How to accelerate growth is one of the most important questions companies face every day. So why is it that so many fail or stagnate? We spoke to Dr. Laurence Capron, a professor at INSEAD and the co-author of ‘Build, Borrow, Or Buy’ about why companies fail at their central task.
‘Build, Borrow, or Buy’ refers to the three major strategies available to a company. They can “build,” rely on what they already have, “borrow,” make temporary arrangements to get resources, or “buy,” go out and purchase what they need.
Dr. Capron argues that far too many companies focus on just one strategy, which hurts them in the long run.
Build: It’s not always possible to go it alone
Internal innovation may be the ideal, but it’s difficult. Especially at big companies, finding the most innovative people and pointing them in the right direction can be incredibly hard.
“Internal innovation always has limits,” Capron says, “not only because firms do not have the right technical skill or the right knowledge base, but also because usually a new activity faces resistance by entrenched people.”
The companies we think of as incredibly innovative are well aware that they have to go outside.
“Even if you think of some company like Apple, for example, which has very strong internal innovation, even Apple has been able to build an ecosystem of resource partners and to make focused acquisitions when it needed to.”
Borrow: Companies often ignore one of their most powerful tools
Temporary agreements between companies are one of the most powerful but underused tools available. They allow businesses to get essential resources or gain experience without committing too much. However, companies ignore them because they’re too focused on control. Dr. Capron explains that:
“Companies can be very suspicious of partnerships. If you think of firms which have been used to growing organically, they want to have full control. When they realise that internal development will not be sufficient, what they do is that they jump to an acquisition, believing that full control will give them competitive advantage.
This is also true for entrepreneurial firms, usually mid sized companies. They will focus a lot on having the best products and the best business model, they don’t really strategize in terms of finding viable paths for growing their companies, they will also overlook the use of alliances or different types of contractual agreements to gain resources and to gain legitimacy.
If you think of a firm like Tesla Motors, very early on they were able to use very clever alliances and contractual agreements to get access more resources. When they made the alliance with Daimler to manufacture their electric car, Daimler brought the manufacturing capability, but more importantly the alliance brought them a lot of legitimacy in the market.”
Big companies can test the waters before jumping in, and small companies can access resources they can’t afford on their own.
Buy: Successful strategies become a straightjacket
At their best, acquisitions are narrowly targeted and quickly integrated into a company. Too often, that’s not the case. Firms, worried about growth, competition, or a new technology, go out and buy companies that are a bad fit.
“If you think of firms which focus on acquisitions” Capron says, “they get early success with acquisitions they build some processes, some habits, and keep on making new acquisitions. At some point, the one specific mode becomes their straightjacket.”
That attitude can be entrenched in an organisation. Capron recalled a recent conversation with an executive:
“A few days ago, I was talking to an executive of a big media company in France and he told me, in my company we do a lot of internal development, and we know how to finance an M&A deal. Everything in the middle, we don’t know how to do it. We don’t know how to engage without acquiring and killing them to some extent, we don’t know how to engage with partners.”
The problem’s often at the top. “We all know that mergers and acquisitions attract a lot of the attention of the CEO,” Capron says.
In contrast, the teams that focus on licensing and alliances are usually farther down the corporate ladder. Those options aren’t considered at the same level as internal development or mergers, when they can be just as important and much cheaper. Knowing about a company by first forming an alliance can prevent costly acquisition failures.
Sometimes, it takes a crisis to change, but the best companies formally pursue a balanced strategy
Dr. Capron cited companies like Sanofi Aventis and Merck that suddenly found themselves completely dependent on internal development, but without anything to show for it. Then, they suddenly overemphasized acquisition and external development and neglected internal research. It’s not a terribly efficient cycle.
A good model is Cisco, which made many successful acquisitions in the 1990s, but eventually became too fragmented and chaotic. Now it makes a conscious effort to consider all options.
The growth decision needs to really be a decision, not a default.
Find Dr. Capron’s book here.
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