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do oR Buy? THE vERTiCAl inTEgRATion dECision 169

supply network strategy was a direct result of its early lack of cash. It did not have the money
to invest in its own manufacturing facilities (or to take the risk of subcontracting manufactur-
ing), so it focused on licensing its ‘reference designs’. Reference designs provide the ‘technical
blueprint’ of a microprocessor that third parties can enhance or modify as required. This means
that partners can take ARM reference designs and integrate them flexibly to produce different
final designs. And, over the years, a whole ‘eco-system’ of tools has emerged to help developers
build applications around the ARM design architecture. The importance of ARM’s supply ‘eco-
system’ should not be underestimated. It is an approach that allows ARM’s partners to be part
of the ARM’s success, rather than cutting them out of the revenue opportunities.

The process of do/buy analysis

In addition to the effect on the operation’s performance objectives, there are other
issues when deciding if outsourcing is a sensible option. If an activity has long-term
strategic importance to a company, it is unlikely to outsource it. For example, a retailer
might choose to keep the design and development of its website in-house, even though
specialists could perform the activity at less cost, because it plans to move into Web-
based retailing at some point in the future. Nor would a company usually outsource an
activity where it had specialised skills or knowledge. For example, a company making
laser printers may have built up specialised knowledge in the production of sophisti-
cated laser drives. This capability may allow it to introduce product or process innova-
tions in the future. It would be foolish to ‘give away’ such capability. After these two
more strategic factors have been considered, the company’s operations performance
can be taken into account. Obviously, if its operation’s performance is already too
superior to any potential supplier, it would be unlikely to outsource the activity. But
also, even if its performance was currently below that of potential suppliers, it may
not outsource the activity if it feels that it could significantly improve its performance.
Figure 5.7 illustrates this decision logic.
A strategic approach to do/buy decisions requires the firm to reflect on its own rela-
tive capabilities and their contribution to competitive advantage. Insights from the
resource-based view of the firm (see discussion in Chapter 1) are potentially valuable
here. Having identified those operations in which the firm has neither any meaningful
competitive advantage nor critical strategic need, the analysis also has to look for the
most effective sourcing arrangement. In determining what is effective, the firm must

Figure 5.7 The decision logic of outsourcing

Does Is significant
Explore
Is activity of No company No Is company’s No operations No outsourcing
operations
strategic have performance
importance? specialised performance improvement of this
knowledge? superior? likely? activity
Yes Yes Yes Yes

Explore keeping this activity in-house

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