JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
The Make-or-Buy Question in Mature Industries
BUSI 613
Dave Kimball- Liberty University
Dr. Easley
JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
Authors Purpose
The authors were successful in presenting the importance being decisive and having a
strategic operating plan. Mature and potentially stagnate industries need leaders that can “grind”
through tough times. They need leaders that can face risk, and aren’t afraid to fail. Playing it
safe and getting in before dark are recipes for mediocrity, not success.
Application of supply chain management theory relevant to article (Vertical Integration)
Vertical integration is a strategy used by companies when they choose to take control of
their suppliers and distributors. To further define the concept, forward integration involves
distributors; backward integration focuses on greater control of previous suppliers. Companies
should consider vertical integration when the needed products can be produced cheaper in-house.
They should also ensure the scope of the firm can support the endeavor.
If the integration is successful companies can lower costs, improve supply chain
coordination, and develop or expand core competencies. This strategy may not always be the
best choice for an organization due to a lack of sufficient resources that are needed to venture
into a new industry[Str13]. If the endeavor is unsuccessful, less competition can lead to lower
quality products, less flexibility, and the potential for competitive disadvantage.
Background of the issue
Many company executives have stumbled over the make-or-buy question. When should
a company rely on itself for certain parts and when should those parts be sought from outside
manufacturers? Mature industries, such as auto manufacturing, have long debated the key topics
of vertical integration and remaining competitive in the marketplace when the majority of the
industry is moving offshore[Fil08].
The researchers chose to study three companies involved in the Portuguese footwear
industry. The study was conducted over a 15 year period from 1990 to 2005. The researchers
discovered that manufacturing shifted away from developed countries, such as the US and
southern Europe, to emerging markets such as China, India, and Eastern Europe. The reason for
JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
this shift was undoubtedly the labor market. They also noted that the attitude toward footwear
had moved from strictly utilitarian to more of an expression of lifestyle choices.
The companies; Basilius, J. Sampaio & Irmao, and Investvar were the subjects in the in-
depth study. They were chosen because of similar size and business activity, but later
experienced different results in business performance. Basilius started strong, and finished
weaker, ten years later. J. Sampaio & Irmao started weak and finished well, And, Investvar was
the industry example for starting strong and finishing extremely well.
Researchers wanted to discover the correlation between business activity and long-term
benefit to the company. They examined the general business processes of product design,
marketing, and distribution. Researchers also studied industry specific practices, such as cutting
and stitching of the leather and the production of shoe soles[Fil08].
The three companies made the decision to perform supporting tasks in-house, subcontract
the work out, or a combination of both. Researchers wanted to know how the individual
companies arrived at the “vertical integration” decision and the effect it would have on the
company over the long term.
As with any business, each company had to endure up-and-down cycles in the
marketplace. Their individual results seem to be effected by how they reacted to the changing
environment. One company, Basilius, was the most conservative. They did not choose to
“attack” the marketplace. Instead, they stayed close to, and guarded, their core competencies. J.
Sampaio & Irmao, and Investvar were more aggressive; they chose to expand activities
“upstream and downstream” of their core competencies. The choice to “attach the risk” paid off
well for the latter two companies. They were both stronger at the conclusion of the study. A
parable from the Bible comes to mind.
The Parable of the Talents
Matthew 25:14-18 (NASB)
JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
14 “For it is just like a man about to go on a journey, who called his own slaves and
entrusted his possessions to them. 15 To one he gave five talents, to another, two, and to another,
one, each according to his own ability; and he went on his journey. 16 Immediately the one who
had received the five talents went and traded with them, and gained five more talents. 17 In the
same manner the one who had received the two talents gained two more. 18 But he who received
the one talent went away, and dug a hole in the ground and hid his master’s money[Bib18].
Managerial Implications
Remaining competitive in a stagnate industry
The need for competent managers will increase as industries mature and potentially
stagnate. There is a common misconception in business that only the most gifted and talented
managers should be placed in rapidly growing industries. This mindset leaves mature and
stagnate businesses with less-aggressive or over-the-hill management[Ric79].
As businesses mature, product or service demand decreases, making it imperative that
managers with strong leadership capabilities are at the helm. It may not be the correct decision
to drop stagnate or slow growing divisions of the company. Without the revenue generation of
those “less glamorous” divisions, leaders must replace the benefit they provide, such as covering
a portion of company overhead. Wise leadership proves invaluable.
Some harsh realities exist for the mature industry. Periods of rapid growth do not usually
return to mature industries. If managers are to enjoy future success, they must develop strategies
based on “less” or slowing demand. Market share for the larger companies will increase as
competition intensifies, and eliminates the weaker companies.
The “Big Three” have not always been the only American automobile manufacturers,
they just happen to be the ones that have survived over time. Mature or stagnate industries are
NOT immune to significant changes in technology, production processes, and distribution. Less
demand does not prevent the need for agility; it can make it harder to be so. Increased
JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
advertising can lead to higher inventory investment, manufacturing costs, and lower profitability;
it is seldom useful in mature industries[Ric79].
Where to find leaders with courage?
It happens all the time, the call to commit and act; to make hard choices and take risks;
and to do what’s unpopular and right. How people live is far more important than what they say.
Fact is, leaders don’t show courage just by taking a stand or facing down a taboo topic. Real
courage is a mentality that’s reflected in day-to-day lives.
Strong leaders avoid backstabbing, they're not afraid of work. They can make hard
choices, they're good listeners, and they can think for themselves. Courageous leaders know
when to step up, give direction, or take action. They care little for the trappings of leadership,
focusing instead on setting the example for their peers[Jef13].
Summary
The authors present the concept of vertical integration; the strategy used by companies to
take control of their suppliers and distributors. Companies should consider vertical integration
when the needed products can be produced cheaper in-house. They should also ensure the scope
of their firm can support the endeavor. Many company executives stumble over the make-or-buy
question.
The researchers chose to study three companies involved in the Portuguese footwear
industry. They wanted to discover the correlation between business activity and long-term
benefit to the company. They examined the general business processes of product design,
marketing, and distribution. The three companies made the decision to perform supporting tasks
in-house, subcontract the work out, or a combination of both. Researchers wanted to know how
JOURNAL ARTICLE REVIEW: THE MAKE OR BUY QUESTION IN MATURE
INDUSTRIES BUSI 613
the individual companies arrived at the “vertical integration” decision and the effect it would
have on the company over the long term.
References
Bible Gateway. (2018, Oct 31). Matthew 25:14-30. Retrieved from Bible Gateway:
https://www.biblegateway.com/passage/?search=Matthew+25%3A14-30&version=NASB
Filipe Santos, A. A. (2008). The Make-or-Buy Qusttion in Mature Industries. MIT Sloan Management
Review, 5-6.
Schmitt, J. (2013, Apr 08). 12 Signs of Cowardly Leadership. Retrieved from Forbes.com:
https://www.forbes.com/sites/jeffschmitt/2013/04/08/12-signs-of-cowardly-
leadership/#1383957b3b6c
Silk, R. G. (1979, Sep). How to Compete in Stagnant Industries. Retrieved from Harvard Business Review:
file:///E:/BUSI%20613/Vertical%20Integration/How%20to%20Compete%20in%20Stagnant
%20Industries.html
Strategic Management Insight. (2013, Apr 13). Vertical Integration. Retrieved from Strategic
Management Insight: file:///E:/BUSI%20613/Vertical%20Integration/Vertical%20Integration%20-
%20Strategic%20Management%20Insight.html
