In today’s rapidly evolving business environment, companies face a critical choice when developing new systems: should they build everything in-house (or outsourced) or buy components from existing 3rd party vendors? This decision, while seemingly straightforward, has far-reaching implications for a company’s competitive advantage and its ability to deliver value to customers. Leveraging Michael Porter’s principles, particularly the concepts of value creation and differentiation, provides a strategic framework for making this choice. To add value and increase customers’ willingness to pay, businesses must carefully consider how the build-or-buy decision aligns with their overall strategy.
Understanding the Build vs. Buy Dilemma
The decision to build or buy hinges on a company’s need to deliver unique value to its customers while optimising costs and resources. Building owned software allows for customisation tailored to specific business needs, fostering differentiation. Conversely, buying systems off-the-shelf (white label for example) can offer cost savings, provide maintenance & support, quicker deployment, and access to advanced technologies.
The choice is not merely a technical decision but a strategic one that should align with the company’s competitive strategy, whether it is cost leadership, differentiation, or focus.
Applying Strategic Principles
Michael Porter’s principles of competitive strategy, particularly the value chain framework, emphasise the importance of understanding how each activity within a business adds value and contributes to a company’s competitive position. The build-or-buy decision is a critical component of this framework, influencing both primary activities (such as operations and marketing) and support activities (such as technology development).
1. Differentiation and Value Creation
One of Porter’s core principles is the importance of differentiation—offering something unique that customers are willing to pay more for. When deciding whether to build or buy, companies must assess which option will better enable them to differentiate their offerings.
Building Systems In-House: This option provides the flexibility to develop systems that are perfectly aligned with a company’s unique value proposition. For instance, a company that competes on exceptional customer experience might choose to build its customer relationship management (CRM) system to provide unique features that competitors do not offer. Building in-house allows for the integration of proprietary processes and capabilities that can enhance differentiation.
Buying Systems: On the other hand, purchasing a ready-made solution might suffice if the system in question does not directly contribute to the company’s competitive differentiation. For example, a company whose competitive advantage lies in low-cost production might opt for a standard financial management system, where customization adds little additional value to the customer and does not increase willingness to pay.
2. Cost Leadership and Efficiency
Achieving the lowest cost of operation in the industry. Companies pursuing a cost leadership strategy need to carefully weigh the costs associated with building systems in-house against buying them.
Building Systems: Developing systems in-house can be costly, involving expenses for talent acquisition, software development, maintenance, and upgrades. However, if a business has unique requirements that standard solutions cannot meet, building may be more cost-effective in the long term, especially if it reduces operational inefficiencies or leads to innovation that cuts costs elsewhere.
Buying Systems: Purchasing a system from an external vendor often comes with lower upfront costs and quicker implementation. It can provide immediate access to updates, support, and new features, potentially lowering the total cost of ownership. For companies where speed to market and minimizing initial costs are crucial, buying can be the more cost-effective route.
3. Strategic Focus and Core Competencies
Focusing on core competencies to build competitive advantage—also plays a critical role in the build-or-buy decision. Companies should focus their resources on areas where they can excel and outsource non-core activities to external providers who can do them more efficiently.
Building Systems In-House: If a system development project aligns closely with the company’s core competencies, building in-house can be the right choice. For example, a tech company whose core competency is software development may choose to build its systems, leveraging its expertise to create superior products that enhance its competitive edge.
Buying Systems: Conversely, if the system development does not align with the company’s core competencies, buying might be more strategic. For instance, a retail company focused on merchandising and customer service might outsource its IT systems to focus more on its core business activities.
Enhancing Willingness to Pay Through Strategic Decisions
The ultimate goal of any strategic decision, according to Porter, is to enhance the value delivered to customers, thereby increasing their willingness to pay. The build-or-buy decision should be evaluated in terms of how it impacts the customer experience and value proposition.
- Building to Enhance Customer Experience: If developing a system in-house allows a company to offer a unique customer experience—such as a seamless, personalized digital interface that competitors cannot match—this can significantly increase customers’ willingness to pay.
- Buying to Reduce Time-to-Market: Alternatively, buying a system can be strategically advantageous if it allows a company to quickly implement a critical function that enhances customer satisfaction or operational efficiency. For example, adopting a well-established e-commerce platform might enable a retail business to swiftly enter the online market, capitalizing on new revenue streams without the delays associated with building from scratch.
Conclusion
The decision to build or buy is not a binary choice but a strategic decision that should be informed by principles of value creation, differentiation, cost leadership, and strategic focus. Companies must carefully evaluate how each option aligns with their overall strategy and contributes to their competitive advantage. By focusing on adding value and increasing customers’ willingness to pay, businesses can make informed decisions that not only optimise resources but also enhance their market position and drive long-term growth.
Ultimately, whether a company chooses to build or buy, the decision should be guided by a clear understanding of how it fits within its broader strategic objectives, enhances its competitive advantage, and delivers superior value to customers.