Make or buy? | Seth’s Blog

If you’re a writer, it probably doesn’t pay to chop down trees and make your own paper, or even to set up a little machine shop to make your own pens. That’s pretty obvious.

Should the smoothie shop make its own almond milk?

It’s pretty clear that Starbucks should have a team of architects, lawyers and graphic artists on staff, but does it pay for them to make their own cups?

Ford makes engines but they don’t make tires.

The theory of the firm was first written about by Ronald Coase nearly a hundred years ago, and the questions persist.

Consider:

Is there a reliable way for you to purchase the inputs as a commodity, where you have more power than the suppliers do?

Does buying a commodity input free you up to focus on something your customers value instead?

In the case of Ford, there are plenty of companies that are in the tire-making business, and the amount of customer-facing innovation in that industry is low. Since Ford can shop around for tires each year, and since customers don’t care very much, it makes little sense for Ford to make tires.

On the other hand, Apple discovered that there were very few companies that were competing for their chip business, and customers did indeed care about whether or not a laptop would be faster, cooler and cheaper. Rather than allowing a chip company to dominate their future, they set up their own.

If you’re a soloist, you only have a dozen hours a day (tops) to work on your project. How many of those hours are spent replicating something you could buy, the way Ford buys tires?

February 19, 2024