9/24/2019 Build, Borrow, or Buy: Selecting Successful Paths to Growing Your Company | The European Financial Review

Build, Borrow, or Buy: Selecting Successful Paths to

Growing Your Company
February 28, 2014

By Laurence Capron and Will Mitchell

Most companies are very good at identifying the resources they need to grow.
However, organisations get into trouble because they pay much less attention to the
right way to obtain resources than to the task of identifying them. Below, Laurence
Capron and Will Mitchell discuss the paths to growing a company successfully.

There is something broken in the way many businesses obtain the resources they need to
grow. Most companies are very good at identifying what those new resources are, and nearly
all of them take that challenge seriously. Pursuing a new opportunity indeed requires one or
more types of resources firms don’t yet possess. These might consist of some combination of
assets, skills, know-how, technologies, methods, and broad competencies. And yet we have
seen company after company –even highly regarded ones- get into trouble as they grow,

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because they paid much less attention to the right way to obtain resources than to the task of
identifying them.

At the most basic, your business has three main paths to growth: 1. Build on your existing
internal resources; 2. Borrow from others via contracts or alliance agreements; or 3. Buy other
companies. Of course, put like that, it sounds deceptively simple. But it’s not. Many businesses
struggle in choosing among even this limited set of growth options. Leaders often skip the
critical first step of deciding which way to obtain new resources, believing that the key success
factor lies in working hard to execute whatever method they chose.

Yet, in truth, our research shows that companies can put huge effort into execution and still fail
because they choose the wrong mode of development – quite simply, attempting to do the
wrong thing really well is a recipe for disaster. Some firms invest resources on internal
development programs, when, actually, they should have been looking beyond their existing
resources to identify new ideas and obtain new skills. Others turn too quickly to external
sources, missing opportunities to create new value from their current internal activities.

The Implementation Trap

When firms struggle as they attempt to grow, leaders commonly simply try harder. In doing so,
executives fall into the “implementation trap,” in which they and their staff work hard to perfect
the wrong course of action. They invest in learning how to manage on main mode of growth
and continue refining their “best practices” with that mode.

It is tempting to repeat what has worked well in the past. Unfortunately, the implementation
trap is deadly. At its heart, implementation excellence based on prior best practices will not
save you if you make the wrong choices of growth mode.

In our research on 150 telecom firms, we found that companies that used multiple ways to
grow outperformed those that focused on a single mode. Indeed, firms that used multiple
modes to obtain new resources were 46 percent more likely to survive over a five-year period
than those relying on alliances, 26 percent more likely to survive than those relying on M&As,
and 12 percent more likely than those relying on internal development.

Similarly, consider Xerox and Sanofi. During the 1980s, Xerox emphasised internal
development while actively eliminating opportunities that were not consistent with its existing
technologies and office system markets – for instance, it spun off the companies that became
Adobe and 3Com. Similarly, in 1990s, the French pharmaceutical company Sanofi missed key
market changes as it emphasised creating new drugs in its internal laboratories. These
practices worked well enough in mature markets, but they limited the companies’ ability to
create new product lines in response to market transformation. Only when they expanded their
growth options—while learning to create and manage business experimentation—did Sanofi and
Xerox regain their stride. They continued to develop and launch products internally, but also
actively sought in-licenses, alliances and acquisitions to renew their resource base.

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Some firms invest Five Rules for Selecting Growth Modes

resources on internal
development programs, Rule 1: Be honest about the relevance of your internal
when, actually, they resources.
should have been
looking beyond their
We all believe that we have outstanding skills; that is why we
existing resources to
have flourished so far. Yet executives need to be clear-eyed
identify new ideas and
about whether their firms’ existing skills are strong enough to
obtain new skills.
meet new competitive opportunities. Companies often grossly
underestimate the gap between what they have and what they
need, failing to recognise the difficulties of conducting in-house projects.

Many established European telecom firms fell into that trap when they began to move into
data-networking environments in the 1990s. Several of the moves failed because they over-
relied on traditional internal development processes. Eventually, the surviving firms found that
they needed alliances and acquisitions to complement internal R&D.

Much earlier, in the early 1900s, the leading steam locomotive manufacturers recognised
challenges from diesel and electric locomotives and worked tirelessly to produce the most
efficient steam locomotives ever seen — and, of course, despite their hard work, the ex-
leaders that engaged in this obsolete innovation, such as Alco, Baldwin, and Lima, disappeared
into the annals of business history and onto the logos of toy trains.

More recently, both Nokia and Research In Motion have struggled to respond to advances in
consumer Smartphones; both firms over-estimated the relevance of their existing internal
resources to respond to advances from companies such as Apple, Google, HTC, and Samsung.

Rule 2: Acquisition should be the last resort.

In their obsession with control, executives often fall for M&A as a seductive shortcut to growing
their businesses, neglecting the borrowing modes of contracts and alliances. Clearly, strong
acquisition programs can leap-frog firms past their rivals. Sophisticated acquirers such as
Siemens, GlaxoSmithKline, Haier, Google, Apple, General Electric, Johnson & Johnson, and
Cisco are great examples. However, M&A deals need to complement simpler modes of external
sourcing, rather than substitute for them – each of these firms is equally active in internal
development, contract, and alliance activities.

Bank-insurance acquisitions are a good example. Seeking to grow revenues by cross-selling

insurance products, many banks used M&As as short cuts to obtain product capabilities for the
insurance market. Most failed — Citigroup, ING, and others have been divesting their insurance
arms. These failures have reawakened interest in contractual and joint-venture relationships,
which recognise insurance as a complex specialty in which acquisitions can destroy the
motivation of key employees at the target insurance business. Alliances provide opportunities
to learn from a variety of independent partners—often under more flexible terms and at lower
cost than acquisitions, while keeping motivation honed in on appropriate goals and activities.

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Rule 3: Learn to use contracts and alliances to obtain

Ideally, you should start
new resources.
from a position of
strength as early as
possible as you Learn to use basic contracts for external resources when the
experiment with new nature of the resources you want and the working relationships
modes of growing, you will need to build with your resource partner can be defined
before rigid habits and clearly through a contract. In such cases of “tradable”
reliance on a dominant resources, success often arrives smoothly. A thoughtful
mode of growth start contracting strategy helps you shop for target resources without
hurting your
having to integrate an entire organisation or manage a complex
performance; begin to
alliance.
use multiple ways of
achieving your goals.
At the same time, a contracting strategy is most effective when
coupled with strong internal capabilities that help you absorb
new knowledge into your firm — relying primarily on external sourcing will make your firm
partner-dependent. For instance, in the 1970s, AIDC in Taiwan successfully introduced a
licensed version of the Northrop F-5 fighter, but failed in its subsequent attempt to switch to
independent production of the Indigenous Defence Fighter project, incurring problems that
many observers believe occurred because AIDC attempted to apply ideas from the F-5 design
that they did not understand and did not suit the new fighter.

If a contract is not sufficient to grow your company, consider alliances — more involved
borrowing relationships that facilitate more extensive collaborative resource sharing. An
alliance has the greatest chance of success when your partner’s goals are aligned with yours
and when the scope of collaboration is focused on a few points of contact at the partners. Much
like a string quartet, focused and compatible alliances involve a limited number of players who
know their roles as they weave their parts together.

If you find that you cannot align the goals of an alliance or need to develop an overly
complicated partnership to manage a complex set of activities, a full acquisition may be a
better choice. As we said earlier, though, hold off on selecting acquisitions only when simpler
modes will not work.

Sometimes, focused alliances ripen into acquisitions, as the partnership becomes more complex
over time. In 2013, for instance, the British pharmaceutical company AstraZeneca took over
full ownership of a diabetes products alliance with the U.S. firm Bristol-Myers Squibb, as the
activities gained increasingly complex global and product line scope. Bringing the activities
inside one company will allow AstraZeneca to manage the complicated activities involved in the
development and marketing of a broad portfolio.

Rule 4: Identify an integration pathway before embarking on an acquisition.

Acquisitions make sense when unified ownership and centralised control will help you exploit
combined resources more fully than you could achieve with an independent ally. But unlocking
this value can be a challenge. Acquisitions require many steps to exploit their potential value.
Too often, you get swept up in the potential of a deal and fail to lay the groundwork for how to
make the deal work — until you discover that you should not have done it in the first place.

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The obvious killer of failed deals is weak post-merger integration. Negotiating deals is fun;
figuring out how to make them work and then actually doing what that takes is hard work.

Even before the post-deal integration challenges, though, comes the need for selection:
deciding to use an acquisition when there were no clear milestones to success or you simply
would not be able to motivate key people from the target and base business to remain after the
deal. Again, no matter how hard you work to integrate a deal, you are unlikely to succeed if the
deal did not make sense.

Take the example of Compaq. In the mid-1990s, facing competitive pressures from IBM, Dell,
and others, Compaq acquired Tandem Computers and Digital Equipment Corporation, hoping
that the new skills would allow it to compete as a broad-based computer manufacturer. But
Compaq had no roadmap for integrating the acquired firms and struggled to make the pieces fit
together. The resulting fragmentation damaged its ability to compete, resulting in its
acquisition by Hewlett-Packard in 2002.

Even firms experienced in M&A struggle with this piece of the puzzle. Some manage to develop
templates that fit various types of acquisitions, but most need to adapt their approach as they
move into new markets and businesses. Bank One, for instance, developed a strong template
for identifying and integrating local banks as it built a regional network in the central US, but
then over-estimated the relevance of its selection and integration skills when it bought the
much larger bank First Chicago and the credit card company First USA in the late 1990s. The
resulting turmoil led to Bank One’s acquisition by JP Morgan Chase in 2004.

In a real sense, post-merger integration requires more job-shop ingenuity than assembly-line
automation. If you learn to identify targets where you can map the integration process in a way
that key people will embrace, then acquisition is a valuable option. You will often not be able to
identify every step, but at least specify the major milestones along the route to creating new
value. Neglecting these critical identification and mapping components will waste your time and
money—and possibly kill your career.

Rule 5: Revisit your strategy when you realise that the options that you have
considered so far will not work.

Acquisition is the mode of last resort, but it does not mean that you should undertake an
acquisition simply because you have rejected the simpler modes. If no acquisition path appears
to make sense—either because you cannot find a relevant target or cannot identify a viable
integration path—you may want to revisit more complex versions of the options you rejected
earlier, such as more complex alliances or partial acquisitions.

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At the same time, be prepared to change your goals, as there are almost always other
opportunities out there that may be more viable targets for growth. If you cannot identify a
successful route to your first goal, then step back and consider other opportunities. It is better
to change your destination than to die trying to reach an unobtainable target.

An alliance has the Practice for Flexibility

greatest chance of
success when your Ideally, you should start from a position of strength as you
partner’s goals are
experiment with new modes of growing before rigid habits and
aligned with yours and
reliance on a dominant mode of growth start hurting your
when the scope of
performance. As early as possible, before your company
collaboration is focused
develops an over-focused mindset about how to grow, begin to
on a few points of
contact at the partners.
use multiple ways of achieving your goals – and, indeed,
establish goals that allow you to learn the skills of multiple
sourcing options.

Of course, companies develop habits that are hard to change. Therefore, executives must learn
how to overcome resistance from entrenched groups and leaders. Powerful M&A teams are
often reluctant to turn a prospective acquisition deal into an alliance. Company licensing teams
may not be able to see the value of a more complex alliance. Internal staff members often
have difficulty accepting the distinctive quality of third-party resources.

The personal biases of the top management team can strongly limit a company’s growth paths.
Some leaders are compulsive shoppers and deal-makers; others have the souls of inventors
and prefer what they view as the integrity of organic growth.

While leaders must push their companies to change, we believe that pushing a company to
avoid relying on too few ways of changing is just as vital. To succeed, top-management teams
must learn how to identify the right ways to grow the company, even when some paths may
mean abandoning comfortable strategies. In doing so, they must develop the internal discipline
to select their unique “build, borrow or buy” paths to growth.

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Key Takeaways

– Companies often over-commit to a favourite growth strategy — working doggedly to perfect

the wrong course of action.

– Firms that learn when to use multiple ways to grow tend to outperform those that focus
narrowly on one mode.

– Be wary of an acquisition-dominated growth strategy—many M&As fail.

– If you cannot identify a successful route to your first goal, step back and revisit your strategic
goals.

Go to top

About the Authors

Laurence Capron ([email protected]) is the Paul Desmarais Chaired Professor of

Partnership and Active Ownership at INSEAD, as well as director of the INSEAD Executive
Education Programme on M&As and Corporate Strategy. Along with Will Mitchell, she
coauthored Build Borrow or Buy: Solving the Growth Dilemma.

Will Mitchell([email protected]) is the J. Rex Fuqua Professor of

International Management and Professor of Strategy at Duke University’s The Fuqua School of
Business, as well as visiting professor of strategic management, while holding the Anthony S.
Fell chair in New Technologies and Commercialization at the University of Toronto’s Rotman
School of Management.

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