MBA in 2 Minutes | Lesson 22: Let us Build/Borrow/Buy

We will be solving practical challenges through MBA concepts. No theory only applications!

As a founder or a manager, we are constantly working to expand either core or peripheral services for growth. However, the important strategic question that always haunts us is whether we should build/borrow/buy that new service ?

Build/Borrow/Buy is a competitive strategic concept that allows you to decide to build/outsource/purchase from the market. It is an extremely important decision because organizations cannot build "everything" inhouse and not all important services should be outsourced. So how do we then take a rationale well thought-out decision ?

The decision making can be based at an initial level through a 2 cross 2 matrix (well I am BCG consultant; for those who didn't get the joke should read who started 2 cross 2 analysis :p)

X Axis: Knowledge and Capability Fitment

Y Axis: Organization Need Fitment

1. When do you Build

One should build the resource in-house when they realize that they are sitting on the top right quadrant of the 2 by 2 i.e. high knowledge and high organization fitment.

2. When do you Borrow (Non Equity Based Alliances)

or Buy (Equity Based Partnerships)

One should consider external help when either of the parameters are low or both of them are low. Below chart shows examples of both alliances as well as equity based partnerships.

2A. When do we go for Alliances

Alliances should be preferred when-

I. Nature of the resource is low on tradabilility

II. Success outcomes of the project can be relatively low.

III. Scope of the project is extremely Narrow (example- call centres)

Hence, if your alliance partner tomorrow pulls back the chord, you should be able to find 100 such partners because the project initially was low on organization fitment or success outcome.

2B. When do we go for Partnerships

Partnerships should be preferred when-

I. Nature of the resource is low on tradabilility

II. Success outcomes of the project can be high

III. Scope of the project is extremely wide (go to market entry)

IV. Control needed is High (recall Reliance Industry way of growing)

In the end, as I always say MBA tools help you think more systemically and scientifically thereby reducing scope of error in decision making. Next time whenever you read about an acquisition or alliance in newspaper, you may apply the above framework to a) understand strategies of organization b) evaluate their decision making.

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