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Book interview - how to expand your company

One of the most difficult challenges in business is successfully expanding your company. After all, there's more to growing an organisation than simply adding bits on to it.

Einstein's definition of insanity was doing the same thing over and over again and expecting different results. There can't be many better examples of this than the way in which most businesses are managed. If a strategy has failed, we simply roll our sleeves up, have another crack at it, only this time things will be different because we're going to try harder and we might get lucky.

According to Laurence Capron, co-author of the just-published 'Build, Borrow or Buy', the Einstein quotation applies particularly to the way in which organisations, in their search for growth, acquire new resources or market positions. Capron's research shows that firms can inflict real damage on themselves by applying the wrong model of growth. She calls this "falling into the implementation trap". This is not just widespread and frequent - it's a mistake that companies make repeatedly.

"In our research," says Capron "we find that about 40 per cent of companies rely on a dominant mode of growth such as internal growth or mergers and acquisitions (M&A) instead of using the full range of modes of corporate development." She goes on to say that the reason for this is the tendency towards cultural introversion, where companies repeatedly resort to time-honoured tactics simply "because it has worked in the past for them".

It's easy to see why this happens. If the last person to try a specific process didn't get fired, despite his manifest lack of success, you can be pretty sure that you're going to be on safe ground. While this appears to be passively reasonable, the depressing truth is that the desire to repeat strategies that have failed is equally overwhelming. "Firms don't often realise that the new resources they are looking for or the new environment they want to explore call for different modes of sourcing."

Capron draws on the telecommunications industry as an example, where during the early days companies tended to rely on internal development in order to grow. When data technologies emerged in the 1990s, European incumbent telecom firms began to move into the data-networking environment. But according to Capron, "many of the early moves failed because telcos over-relied on their traditional internal skills and development processes. Eventually, they found that they needed to use alliances and acquisitions to complement their internal R&D."

Horns of a trilemma

There are plenty of management books out there explaining how to identify opportunities and threats, following up with how to implement your response. There are useful books on how to manage product innovation, how to make strategic alliances work or how to manage post-merger integration. But what is so interesting about 'Build, Borrow or Buy' is that while it identifies the problems facing a company approaching a growth phase it also offers strategic solutions based on a combination of approaches. The book says that essentially it is getting the mix right that has empowered companies of the calibre of Johnson & Johnson, Essilor, ResMed and Cisco more than anything else.

According to Capron, the approach that she and her co-author Will Mitchell have taken "jumps over the critical step of deciding what the best method to implement is". The book's subtitle is "solving the growth dilemma", and the key to finding the solution is to identify the range of opportunities available. Fortunately for the authors they all begin with 'B', which means that while their trilemma may feel a little contrived at first, it develops the benefit of being easy to remember.

First, you need to decide whether to work alone internally ('build'), work with other firms through licences and alliances ('borrow'), or acquire other firms ('buy'). Capron stresses that these options are not interchangeable substitutes for each other. "Each approach fits in different contexts and, equally, misfits in other contexts. Before putting massive effort into implementing a choice, it is important to figure out what choice to make."

One of the key lessons of 'Build, Borrow or Buy' is that, over time, organisations develop a dominant way of obtaining resources and growing. A strong R&D business may naturally default to building through internal innovation. A business that has grown quickly through acquisitions is likely to look at each new resource gap as an opportunity to buy again. A company that values rapid response and high flexibility in new markets may prefer borrowing through temporary alliances or well-defined contract purchases. Capron says: "Each kind of organisation has grown into a default approach for getting what it needs. And each default approach has become the hammer to which every opportunity looks like a nail. For instance, firms relying mainly on M&As [mergers and acquisitions] to grow and having developed strong M&A capability will often approach any opportunity with an external partner with its M&A toolkit."

While playing to your strengths can never be ruled out there are clearly times when M&As - no matter how good you are at executing them - aren't going to work. M&A can be a great tool to acquire resources where full ownership is necessary to exploit the value of the targeted resources, but in many cases - such as exploring a new technology field or becoming more familiar with an emerging market - more flexible and less integrative models are clearly preferable. But the trap has already been sprung because the management tendency is to do things in a certain way.

The biggest obstacle to tackling Einstein's problem is of course that old habits die hard, and the ubiquitous climate of entrenchment means that adopting anything new can be monumentally difficult. Swashbuckling M&A teams may well take a dim view on turning a prospective acquisition deal into an alliance. Company licensing teams are equally unlikely to see the value of a full acquisition. Staffers don't like the hiring of third-party resources. The assorted biases of the CEO and other members of the top management team further complicate historical preferences and can also strongly influence the paths that the company selects. Some leaders are compulsive shoppers and use their deal-making expertise to expand their companies. Others, having the souls of inventors and engineers, prefer internal development and the integrity of organic growth.

But one thing is certain, and that is you cannot add a fourth option to the 'Build, Borrow or Buy' portfolio. Sitting back doing nothing while waiting to see what will happen is even worse than doing something in a certain way because we've always done it like that. 'Inert firms fail, and so eventually all organisations need to act,' says Capron, whose new book will help you take your first steps.

'Build, Borrow or Buy' by Laurence Capron and Will Mitchell is published by Harvard Business Review Press, £21.99

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