Make Vs Buy

MAKE VERSUS BUY

Strategic
By assessing the relative costs and risks of
making or buying, companies can leverage their
skills and resources for increased profitability

James Brian Quinn • Frederick G Hilmer

approaches, when
properly combined, allow managers to
leverage their companies’ skills and
resources well beyond levels available with
other strategies:

TWO NEW STRATEGIC

•Concentrate the firm’s own resources on
a set of “core competencies” where it can
achieve definable preeminence and provide
unique value for customers.1

James Brian Quinn is
Buchanan Professor
of Management at the
Amos Tuck School of
Business Administration,
Dartmouth College.
Frederick G. Hilmer is
Dean of the Australian
Graduate School of
Management, University
of New South Wales.This article is reprinted
by permission of the
publisher from the
Sloan Management
Review, Summer 1994.
Copyright © 1994 Sloan
Management Review
Association. All rights
reserved.
1

For notes, see page 70.

48

• Strategically outsource other activities – including many traditionally considered integral
to any company – for which the firm has neither
a critical strategic need norspecial capabilities.2
The benefits of successfully combining the two
approaches are significant. Managers leverage
their company’s resources in four ways.
First, they maximize returns on internal
resources by concentrating investments and
energies on what the enterprise does best.
Second, well-developed core competencies
provide formidable barriers against present
and future competitorsthat seek to expand
into the company’s areas of interest, thus
facilitating and protecting the strategic advantages of market share. Third, perhaps the
greatest leverage of all is the full utilization of
external suppliers’ investments, innovations,
and specialized professional capabilities that

THE McKINSEY QUARTERLY 1995 NUMBER 1

outsourcing

Reprinted from the
Sloan ManagementReview

would be prohibitively expensive or even impossible to duplicate internally.
Fourth, in rapidly changing marketplaces and technological situations, this
joint strategy decreases risks, shortens cycle times, lowers investments, and
creates better responsiveness to customer needs.
Two examples from our studies of Australian and US companies illustrate
our point:
• Nike, Inc. is thelargest supplier of athletic shoes in the world. Yet it
outsources 100 percent of its shoe production and manufactures only
key technical components of its Nike Air system. Athletic footwear is
technology- and fashion-intensive, requiring high flexibility at both
the production and marketing levels. Nike creates maximum value by
concentrating on preproduction (research and development) andpostproduction activities (marketing, distribution, and sales), linked together
by perhaps the best marketing information system in the industry.
Using a carefully developed, on-site “expatriate” program to coordinate its
foreign-based suppliers, Nike even outsourced the advertising component
of its marketing program to Wieden & Kennedy, whose creative eƒforts
drove Nike to the top of the productrecognition scale. Nike grew at a
compounded 20 percent growth rate and earned a 31 percent ROE for its
shareholders through most of the past decade.
• Knowing it could not be the best at making chips, boxes, monitors,
cables, keyboards, and the like for its explosively successful Apple II,
Apple Computer outsourced 70 percent of its manufacturing costs and
components. Instead of buildinginternal bureaucracies where it had no
unique skills, Apple outsourced critical items like design (to Frogdesign),
printers (to Tokyo Electric), and even key elements of marketing (to Regis
McKenna, which achieved a “$100 million image” for Apple when it had
only a few employees and about $1 million to spend).

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49

STRATEGIC OUTSOURCING

Apple...