Build, Borrow, or Buy
By Laurence Capron and Will Mitchell
(Harvard Business Review Books, 244 pages, $33)
When it comes to growth, too many companies are one-trick ponies. They might, for example, have a thirst for acquisitions. So they focus intently on gobbling up other companies even when that might not be the best option for them.
In fact, there are four pathways to growth, and professors Laurence Capron, of INSEAD in France, and Will Mitchell, of the Rotman School of Management at University of Toronto, argue that companies need to be alert to each possibility. You can:
- Build internally by using your own resources to come up with a new approach;
- Borrow from other companies by entering a contractual arrangement that gives you access to resources they have, such as a new technology;
- Borrow from other companies by entering an alliance to share resources; or
- Acquire another company.
"Firms that learn to select the right pathways to obtain new resources gain competitive advantage. Conversely, firms that do not carefully weigh competing paths, but instead dutifully replicate a preferred past method – no matter how diligently they pursue it – will often stumble and fall," the authors write in Build, Borrow, or Buy.
The path taken should depend on the company's situation, not the industry. They note that in the smartphone sector, Nokia Corp. initially used a "borrow" strategy, forming an alliance in 1998 with U.K. software company Psion to develop, in conjunction with Ericsson and Motorola, the Symbian operating system. Later, to gain full control of Symbian, Nokia bought the operating system from Psion.
Research In Motion, meanwhile, has pursued a "build" strategy of internal growth with the BlackBerry, using its own staff and technology for enhancements (which might turn out to be insufficient for success). And Hewlett-Packard opted for a "buy" strategy to enter the sector in 2009, acquiring Palm, maker of the breakthrough Palm personal digital assistant.
As for Apple Inc., it has followed a sophisticated strategy that has involved build, borrow, and buy. It developed much of the dazzling operating system for its iPhone internally. But it also pursued technology licences for other components, and initiated a few key acquisitions.
Professors Capron and Mitchell warn of an implementation trap, which arises when companies choose the wrong path (or effectively don't choose the path, but blindly adopt a course of action because everyone else is or because that path was successful in the past).
If you get caught in this trap, you will find yourself working harder and harder to implement the wrong way of obtaining the key resources you need.
"Sticking to a familiar or popular path may work in the short term. But in the long term, the implementation trap becomes a self-reinforcing cycle, with each new resource an occasion for continuously improving implementation of the wrong activities," they write.
They note that a study of the telecommunications industry found that about 40 per cent of companies relied heavily on one way of growing. When the firms supplemented their favoured approach, it was usually done by adding a single additional pathway (such as an acquisition to buttress internal development). But the study found that companies that used multiple approaches were 46 per cent more likely to survive over a five-year period than ones that used only alliances; 26 per cent more likely than ones using only mergers and acquisitions; and 12 per cent more likely than those relying only on internal development.
The authors offer four primary questions to help oversee your selection.
First, are your internal resources relevant to the challenge you see and sufficient for you to successfully move forward? They note, for example, that most traditional publishing companies did not have the proper print-media resources to move into the digital area without bringing in outside help through acquisitions and partnerships.
Second, if you don't have the internal resources, you must consider whether the targeted resources you need are tradeable, so that they can be borrowed from other firms through contracts.
Thirdly, if the resources are not easily tradeable, how close do you need to be with a resource partner? Is an alliance relationship sufficient, or do you need greater control, such as through an acquisition?
If you ponder an acquisition, the fourth question is whether you can successfully integrate the new company into your enterprise. The book shows how often integration goes awry.
Beyond these high-level questions, the book offers a series of more tactical questions and tips to help as you probe more deeply into the build-borrow-buy possibilities. It's not an easy book to read, wrapped in academic stiffness, but the keen insights stir the mind and offer many rewards.
Postscript
In Howard's Gift (St. Martin's Press, 279 pages, $28.99), New York-based entrepreneur Eric Sinoway shares the wisdom about life and careers as taught by his former professor Howard Stevenson over four decades at Harvard Business School.
Professors Allan Cohen (Babson College, Massachusetts) and David Bradford (Stanford Graduate School of Business, California) explain how to persuade key decision makers and turn a difficult boss into an ally in Influencing Up (John Wiley, 244 pages, $29.95).
Special to The Globe and Mail
Harvey Schachter