Build, Borrow, or Buy. Laurence Capron

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      Less successful was an earlier pair of acquisitions by Compaq. From its founding in 1982 through the 1990s, Compaq grew to become one of the world’s leading business and retail PC manufacturers. But in the mid-1990s, the company faced competitive pressure from Dell and other industry rivals. In 1997 and 1998, Compaq purchased Tandem Computers, a producer of high-end business computers, and Digital Equipment Corporation (DEC), a leading maker of minicomputers. Compaq believed that these two acquisitions would allow it to compete with the likes of IBM as a broad-based computer manufacturer.

      But Compaq had no blueprint for integrating and exploiting the acquired properties. Fundamentally, it could not assess the feasibility of postacquisition integration or identify the right ways to fill complementary resource gaps. Compaq struggled to make the pieces fit together. The resulting fragmentation damaged its ability to compete successfully with better-integrated computer makers.

      Compaq made two mistakes in its acquisition decision. First, it did not carefully assess the difficulties of absorbing two ambitious—and very different—acquisitions in consecutive years. Second, having failed to weigh integration issues, it had effectively overlooked potential problems that might have led it to walk away from the deal. Deals sometimes fall through, often for good reasons. If you are well informed enough to dodge a bullet, you then have the chance to shift gears and pursue a more appropriate business-transformation strategy. But Compaq was unable to recover from the failed acquisitions. It became available as a target.

      Conversely, in the 1990s, HP had grown from its roots as a scientific instruments innovator, becoming a strong player in the minicomputer segment and an industry leader in PC printers. In the late 1990s, HP decided to focus on the computer industry. It separated its traditional scientific instruments unit and several related businesses into a separate company called Agilent. In 2002, HP saw Compaq as a lever to help expand its computer industry presence.

      Unlike Compaq, HP paid considerable attention to how it would select the necessary resources for this strategy. It looked carefully at the feasibility of postacquisition integration and at ways of complementing the acquisition with both internal development and alliance support. Before completing the Compaq deal, HP set up a brigade of integration teams to specify activities the company would need to undertake to integrate Compaq’s resources and to identify HP resources that would become redundant once the firms combined. The integration was led by a highly respected senior executive who reported directly to HP’s CEO, Carly Fiorina. Immediately after the deal was completed, a senior executive from Compaq joined the integration team as coleader.

      In parallel, HP’s senior leadership recognized complementary resource gaps that the company would need to fill through build and borrow strategies. HP therefore set up multiple project teams to develop software and hardware bridges that would interconnect key parts of the newly integrated businesses (for example, linking Compaq’s computers to HP’s printer product lines). In addition, HP identified partners to help it expand the integrated business—for example, working closely with SAP to develop software HP would need for its expanded business-oriented services.

      The combination of build, borrow, and buy strategies following the Compaq acquisition led to major changes at HP over the next decade—and ultimately to financial success. The company laid off thousands of people from the target companies and traditional HP units. At the same time, though, it added staff to support the change in strategic direction. The company quickly became the world’s largest PC maker and reinforced its leadership in the printer business.

      Early financial results were mediocre. There were losses in 2002 and low profitability through 2005. By 2006, however, the transformation had produced substantial success. The company had returned to strong profitability, growing sales by 50 percent while increasing staffing by only 10 percent. Over the next five years, HP grew sales by a further 50 percent while the company maintained profitability—despite having doubled personnel as it invested in areas of the transformed business to build on its market leadership.

      Of course, no single transformation can respond to ongoing competitive dynamics. In 2012, under new leadership, HP is considering new changes to the business mix. As part of this shift, the company acquired Autonomy Corporation for $10 billion in 2011, to provide resources that HP will need for expanding its enterprise information management business.

      As noted in the introduction, our step-by-step resource pathways framework helps you choose the best way of obtaining the resources you need to exploit strategic opportunities. Part of the framework’s power is its simplicity. Even so, you can expect internal and external pressures to lead you and other decision makers on bumpy detours.

      Why? It is human nature for business leaders to rely repeatedly on what they know best. Over time, organizations develop a dominant way of obtaining resources. A strong R&D business may naturally default to building through internal innovation; a business that has grown through acquisitions is likely to look at each new gap as an opportunity to buy again; and a company that values rapid response and high flexibility in new markets may prefer borrowing through expedient temporary alliances or well-defined contract purchases. Each kind of organization 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.

      Consequently, most businesses will need to break old habits. And old habits die hard! You will need great discipline to stay the course. But if you do, you will respond to each new opportunity appropriately. Success will depend less on outside forces, such as markets and technologies, than on the discipline and commitment of key decision makers within the firm.

      Most businesses think far too little about the pathway they select; instead, they focus on implementation—and end up wondering why all their hard work is unavailing. By focusing on the selection challenge, the resource pathways framework leads to more effective implementation, because of its emphasis on the right path. Let’s start by comparing the basic pathway choices.

      The Resource Pathways Choices

      Building through internal development or innovation can create powerful new value by recombining a firm’s existing resources, but even the most aggressive R&D firms can’t create all the skills and resources they need solely through internal development efforts. Companies must draw on external sources to complement organic growth. External sourcing can take many forms. At the simplest level, a resource-seeking firm can contract with other organizations that are willing to sell the needed resources. Alternatively, it may acquire resources by collaborating with or purchasing another company.

      Acquisition is often touted as the fastest way to obtain a portfolio of resources—along with supporting teams, processes, and cultures. Yet purchasing a business requires an arduous M&A transaction and the postmerger integration of the acquisition into the organization— a difficult process that often fails.

      Although internal development and M&A are dramatically different paths, both allow the resource-seeking firm to exercise strong control over the needed resources and the value the resources ultimately produce. Since many firms assume that ownership or control of resources is necessary to achieve competitive advantage, they see themselves facing a simple choice to either build or buy.

      That is a mistake. Borrowing new resources, through contracts or alliances with partner organizations, is often a valuable path. Contracts and alliances offer temporary access to targeted resources under more flexible terms and at lower risks and costs than other modes. As described below, this was certainly the experience of the pharmaceutical industry.

      From Fortresses to Networks

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