To Build or Not to Build...That is the Question.
A brief examination of criteria to consider when deciding between building or buying technology and solutions in your organization.
If you like playing chess, you know that planning several moves in advance is essential to controlling the game. A grandmaster can run complex scenarios in parallel at a rate of 10-15 moves, while an average player may be able to plan 2-3 moves in advance. In business, deciding between building internal capacity to develop technologies in-house or buying from a vendor is quite similar to playing chess. When deciding between these options, it's essential to consider the long-term implications for your organization's competitive position and bottom line. Both approaches have their benefits and downsides (Table 1) and the decision should be based on your needs today and your vision for the future. Here we will explore evaluating a few deciding factors such as your firm’s abilities, competition, customers, the current and future landscape of evolving markets.
History Repeats Itself - A tale of winners and Losers
While each “build vs. buy” decision is unique and should be evaluated by analyzing relevant product and market trends, looking at historical patterns and examples can serve as additional helpful data in your model.
For example, Netflix and Amazon have made some good build decisions while Target’s attempt failed. Netflix and Amazon chose to internalize their content delivery network (Netflix) and cloud computing platforms (Amazon AWS), which allowed them to have greater control, reduce cost, and offer better service to their customers.
On the other hand, Target’s self-developed security system suffered a massive data breach that affected millions of customers. This decision to build internal systems that became vulnerable instead of buying a third-party solution had serious consequences for Target, including financial losses, damage to its reputation, and legal settlements.
In another example, in 2011, Google made the decision to build its own social networking platform, Google+, rather than buying an existing platform like Facebook. Despite significant investment and promotion, Google+ failed to gain significant market share and was ultimately shut down in 2019. This decision to build instead of buy was criticized by some analysts as a waste of resources and a distraction from Google's core business of search and advertising.
None of these examples were all right or all wrong. Digging deeper into each case highlights complexities related to multiple attempts to get it right for Amazon or missed warnings on how it would go wrong for Target. Reverse engineering these cases would offer great learnings but how could an organization predict the future of their decision today?
How to decide?
The decision between building, buying would depend on several factors such as business needs, cost, risk, resources, capabilities, and business priorities, balanced to the anticipated long-term implications of the decision (Figure 1).
Let’s look at a few activities that can help with decision making in this area (Table 2).
A good place to start is to determine your organization’s core competencies. A company's core competencies are the unique capabilities and resources it possesses that fosters sustainable growth and enables a competitive advantage in the marketplace. For example, does your retail organization have the competency to build complex software?
Carefully assess the unmet need in the market and identify customers who can benefit from your technology beyond just yourself. For example, can your internally valuable technology be productized to benefit others?
Identify current competition and future competing technologies and trends that can impact your long-term position (another application of the type of analysis machines can do). For example, can a seemingly non-competing company apply their assets to an adjacent market (yours) that can tighten your reach and market share? Are there emerging technologies that can make yours obsolete?
Inventory both internal resources and investments that need to made in each scenario. For example, is your organization ready to take on the cost of bringing on new talent and build a new team? Would your organization have the financial resources to fund certain development or would it make more sense to outsource to a third-party provider?
Evaluate your company’s history and culture to assess risk-tolerance, cultural tendencies, and past successes and failures. For example, R&D requires a level of risk tolerance and financial commitment that may not be acceptable for your company.
Overall, advanced analytics combined with an open-minded evaluation of your business would make a great difference in the long-term success and longevity of this type of decision.
Is there a third option?
Mergers and acquisitions (M&As) present a third option that may be considered. In this scenario, instead of building a solution in-house or buying a third-party solution, the company may choose to acquire another company that has the desired technology and expertise or join forces through a merger.
In some cases, M&As can leapfrog growth and competitive advantage over building or buying by providing access to new technologies, talent, or capabilities that were not available before. For example, a company that specializes in building software may acquire a company that has developed a proprietary technology that would take years to develop in-house but would have a major impact if quickly integrated within the existing platform.
On the other hand, M&As can also negatively impact the business by introducing new complexities and uncertainties; therefore, both the positive and the negative consequences should be modeled. For example, if a company has already invested in building a custom solution, an acquisition that brings in a superior (in market share or technology) yet competing solution can cause confusion with existing customers. Additionally, an acquisition may result in the duplication of efforts, with multiple teams working on similar solutions or clash with the dominant company culture, causing internal misalignment and poor integration. Here’s some examples of a few successful and failed attempts in leverage M&As to give you an idea about real-world outcomes (Table 3).
Ultimately, the impact of M&As on the “build vs. buy” decision-making process depends on the specific circumstances of the companies involved and the strategic goals of the acquisition. While M&As can provide new opportunities for companies to acquire the technology or expertise they need, they can also disrupt existing plans and add new complexities to the decision-making process.
Overall, an informed decision considers several factors but some of the most important components are thinking for the long-term, leveraging advanced analytics to inform decision making, and building a culture of considering multiple options with an open mind in your organization.
As always, I would love to hear your thoughts on this topic. Feel free to comment here or reach out via email.