This is a guest post from Laurence Capron. Laurence is the Paul Desmarais Chaired Professor of Partnerships and Active Ownership at INSEAD and Director of INSEAD Executive Education Program on “M&As and Corporate Strategy.” She is the coauthor (with Will Mitchell) of the new book Build, Borrow or Buy: Solving the Growth Dilemma.
Firms that over-rely on a single growth mode suffer. The reliance on a single growth mode is misplaced. In the research I did with Professor Will Mitchell (Duke & Toronto University) on 150 telecom firms, I find that firms prepared to grow in diverse ways outperform the ones that narrowly focus on one single mode. Specifically, firms using multiple modes to obtain new resources and skills were 46 percent more likely to survive over a five-year period than those using only alliances, 26 percent more likely than those using only M&A, and 12 percent more likely than those using only internal development.
Overreliance on acquisitions drains key resources, demotivates and burns out internal teams, and fragments the organization. Firms risk corporate bloat if they undertake multiple acquisitions too rapidly, so pacing an acquisition program is crucial for active acquirers. Too much emphasis on organic growth can make your organization so cohesive that it becomes too inert. The US leading pharmacy chain, Walgreens, for instance, became the largest self-service retailer in the country through the green-field development of new stores and distribution centers. Yet, when faced with new challenges (generic drugs, rise of internet and mail order channels, competition from Target and Wal-Mart) in the 1990s, it responded by trying to find internal solutions and ran out of steam –Walgreens has in the past few years made alliances and acquisitions to access new resources and markets.
How can a company discover it is time to start doing thing differently?
It is time to start for a company doing thing differently when firms fall into what we call the “implementation trap” —in which a company works doggedly to perfect the wrong course of action. They invest substantially in learning to manage a specific mode of growth—and then continue refining toward what they deem are best practices attained through experience with that mode.
Ideally, firms should start to experiment with new modes of growth before old habits start hurting the company’s performance. Of course, old habits die slowly. Firms have to overcome resistance of entrenched groups and leaders. Powerful M&A teams are often reluctant to turn a prospective acquisition deal into an alliance. Company licensing team might not be able to see the value of a full acquisition. Internal staff may have a hard time accepting the distinctive quality 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 savvy to expand their companies; others have the souls of inventors and engineers, leading them to prefer internal development and the integrity of organic growth.
To succeed, therefore, CEOs have to learn to right way to grow their company – and also learn when and how to abandon the strategies they have grown up with.