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Transcript: To buy or grow organically? That is the CEO’s question

KARL MOORE – This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am delighted to speak to [professor of strategy] Phanish Puranam from [international business school] Insead.

So Phanish, you have been looking at some very interesting research looking at key corporate strategic decisions. What are the key decisions that corporations have got to make these days?

PHANISH PURANAM – So when I talk about corporate strategy decisions, I mean the decisions that the people in the headquarters of a multibusiness firm have to take.

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So these tend to be decisions around the portfolio. So how many different businesses we will be in and which ones? How we enter them – organically or inorganically? How do we get out of them – do we diversify and if so, when and in what format? And how do we work increasingly with external partners who are not part of the firm but whom we have to work closely with?

Decisions around each of these are what I think of as strategic decisions in a corporate context.

KARL MOORE – One of the key decisions you mentioned was entering a new business. Tell us a bit more about that.

PHANISH PURANAM – The first thing to ask yourself when considering entering into a new business is what is the value that will be created for you to be jointly present in the new business and your old portfolio?

If there is no unique source of value that you can create as a corporate strategist by being present in both of these, then you shouldn't even be considering it. Assuming you pass that test – you decide that, in fact, your shareholders are better off by your being jointly present in the old and the new businesses – the next set of questions are how do you get into the new business?

Broadly speaking, there are two alternatives to consider – there is organic growth, and there is inorganic growth. Now, organic growth is about creating a new division or starting a new project in a much smaller scale, funding it and watching it grow. It takes time, it's uncertain, and sometimes the investments don't pay off. On the other hand, you maintain complete control and you can shift the direction this will grow in with a very high degree of control.

Inorganic growth is about relying on external partners, either through acquisitions or alliances or joint ventures. These are faster typically, not because an alliance is necessarily quicker to assemble, but because you are typically choosing a partner who has already solved the problem you are trying to solve. So that is where you get the speed advantage but once you've found the partner, you need to structure a contractual agreement that will work for them and will work for you. In the case of an acquisition, you have to fill out an acquisition premium.

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Finally, there is the entire issue of post-merger integration if you acquire this partner. So the tradeoff here is about the speed that you gain by working inorganically against the cost of partner selection, contract creation, and post-merger integration.

So that is the tradeoff that we have been looking at quite closely.

KARL MOORE – So do you see any trends that we tend to be favouring one or the other in the current circumstance? And if so, why?

PHANISH PURANAM – M&A [mergers and acquisitions] has been probably the most popular growth mode for CEOs for a long time. Year on year, you look at the M&A markets and, there are recessionary cycles, but in the long term it looks like M&A as a corporate strategy for growth remains very popular.

What has changed, I think, is the increasing realization that alliances can be a very useful substitute. So not every transaction with an external partner needs to end in you buying them. Strategic alliances, joint ventures, long-term relationships up and down the supply chain, but also horizontally, are increasingly being seen as very credible alternatives to actually acquiring a partner and going through the pain of post-merger integration.

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