Make or Buy Decisions Flashcards
What goes into the transformation process?
- Materials
- Information
- Customers
- Staff
- Facilities
What are the three levels of process perspective?
Supply network level - flow between operations
Operational level - flow between processes
Process level - flow between resources
What do supply networks involve?
Involves flow of materials, people and information. Need to understand these and decide how much to outsource.
What is the make (do) or buy dilemma?
Deciding how much of the supply chain to own - suppliers that you do not directly employ are still your responsibility even if they are not visible, you still to blame
How is transaction cost economics used in do or buy decision making?
TCE attempts to explain the existence of firms and formation of alliance structures
Coase (1937) –> existence of firms was predicted on the costs of using the market mechanism (transaction costs)
i.e the price of making is not the total cost
What are the costs involved in make/do or buy decisions?
- Maintaining equipment
- Opportunity cost
- Delivery
- Cost of search
- Contracting
- Negotiation
- Order placing costs
- Authorisation costs
- Legal
- Exit costs
What are transaction costs?
- Costs of planning, adapting, coordinating and safeguarding exchange
- Costs vary according to the nature of the transaction
- Where these are high, TCE predicts that it is more efficient to coordinate activity within the boundaries of the firm
What are the key drivers of TCE decision making?
- Transaction characteristics
- Behavioural characteristics
- -> transaction costs –> do or buy?
What are transaction characteristics?
Frequency - cost is higher when transactions are frequent
Asset specificity - ability to specify what you want e.g easy to specify specifications for a pen, camera has high asset specificity
Uncertainty - cost of mitigating risk, where uncertainty is low, transaction cost is low and where it is high, transaction cost is high
What are behavioural characteristics and how did Williamson (1975 and 1985) predict that transaction costs arise?
Bounded rationality - rationality limited to the amount of info that they have, cognitive limitations of their mind, finite amount of time to make decision
Opportunism - where suppler intentionally underperforms, might not be aware of this until later down the line e.g plumbing - using cheaper materials
What is the general rule for make/do or buy?
If the cost of using the market goes up due to transaction cost, do things in house.
When the market is straightforward to use, use the market.
High - frequency, asset specificity, uncertainty, bounded rationality and opportunism make the cost of using the market high
How is TCE summarised?
- Theory of efficiency
- Boundaries set by minimising transaction costs
- Transaction costs determined buy - behavioural characteristics, transaction characteristics
What are the criticisms of TCE?
- Focuses on cost minimisation not on value maximisation
- Assumes that capabilities pre-exist and can be developed equally in all firms (not possible in real life)
- Implies that all firms facing the similar set of transactional attributes will reach similar conclusions regarding insourcing and outsourcing
What is the Resource Based View (RBV)?
- Views the firm as a bundle of resources
- Strategic view regarding the things we do and outsource, source of competitive advantage
- Resources and capabilities = intangible + tangible assets firms use to conceive of and implement strategies that improve performance
How is the RBV incorporated into make/do-or-buy decisions?
Have we got the capabilities/resources within the boundaries of the firm?
- Yes = make
No –>
Can we develop the required capabilities?
- Yes = make
No –>
Can we access the required resources?
- Yes = make
- No = buy
What are strategic resources?
Those that are valuable, rare, inimitable and non-substitutable –> lead to sustainable competitive advantage
What are valuable resources?
Those that enable a firm to implement strategies to improve efficiency or effectiveness
They should increase benefits or reduce sacrifices
What are rare resources?
Unique - if every firm has the valuable resource, it cannot result in competitive advantage
How can resources be inimitable?
Unique historical conditions - path dependencies
Casual ambiguity - link between resources and SCA is poorly understood
Social complexity - interpersonal relations, culture
What are non-substitutable resources and what kinds of substitutes are there?
No strategically equivalent valuable resource that can be used to implement the same strategy
Similar substitutes - two competing, but different management teams
Different substitutes - charismatic leader, systematic planning process
What are the criticisms of RBV?
Too internal? – doesn’t consider assets from external supply networks
- Extended RBV
- Opportunism
More contingent perspective required
- When are specific resources required?
More detail on resource development required
How is RBV summarised?
- Theory of competitive advantage
- Capability contingent perspective to make or buy decision
- Contingent upon costs of developing and acquiring desired resources and capabilities
How does the resource position and potential for opportunism matrix influence make-do-or-buy decisions?
Superior resource position + low potential for opportunism = RBV –> make TCE –> buy (contradictory)
Superior resource position + high potential for opportunism = RBV + TCE –> make (complementary)
Weaker resource position + low potential for opportunism = RBV + TCE –> buy (complementary)
Weaker resource position + high potential for opportunism = RBV –> buy, TCE –> make
(contradictory)
How can models be integrated into make-do-or-buy decisions?
- Combining the philosophy of TCE and RBV
- TCE - cost based approach, short term, RBV - long term strategic view
- Transaction cost as well as core capabilities must be considered
