International businesses invariably face decisions about whether they make all or just some of the components used in their final product and therefore buy in from other sources (outsourcing) those components they decide not to make. This make-or-buy decision is related to the degree to which a firm is vertically integrated: that is, the extent to which a firm is its own supplier and market. At one extreme a firm can make all of its own inputs and be its own supplier; at the other extreme, it can buy all its inputs and rely on external suppliers. Partial integration implies that some components are made and others bought.
A major benefit of making inputs (backward or upstream integration) is the degree of control maintained over cost, quality and timeliness of delivery. Major drawbacks are the cost of investment and expertise needed to provide these inputs. A benefit of buying is the ability to choose one or more suppliers. A corresponding drawback is the reliance on suppliers. The trade-offs associated with make-or-buy decisions are summarized in following table:
Make-or-buy decisions in an international firm may be complicated because they are made relative both to the whole company and to each of its subsidiaries. Three make-or-buy options exist:
- A subsidiary is fully integrated and makes its own parts
- A subsidiary is vertically integrated with other parts of the company and buys inputs from other subsidiaries or from the parent company.
- There is no vertical integration and inputs are obtained from outside suppliers.
The ‘real world’ is seldom so simple and a wide variety of combinations is possible. However, there is another way to obtain some of the benefits of vertical integration without incurring some of the costs through strategic alliances. The principal cost may be giving away technological know-how.
Strategic alliances in the make-or-buy context may be said to come in two sizes. The larger is between two or more companies of similar size. Alliances between Kodak and Canon to manufacture copiers to be sold by Kodak; between Motorola and Toshiba to cross-licence their respective technologies; and between General Motors and Toyota to build the Chevrolet Nova as a joint venture are came under this context. The smaller size of strategic alliance is between a large company such as Toyota and a number of small-parts suppliers, some of whom supply only Toyota while others supply most of their output to Toyota. This is the more likely scenario in make-or-buy situation, where Toyota does not have production facilities for all of the thousands of parts needed to construct a motor vehicle.