” Competition between suppliers should drive down price “Let’s cut out the middle man.” Wholesaler buying power because of bulk quantities Make or Buy Myths
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2 Cornel University Why Outsource? Outside vendors might have lower costs Economies of scale Learning curve effects: specialized experience improves efficiency Exclusive asset or capability Smooth demand variability seasonality High Transaction Costs Search costs for good subcontractors Coordination and monitoring costs Difficult to transfer design specifications Wish to protect some proprietary know-how Slack internal resources Low-cost technology Why Not Outsource? For generic inputs: non- specialized so outsourcing usually more efficient i.e. office supplies Supplier incentive to reduce cost in competitive markets Difficult to reproduce these
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verticalintegration_Presentation - Preview Make or Buy When...

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