Build, Borrow, or Buy. Laurence Capron
new plants. Internal development is the alternative to the three forms of external sourcing: borrowing via contracts, borrowing via alliances, and buying (acquisition).
Build—internal exploratory environment: an independent space where teams—working either as Skunk Works or as formally chartered, independent units—can experiment with new ideas, resources, and business models. An exploratory approach can be valuable as a way of buying time to learn about uncertain opportunities.
Borrow—contract: arm’s-length agreements to buy existing products or services from third parties. Such arrangements include purchasing outright off-the-shelf technologies and services; in- or out-licensing the use of specialized knowledge sources, software, and services; basic market agreements; and consulting contracts.
Borrow—alliance: ongoing collaborative partnerships with other firms or institutions (e.g., a university). In an alliance, two or more partners agree to commit resources to work together for a period while retaining strategic autonomy. Examples include equity and nonequity joint ventures, R&D and marketing alliances, corporate venture capital investments, multiparty consortia, franchises, and detailed outsourcing agreements. Alliances may involve relatively simple agreements or far more complex relationships, including multistage contracts, cross-investments, and complicated rights agreements. All forms of alliances involve ongoing interactions between independent actors that commit money and effort to sustain work over the duration of the agreement. The partners’ independence means that they each have strategic autonomy; one firm cannot force its partners to do something.Alliances typically are guided by formal contracts, but all contracts are inevitably incomplete in the sense that they cannot fully specify all possible future events.
Buy—acquisition: cases in which a firm purchases at least a controlling interest in another firm to obtain unfettered use of its resources. Acquisitions provide unified strategic direction for both the buyer and the target firm. Buyers sometimes continue to operate a target firm as an independent entity, at least initially, but have the right to integrate people and other resources across the two firms to combine operations and cocreate new resources. Acquisition might mean purchasing entire firms or individual business units from multi-unit corporations.
Divestiture: the sale of business units, product lines, and major assets.
The Resource Pathways Framework
Business ecosystems change constantly. Opportunities come and go quickly. The race is won by those most agile and swift. To compete and grow, companies worldwide must regularly expand or reinvent their resources. Media businesses need new digital offerings, retail banks must add Internet banking services, automakers face pressure to offer green technologies, food companies’ customers demand more-healthful products, and pharmaceutical firms need to constantly absorb the fruits of biomedical research. Indeed, there is hardly a sector in which change is not a permanent wild card.
The pace of this market-driven, technological, regulatory, and competitive ferment requires that companies continuously analyze and address the gaps in their existing knowledge and skills. Inevitably, these gaps present leaders with important choices.
Closing those gaps is an unending business challenge. Companies face a dizzying diversity of expert skills and knowledge sources and the growing global competition to acquire them. This competition spans both the developed world and the fast-growing emerging markets. More and more, firms find themselves navigating a global expanse of evolving geopolitical and institutional boundaries, a reality that affects new entrepreneurial businesses and deep-pocketed, established companies alike.
But no matter their size or pedigree, firms seeking to bridge resource gaps have a limited number of options: they can innovate internally (build); enter into contracts or alliances and joint ventures (borrow); or merge or acquire (buy). This trio of straightforward categories masks a complex mix of considerations that make selection difficult and outcomes uncertain. Articles in the business press highlight businesses’ frequent failure to innovate successfully, to sign contracts or forge alliances that remain harmonious and productive, or to realize the predicted synergies of a seemingly potent acquisition.
Our research and experience have found that companies of all kinds across the globe struggle to find and manage the resources critical for their future success. Failure to obtain new resources has two root causes. First, and most visibly, firms often struggle to implement the paths they have chosen for obtaining resources; second, and less well understood, the paths chosen are often the wrong ones.
Because each path presents many difficulties, executives must understand when one path makes more sense than another. Indeed, choosing a wrong path will, in itself, make implementation more difficult and can lead to the implementation trap. In this trap, the firm fails because it tries harder and harder to implement the wrong way of obtaining key resources.
Our core message throughout this book is simple: firms that learn to select the right pathways to obtain new resources gain competitive advantages. 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 fail. They will lose ground to firms that pursue more disciplined approaches of reviewing, selecting, and balancing the different resource-development paths. (“A Tale of Two Deals” highlights the advantages and disadvantages of various pathways.)
A TALE OF TWO DEALS
Selection Mistake Meets Selection Success
The 2002 purchase of the Compaq Computer Corporation by Hewlett-Packard (HP) embodies a tale of two selection processes—one successful and the other not.
At the time of the $25 billion deal, HP’s acquisition of Compaq was highly controversial. Yet, despite many predictions of catastrophe, the deal helped HP complete its transformation from a scientific instruments company into a personal-computing leader.
Less successful was an earlier pair of acquisitions by Compaq. From its founding in 1982 through the 1990s, Compaq grew to become one of the world’s leading business and retail PC manufacturers. But in the mid-1990s, the company faced competitive pressure from Dell and other industry rivals. In 1997 and 1998, Compaq purchased Tandem Computers, a producer of high-end business computers, and Digital Equipment Corporation (DEC), a leading maker of minicomputers. Compaq believed that these two acquisitions would allow it to compete with the likes of IBM as a broad-based computer manufacturer.
But Compaq had no blueprint for integrating and exploiting the acquired properties. Fundamentally, it could not assess the feasibility of postacquisition integration or identify the right ways to fill complementary resource gaps. Compaq struggled to make the pieces fit together. The resulting fragmentation damaged its ability to compete successfully with better-integrated computer makers.
Compaq made two mistakes in its acquisition decision. First, it did not carefully assess the difficulties of absorbing two ambitious—and very different—acquisitions in consecutive years. Second, having failed to weigh integration issues, it had effectively overlooked potential problems that might have led it to walk away from the deal. Deals sometimes fall through, often for good reasons. If you are well informed enough to dodge a bullet, you then have the chance to shift gears and pursue a more appropriate business-transformation strategy. But Compaq was unable to recover from the failed acquisitions. It became available as a target.
Conversely, in the 1990s, HP had grown from its roots as a scientific instruments innovator, becoming a strong player in the minicomputer segment and an industry leader in PC printers. In the late 1990s, HP decided to focus on the computer industry. It separated its traditional scientific instruments unit and several related businesses into a separate company called Agilent. In 2002, HP saw Compaq as a lever to help expand its computer industry presence.
Unlike Compaq, HP paid considerable attention