Your company has ambitious growth targets – so why not acquire another firm? It’s a common reflex among CEOs, but according to INSEAD Professor Laurence Capron, co-author (with Will Mitchell) of Build, Borrow, or Buy: Solving the Growth Dilemma, it may be the wrong move.
Mergers and acquisitions (M&A) have a certain sex appeal in the corporate world, and that can lead executives astray, she says. “CEOs are driven by power and making an impact, so the hubris factor is very important. What we see in many industries is there’s so much uncertainty about what’s next, companies tend to jump on the bandwagon. M&As go by wave, and when companies don’t know what to do and see their closest competitor making acquisitions, let’s say in China, the temptation to mimic that competitor is very high.” M&As are complex, costly, and convoluted – and therefore, she says, should be the last resort, not the first.
So what alternatives should smart companies consider? The first is emphasizing in-house research & development (R&D) – what Capron terms the “build” option, as compared to “buying” through an acquisition. With organic, in-house growth, “you get full control, and it’s much easier to integrate what has been internally developed into your current platform,” she says. “There’s less disruption and it’s more cohesive.”
The trouble is, organic growth is usually not sufficient. “Look at Google or Yahoo, and 75% of their product innovation comes from alliance portfolios, acquisitions, etc. In a rapidly changing environment, [internal R&D] is no longer enough.” The goal, instead, is for your company to have a balanced mix of internal growth and external alliances or partnerships – and only to acquire new companies when other, simpler options have been exhausted, or you need to induce a massive culture shift.
“When you have very strong inertia, you need to go outside to bring in fresh blood,” says Capron. “You need to buy a firm to shift the balance in your organization, rather than doing it incrementally by poaching a few talented employees.” Some organizations, especially large and entrenched incumbents, resist this message. “They often believe that having a strong technical base is enough to come up with new innovation,” she says. “But most of the time, it’s not so much an issue of not having good people or smart engineers. It’s about having the right social context” and the ability to perceive new realities, even those that might threaten the company’s status quo.
Finally, says Capron, companies should think about ways to cultivate strategic partnerships: “Alliances can be a powerful tool to learn from partners in a flexible way, particularly when you’re unfamiliar with the environment – for instance, if you want to run a plant in China.” The benefits can be great, but Capron urges a few cautionary notes. First, understand that partnerships aren’t forever. “An alliance, by definition, has a lifecycle,” she says. “You need to think of an exit strategy, a Plan B, because the danger is that you’ll become too reliant on your partner.” (One recent example of an exit strategy was Apple’s shift to using its own maps and parting ways with Google, after realizing, Capron speculates, that “this type of mapping service would be increasingly strategic for them.”)
Particularly when you’re dealing with developing markets where IP protections are not robust, you need to be careful: if something is truly your company’s crown jewel, ensure its secrecy by keeping your alliance partner at arm’s length. But otherwise, recognize that “as soon as you start to let people collaborate on a day-to-day basis, even if their intent is not to steal your knowledge, they’ll learn, and they eventually won’t need you anymore.” The antidote is developing a clear, explicit strategy of reciprocity. For instance, says Capron, “You send your best engineers but they send their best marketing people, so it’s a fair transfer of people. Make sure you set up learning mechanisms so you learn from this alliance, and send your best people not only to manage the alliance but to transfer knowledge back to headquarters.”
The allure of swallowing another company can transfix many CEOs. But the best companies, Capron says, are willing to take a step back and carefully question whether M&A is the best option. Sometimes, “building” your capacity through internal R&D or “borrowing” resources through strategic partnerships or alliances is a much better bet.
This post originally appeared on the Forbes website on October 17, 2012.
Dorie Clark is CEO of Clark Strategic Communications and the author of Reinventing You: Define Your Brand, Imagine Your Future (Harvard Business Review Press, 2013). She is a strategy consultant who has worked with clients including Google, Yale University, and the Ford Foundation. Listen to her podcasts or follow her on Twitter.