MAKE OR BUY DECISIONS

Ravi Kiran

INTRODUCTION
The make-or-buy option represents a fundamental dilemma faced by many companies. Today's global competition forces manufacturing companies to re-evaluate their existing processes, technologies, manufactured parts and services in order to focus on strategic activities. However, companies have finite resources and may not be able to afford to have all activities inhouse.

INTRODUCTION
This has resulted in an increasing awareness of the importance of the make-or-buy decision, the dilemma organisations face when deciding between keeping technologies/processes in-house or purchasing them from an outside supplier. The ability to make such decisions in a structured and rational manner is likely to improve a company's overall performance.

BUILD, BUY, PARTNER: BENEFITS AND

TRADEOFFS
Pros
Most product control Own the IP Most profit opportunity

Cons
Longest time to market Risk in market shifts High development costs Highest switching costs

Build Cost & Risk

Buy

Shorten time to market Own the IP

Acquisition costs Integration costs

Partner

Shortest Time to Market Conserves Resources Try before you Buy Lowest Switching Costs Credibility and access

Least Control Integration Costs Shared gross margins Least Profit Opportunity

Time to Market & Control & Profit

4

WHY BUILD: TECHNOLOGY LEADERSHIP

Pioneer in the field Patentable technology Need to own the intellectual property

Core business Have time or can build in increments Have in-house expertise

WHY BUY: CORE TO BUSINESS

Core to business Need intellectual property Time critical

Shortage of inhouse expertise Acquire market leadership

NorCal PDMA

WHY PARTNER: SPEED

Fastest Time to Market Reduce Risk Leap Frog Competition

Customize for Specific Markets Customers buy best of breed

WHICH HORSE TO PICK?

Build
Leadership

Buy
Core Business Time to Market

Partner
Reduce Risk

PRODUCT LIFECYCLE
Project managers can use lifecycle to understand: where their product fits into the lifecycle, what kind of customers there are in each step and how it affects product needs and requirements as they move through the lifecycle. Sometimes product doesnt start at beginning company entering market during early adopter or majority, so can determine where product is when developing and what to do to match customer desires.

PRODUCT ADOPTION LIFE-CYCLE

Revenue

First time buyers

1 S.D. 1 S.D.

Innovators

Early Adopters

Early Majority

Late Majority

Laggards

Time

early market

BUYER MOTIVATION AFFECTS PRODUCT DECISIONS

3 I will deploy proven technology to deliver services expected by my customers 2 2 I will use stable but not yet common technology to develop a competitive advantage 4 I will buy commodity technology to cut costs
1

I will work with vendors of bleeding edge technologies, to fundamentally reshape my business or my competitive environment
11

MOTIVATIONS AFFECT WHAT BUYERS WANT FROM THE PRODUCTS

1. Innovatorscan take some time to build, willing to work with vendor and partners to truly be innovative. Product need not be finished and stable, want product capability, flexibility, technical expertise 2. Early adoptersproduct should be more developed, more stable, willing to go with early proven products, work with vendor and partners to be competitive. Product must be stable, technical partnering important here. Can still take time to build products, but start to look at buying or partnering. want references, experienced professionals

PRODUCT LIFE CYCLE

3. Early majorityproduct needs to be more whole, market building, need fast time to market with new features. Products must be delivered quickly, very competitive marketplace. Better to partner for new feature/functionality or competitive differentiation than to spend time building major new features. want packaged solutions, choice of suppliers, good service, ease of installation and use, performance guarantees

PRODUCT LIFE CYCLE

4. Late majority: Need packaged product, must be packaged and integrated seamlessly with partner products/easy installation, support distributed by distributors-B to B, or mass merchants for B to C. low costs, ease of use

PRODUCT LIFE CYCLE

Early in the life cycle, buyers are motivated by the chance to innovate to gain a big advantage. The buyer is willing to assume a larger risk in return for a large potential reward. As the technology proves its worth, a larger group of buyers are willing to adopt it to gain business advantage.

PRODUCT LIFE CYCLE

Once the technology is well-accepted, another large group (late majority), will adopt the technology out of fear of losing business to their competition. SAP in the late 90s is an example of a product in this category.

PRODUCT LIFE CYCLE

The laggard category adopts the technology once it becomes ubiquitous, low cost, and simple. This generally requires that the product itself be the solution, and can be used almost out-of-the box. Because of the different buyer characteristics, the requirements of the whole-product tend to be different, so the partner mix will need to be different.

NorCal PDMA

PARTNERING REQUIREMENTS

technical value-add Goal: Bring product to market Reason to Partner: Building own product, fill in gaps in technology with partners Type of Partner: OEM, Technology co-development logistics value-add Goal: Penetrate market/win markets hare Reason to partner: Customize built product to specific market segments, whole-product, provide services Type of Partner: Software integrators (SIs) and value added resellers ( VARs) Early Late Goal: Moving Volume Reason to Partner: Widespread market penetration Type of Partner: Distributors End of life

Innovators

Early Adopters

Majority

Majority

Laggards Time

19

The technology adoption life-cycle was developed by Everett Rodgers in the late 1950s on how communities respond to discontinuous innovations. The peak of the bell curve bisects the customer community. The boundaries are at 1 std. deviation intervals. In 1964 Ted (somebody) from Harvard turned it into the Product Life Cycle Geoffrey Moore popularized the model in the early to mid 1990s with three books: Crossing the Chasm Inside the Tornado (1995 - ISBN 0-88730-824-4) The Gorilla Game

It shows the adoption of a technology or product over its life. Early on, the technology is used by those who think that they can gain a dramatic advantage over their competition through innovation. If the technology catches on, then it will be adopted by a large number of companies seeking to build advantage, then another large group will adopt the technology to catch up. Finally a smaller group who have lagged behind will gradually start to see the opportunity to use the technology once all the problems have been solved and the price has dropped to its lowest levels.

The transition from early adopters to early majority is the place that Moore calls the chasm, which is the point at which a company either takes advantage of the rapidly growing adoption, or cedes the market to its competitors and/or a better technology or marketing strategy. The chasm applies to both to products and technologies. For the latter, some competitor comes along and takes the highgrowth part of the life cycle from the company that introduced the innovation.