How do you grow your company? There are generally three ways: 1. Building on your internal resources (funding innovations, running product development teams); 2. Borrowing from others by making licensing or alliance agreements; or 3. Buying your way in by acquiring other companies.
Put like that, it sounds deceptively simple, but it’s not. Few businesses recognize how difficult it is to choose wisely among even a limited number of options. They skip this critical step and emphasize execution. In fact, research shows that companies can excel at execution and still fail because they choose the wrong mode of development. For instance, they may spend considerable resources on internal development programs, when, actually, they should have been looking outward to catch new trends and acquire new talent and skills.
When attempts to grow falter, the common response is simply to try harder. In doing so, executives fall into the “implementation trap,” whereby they work doggedly to perfect the wrong course of action. They invest in learning how to manage a specific mode of growth and continue refining what they have come to revere as “best practices” attained through their experience with that mode.
It’s tempting for firms and executives to repeat what has worked in the past—to reproduce across each project what they have rigorously developed through learning by doing, repetition and training. Unfortunately, the implementation trap is a deadly one.
Sadly, best practices and implementation excellence will not save you if you make the wrong choices for your growth modes. In research on 150 telecom firms, we found that organizations that used multiple ways to grow outperformed those that focused narrowly on one mode. Indeed, firms that used multiple modes to obtain new resources and skills were 46 percent more likely to survive over a five-year period than those just using alliances, 26 percent more likely to survive than those exclusively using M&As and 12 percent more likely than those relying purely on internal development.
Consider IBM. In the 1980s and 1990s, IBM missed new technologies and market opportunities. An internal report suggested several reasons: 1. Too much emphasis on execution efficiency and short-term results; 2. A related focus on existing markets and offerings; and 3. A tendency to assess growth opportunities using the same performance process and metrics applied to mature businesses. These factors worked well enough in mature markets, but they limited IBM’s ability to explore and develop new businesses.
The challenge was compounded by the company’s dominant ethos: “We do it best.” For many years, IBM placed most of its best internally. Only when it expanded its growth options—while learning to create and manage business experimentation—did IBM regain its stride. It continued to develop products internally and revitalized its ability to launch new products and businesses, but it also actively sought in-licenses, alliances and acquisitions to renew its resource base.
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.
For instance, the Romanian automaker Dacia manufactured licensed versions of French Renault models for more than 30 years without ever developing a single indigenous model (Renault acquired Dacia in 1999). Conversely, the Korean automaker Hyundai initially developed cars in collaboration with Ford; but ultimately, Hyundai successfully marketed its own models.
If a contract is not sufficient to grow your company, consider alliances—these more involved borrowing relationships typically facilitate more substantial 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. Much like a string quartet, focused and compatible alliances involve a limited number of players who know their roles and require limited contact as they weave their parts together.
If you find that you can’t align the goals of the alliance or need to develop an overly complicated partnership to manage a complex set of goals and activities, a full acquisition may be a better option.
Sometimes, focused alliances ripen into acquisitions, as the partnership becomes more complex over time. For instance, Eli Lilly initiated an alliance with Seattle-based ICOS to develop the drug Cialis for ed treatment. After Cialis succeeded in the erectile-dysfunction market, the partners saw an opportunity to use the drug’s base chemistry to develop a treatment for cancer and other medical conditions. Eli Lilly viewed these additional markets as an interrelated part of its growth portfolio and decided to acquire ICOS rather than continue the alliance, putting it on a sounder footing to manage the complicated activities involved in the development and trial of related products.
Rule 4: Define an integration path before embarking on an acquisition. Acquisitions are the best solution when unified ownership and centralized control will help you exploit combined resources more fully than you could achieve with an independent ally, even through a complex collaboration. 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 it is too late—because you discover that you should not have done it in the first place or because you start down a flawed integration path only to realize that there was an easier route to accessing the value of the new combination.
The real killer of most 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 harder. Integration is often ambiguous, time consuming and contentious, so you look for short-cuts. Take the example of Compaq. In the mid-1990s, facing competitive pressures from IBM, Dell and others, it acquired Tandem Computers, a producer of high-end business computers, and Digital Equipment Corporation, a leading maker of computers, hoping that they would allow it to compete with the likes of IBM as a broad-based computer manufacturer. But Compaq had no blueprint for integrating or exploiting the acquired firms and struggled to make the pieces fit together. The resulting fragmentation damaged its ability to compete with better-integrated makers, 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. In a real sense, post-merger integration is more job-shop ingenuity than assembly-line automation. If you learn to map the integration process in a way that key people will embrace, then acquisition is a valuable option. If you cannot identify every step, at least specify the major way stations along the route to creating integrated value. Neglect this critical component of merger success and even a potentially successful deal will waste your time and money—and possibly kill your career.
Rule 5: Revisit your strategy when you realize that the options considered thus 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 alternative modes. If no acquisition path appears to make sense—either because you cannot find a relevant target or cannot identify a viable integration path—revisit more complex versions of the options you rejected earlier, such as more complex alliances or partial acquisitions.
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. Quite simply, it is better to change your destination than to die trying to reach an unobtainable target.
Ideally, firms should start from positions of strength to experiment with new modes of growing before rigid habits and reliance on a dominant mode of growth start hurting their performance. As early as possible, begin to use multiple ways of achieving your aims and of developing goals that allow you to learn the skills of multiple sourcing options. Ideally, you should do this before your company develops an over-focused mindset about how to grow.
Of course, most companies develop habits that are hard to change. Therefore, executives must 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 for a full acquisition. Internal staff members often have difficulty accepting the distinctive quality of third-party resources.
The personal biases of the CEO and other members of the top management team may also complicate thoughtful decision making and can strongly shape the paths that the company selects. Some leaders are compulsive shoppers and use their deal-making savvy to expand their companies; others have the souls of inventors and engineers—preferring the integrity of organic growth. While it’s accepted that leaders need to 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, CEOs and top-management teams must learn how to identify the right ways to grow the company, even when some paths may mean abandoning strategies with which they are comfortable. In parallel, they must develop the internal discipline to select their unique “build, borrow or buy” paths to growth.
Laurence Capron (laurence.capron@insead.edu) 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 (william.mitchell@rotman.utoronto.ca) 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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