How to Grow your Company

Five Rules for Choosing a Growth Mode

Rule 1: Don’t overestimate the relevance of your internal resources. We all believe that we have outstanding skills; that is why our careers and our companies have flourished so far. Yet executives need to be honest and clear-eyed about whether their existing skills are strong enough to meet the competitive challenges and opportunities they face. Companies often grossly underestimate the gap between what they have and what they need. In their determination to develop resources internally, they fail to recognize the difficulties of conducting in-house projects.

Many established European telecom firms fell into that trap when they began to move into the data-networking environment in the late 1990s. Several of the early moves failed because they over-relied on traditional internal skills and development processes. Eventually, they found that they needed alliances and acquisitions to complement their internal R&D. Similarly, most media firms have struggled to blend digital activities with their traditional print operations. When Axel Springer, the leading German publishing group, discovered that it couldn’t generate enough growth by turning traditional print into digital formats, it changed paths and embarked on multiple acquisitions of “native” Internet businesses like AuFeminin.com.

Rule 2: Acquisitions should be the last resort, not the first choice. In their mania for control, executives often fall for M&A as a seductive shortcut, neglecting the borrowing modes of contracts and alliances. To be sure, a well-conceived, well-executed acquisition program can slingshot a firm past rivals by several years. Active and sophisticated acquirers like Google, Johnson & Johnson and Cisco are good examples. However, they are the exception rather than the rule, since about 70 percent of acquisitions fail. They often destroy the target’s capabilities, while being disruptive and costly for the acquirer.

Bank-insurance acquisitions are a good example. Seeking to grow their revenues by cross-selling insurance products, many banks used M&As to snap up the product capabilities and scale they needed in the insurance market. Most failed. Citigroup, ING and others have lately been divesting their insurance arms. These failures have awakened interest in contractual and joint-venture relationships, which recognize insurance as a complex specialty. Alliances provide opportunities to learn from a variety of independent partners—often under more flexible terms and at lower cost than acquisitions.

Rule 3: Learn to use contracts and alliances to obtain new resources. Learn to use basic, external-sourcing options when the nature of your resources and the working relationships you need from your resource partner can be defined clearly through a contract. In such cases, resources are “tradable” and success often comes smoothly and rapidly. Through a good contracting strategy, you can shop for desirable resources without incurring the costs of integrating an entire organization or of managing a complex alliance. Contracting strategy is most effective when coupled with strong internal capabilities that help you absorb new knowledge into your firm. Relying exclusively on external sourcing makes the firm vulnerable and partner-dependent.