Pathways to Growth

A new book tells how companies can put their growth plans on the right track.
Edward TeachSeptember 1, 2012

“There is surely nothing quite so useless as doing with great efficiency what should not be done at all” is one of Peter Drucker’s better-known maxims. Or, as Will Mitchell paraphrases it to CFO, “You can royally mess yourself up if you try to do the wrong thing really well.”

Either way, that nugget of wisdom lies at the core of an original new book on strategy and growth by Mitchell and Laurence Capron, Build, Borrow, or Buy: Solving the Growth Dilemma (Harvard Business Review Press, $33). Much recent thinking on strategy emphasizes execution, but Capron and Mitchell’s research shows that companies can excel at execution and still fail, because they choose the wrong “resource pathway.”

Resources, the authors explain, are what companies need in order to create goods or services. They can be physical assets (plants and equipment), intangible assets (know-how and intellectual property), or human resources (employees and stakeholders). How companies choose to acquire these resources is a critical yet overlooked step between strategy and execution.

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They have essentially three choices, or pathways. Companies can build new products internally, using the resources at hand. They can also borrow resources through a contract or alliance, or they can buy them via an acquisition.

This sounds obvious, yet companies frequently make the wrong choice, the authors contend. (Capron is a professor at INSEAD, the international business school, and Mitchell teaches at Duke University’s Fuqua School of Business and at the University of Toronto’s Rotman School of Management.) Firms persist in believing that they have sufficient internal resources to meet market opportunities — and fall behind their competitors when it turns out they don’t. Or they decide that buying another company is a quick and efficient way of plugging a resource gap — and become bogged down in integrating the acquisition.

Although it’s commonly thought that companies falter because their CEOs are blind to changes in the markets or technology, Mitchell doesn’t think that’s the problem. “Most companies have hypotheses about where changes are taking place and where they have to respond,” he says. “The critical fault is that we often stumble when we move from seeing where a threat or an opportunity is to figuring out what the right response is.”

One-Trick Ponies
Ideally, companies should follow a balanced approach of build, borrow, and buy, but in reality most companies are path dependent, says Mitchell: they get good at one approach and stick to it.

That usually means internal development. The authors’ survey of 162 companies in the global telecommunications industry revealed that 75% preferred internal development as their resource pathway, even though many executives admitted they were disappointed with the effectiveness of the internal path. Atari, Netscape, and Compaq Computer are examples of companies that relied excessively on internal development and lost ground to competitors, say the authors.

Some companies decide that they’re going to grow chiefly through acquisitions, says Mitchell, and they may become expert at rapidly acquiring other firms. But too often “they don’t build enough internal competencies to absorb what they’ve got,” he says. Capron and Mitchell single out Cooper Labs and Tyco as companies that bought companies faster than they could integrate them and subsequently foundered (Cooper) or split apart (Tyco).

A dogged reliance on a single resource pathway can ensnare a company in the “implementation trap.” “The attitude is, tell us what we need to do, and we’ll get it done,” explains Mitchell. “But if you’re doing the wrong thing, no matter how hard you work, it’ll fail.”

Doing It Right
The book does cite examples of companies that follow more than one resource pathway to achieve consistent, solid growth. Johnson & Johnson, for example, successfully blends build and buy strategies. Many pharmaceutical companies have supplemented internal development with external sourcing; Merck revitalized its drug pipeline through licensing.

Given the number of acquisitions it has made over the years, Cisco Systems might seem to be in thrall to “M&A momentum,” an implementation trap. But Mitchell says Cisco has a balanced approach to growth. “They’re not perfect, but they’ve done some things extremely well,” he says. “They have spent a lot of money on internal R&D. They have a very thoughtful way of going about alliances, with a separate group [for that]. And yes, they have done a lot of acquisitions, and they have a thoughtful way of integrating what they’ve bought.”

So how should a company decide when to build, borrow, or buy? Capron and Mitchell’s book offers a resource- pathways framework (along with case studies and lessons drawn from their research); Mitchell gives a capsule version of it here. Think of the decision process, he says, as a sequence going from internal to external, and getting increasingly complex.

1. Build. If a company has the right people and skills to take advantage of an opportunity, the internal approach has many advantages, says Mitchell: it’s faster, you can control it, you can protect your intellectual property, and you’ll build competitive advantage. But a company needs to make a credible case for the internal approach, he warns. “There must be a strong test that you in fact have the skills.” If you don’t, then go from build to borrow.

2. Borrow. Capron and Mitchell distinguish between two types of borrowing: contracts and alliances, both of which are more flexible and less expensive and risky than an acquisition. “Basic contracts work really well when it’s a relatively clear situation — you lack the skills to do full commercialization, but you can license in somebody’s technology,” says Mitchell. “Or, you can license out your technology to go after a market you don’t understand well enough.” This pathway fits situations where a company can trust its partner, where it can write a contract that will cover major contingencies, and where there won’t be substantial off-contract problems.

If those conditions can’t be met, then consider an alliance or joint venture with one or more firms, recommends Mitchell. In such an arrangement, “there is inevitably going to be a lot of give-and-take. There may be a lot of uncertainty about the nature of the technology, the product, the market, the regulatory environment.” The key question, he says, is how many points of contact will there be between the partners? The more people and business units involved, the more complicated the alliance, and the greater the chance of failure.

3. Buy. When it’s too complicated to do an alliance, then consider an acquisition to obtain the resources you need, the authors say. Ideally, the acquirer should be able to map a clear path for integrating the new company in a timely fashion, retaining key people in the process. An acquisition can dramatically bolster a company’s resources, but an ill-advised deal can turn into an expensive failure. If an acquisition doesn’t make sense, you may be better off revisiting the other sourcing modes, say the authors, or even reconsidering your strategy.