Visiting Prof. Laurence Capron on the corporate growth dilemma: Build, borrow or buy?

MIT Sloan Visiting Prof. Laurence Capron

There is something broken in the way many businesses obtain the resources necessary for growth. Most companies are very good at identifying what those new resources are, and nearly all of them take that challenge seriously. Yet, we have seen company after company– even highly regarded ones — get into trouble as they grow because they pay much less attention to choosing the right way to obtain resources than to the task of identifying them. They have underestimated the importance of making a well-considered decision in choosing the right pathway to growth: whether to build, borrow or buy new resources.

So how do you grow a firm? Do you let the firm grow organically? Do you obtain needed resources through a licensing agreement or partnership? Or do you buy them through an acquisition? These are some of the toughest questions executives face and their decision can make or break the company.

Through my research with Prof. Will Mitchell of Duke University, I’ve found that firms which can diversify their growth strategies are actually 46% more likely to be in business five years later compared to those who only focus on alliances. They’re 26% more likely to survive that time period compared to firms that only use M&A, and 12% more likely to survive compared to firms that only rely on internal development.

The problem is that it is human nature to repeat what has worked in the past. If a company has historically used acquisitions to obtain needed resources, they are more likely to continue with that path. You can see this with Cisco, which in the 1990s made more than 70 acquisitions, but later needed to rebalance its mix of organic and acquisitive growth in the early 2000s. Companies that make too many acquisitions within a short period often become fragmented because they simply run out of integration skills; it then becomes a struggle to absorb any organic growth that happens.

It’s also common to see pharmaceutical companies following certain patterns for growth. They often specialize in a certain role, generating a lot of organic growth. However, they eventually become rigid and inert, finding themselves in need of breaking up the cycle so they make sourcing agreements with an external partner to attempt to rebalance the growth paths. In the past few years, big pharma firms like Merck or Sanofi-Aventis have embarked on aggressive external sourcing to complement their internal R&D efforts.

It’s important to consider all of the options when a company is in need of additional resources. A firm needs to ask if they have existing resources to develop their targeted resources. If yes, then perhaps it should build those resources internally. If not, then the firm needs to consider looking at outside options.

The next step is to consider the type of relationship it wants to pursue with an external party. Does it want a simple collaboration? How many people does it want involved? What is the scope and depth of the relationship and how much should the external party be involved?

Depending on the answers, a focused licensing contract might make sense or perhaps the firm should consider a broader alliance. But if the firm wants a broad and deep relationship with the resource provider, then it should consider an acquisition. But keep in mind that M&As are complex, costly and disruptive and should only be used when the ends justify the investment of time, money and human resources.

The bottom line is that firms need to consider all of the options rather than just doing what is familiar. Over time, they need to develop a diverse portfolio of paths for growth. Otherwise, they may not be around in five years.

Also read about the research in the Financial Times

Prof. Laurence Capron is a Visiting Professor at MIT Sloan from INSEAD. She also is the coauthor of the book Build, Borrow or Buy: Solving the Growth Dilemma, which is due out in August

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5 Comments

  1. Posted April 30, 2012 at 3:21 pm | Permalink | Reply

    It seems as if corporate culture has a big impact on the decision to build, borrow, or buy. Doing “what’s familiar” is a matter of tradition. The difficulty with diversity, whether in a corporation, city, town or country, is that the process of integration is difficult to manage. When a business is clear on its core beliefs and can extend these through strategies that influence work being done throughout the organization, acculturation seems more promising. Hence, given your research, I am wondering — what was the power-distance relationship in the companies that had diversified growth strategies? To what extent did the diversity in growth strategies correlate to diversity in areas such as : gender, national representation, ethnic or religious variety?

    http://www.theglobalroundhouse.com
    @GlobalJackie

    • Posted May 8, 2012 at 4:29 pm | Permalink | Reply

      Interesting question about how multiple dimensions of diversity might related to the use of a balanced BBB portfolio. Off the top of my head, I don’t really have any sort of grounded opinion – would be a useful topic for study. One round-about take on it might relate to what we found about conflict and the use of internal development: firms tend to avoid internal development for projects that they expect to generate conflict, but firms that do undertake conflict-generating internal projects often fare well in developing new resources. A potential explanation (this is a conjecture, not a tested conclusion) is that firms are more likely to take on conflict-generating internal projects when they have the ability to manage them effectively and, in doing so, take advantage of the multiple points of view that will arise during the conflict. This is analogous to various forms of diversity, where there is potential benefit from multiple points of view but also the risk of turmoil – firms that create the ability to take advantage of the potential benefits will be better able to use a range of sourcing modes, while firms that do not develop this ability may be more likely to focus on a restricted range of sourcing activities. But this is conjecture rather than solid conclusion.

  2. Posted May 2, 2012 at 2:09 am | Permalink | Reply

    Build, borrow or buy? for Organizational growth. I think most corporate executives are aware that they should not put all eggs into one basket and be dependent on only one single growth strategy.

    Diversity is the game and yet what goes gone behind closed doors and their decision making at board levels leave most of us bewildered.

    Colin Koh
    http://www.ActtionLearningPlus.com

  3. Posted May 9, 2012 at 8:27 am | Permalink | Reply

    Conflict and use of internal development – spot on! Not surprising to me that firms that take on internal development projects even when conflict is likely or expected do well in developing new resources. Your conjecture is supported in the field of cultural studies. Resilience is a tradition, habits and behaviors; ways of responding to various situations in order for a group of people to survive long term. Perhaps firms that do well in managing conflict have core beliefs that are executed through strategies for business survival that enable them the agility required to mediate change/conflict? Hmmm. In firms that do not fare well in managing conflict, especially when engaging internal development projects, perhaps there is a disconnect between core beliefs and strategy? Perhaps strategy is not reaching the front line? Perhaps there are sectors of the organization that aren’t executing strategy effectively?

    EU crisis and Germany with its “culture of austerity” has been on my mind. I am wondering about the inherent national diversity of the EU; core beliefs might be similar between countries (but to what extent and exactly at what points is there convergence?) but how do the various strategies for dealing with the political economy indicate cultural idiosyncrasies that are causing conflict and how to we reconcile these and, perchance, set the economy aright? I’m thinking corporate strategies to BBB are linked to national identity and the traditions inherent therein.

    http://www.theglobalroundhouse.com
    @GlobalJackie

  4. Posted May 10, 2012 at 2:37 pm | Permalink | Reply

    You are right. Corporate strategies to BBB are linked, at least partially, to national identity and traditions.I was teaching last week in my INSEAD program on M&As and Corporate Strategy in France, and the participants from Middle East and Asia stressed how much ties between families or business partners matter. Alliances therefore play a prevailing role compared to M&As in those parts of the world .
    Besides the cultural and social aspects, variations across the different national institutional environments also account for differences in the use of Build, Borrow or Buy strategies. For instance, an active market for corporate control will be conducive to the use of Buy strategy. In the same vein, an active VC market embedded in clusters like the Boston area will offer more opportunities to sell and buy technologies between entrepreneurial sellers and larger incumbents. When such a VC-start up ecosystem does not exist, firms might have to carry out their resource development internally or go for full acquisition of remote targets.

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