Build, Borrow, or Buy. Laurence Capron

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      Although the questions are general enough to address most contexts, we offer additional detail throughout the book to help you tailor your own decisions to your company’s particular circumstances. The balance of this chapter summarizes the four key questions that will guide your path selection.

      Question 1. Are Your Internal Resources Relevant?

      Can you leverage existing company resources to satisfy new needs? Developing new resources internally is often faster and more effective than obtaining them from third parties. But this strategy is viable only when internal resources (knowledge bases, processes, and incentive systems) are similar to those you need to develop and superior to those of competitors in the targeted area. If so, your internal resources are relevant.

      Often, existing resources will not be relevant. For instance, most traditional publishing firms’ legacy print-media resources were so far removed from digital media that publishers had to bring in outside resources through acquisitions and partnerships—often after trying without success to have inside staff learn the ropes.

      Likewise, a global investment bank recently sought to develop a private-equity business in Eastern Europe. The CEO of the country unit first assessed whether internal development might be feasible, but concluded that the local bank lacked sufficient expertise to develop a private-equity offering internally. Nor did the parent company have private-equity experience—which requires a deft understanding of activities ranging from deal origination to exit strategies. The CEO considered hiring away a competitor’s team to support internal innovation. However, not only would that be expensive, but the bank would also risk being unable to retain and leverage the outside team’s expertise. After concluding that internal resources lacked relevance for the new business, the CEO began reviewing external options.

      You might think answering this first question is easy. Yet companies often vastly underestimate the actual distance between their existing resources and the targeted resources. Like many print publishers, business leaders more easily see the similarities than the profound differences: “Reporting, writing, and editing are the same for a Web page as a printed newspaper, right?” Well, yes and no. Traditional publishers failed to grasp radical shifts in the business model, technology, customer and revenue strategies, and the implications of community interaction—all of which continue to evolve. Seeing only what’s similar, a business can fixate on internal development because it doesn’t know what it doesn’t know.

      Internal development is fraught with obstacles that firms often overlook—until later. Businesses choose the build path as their first option and only consider external sources after encountering major setbacks. Among our sample of telecom firms, 75 percent used internal development as their preferred means of obtaining new resources. But when asked to evaluate the effectiveness of the internal path, many executives admitted they were disappointed. Almost half said that they failed to create the desired new resources because they were unable to properly manage internal development, and nearly two-thirds reported friction associated with integrating and diffusing the internally created resources throughout their organization.

      In chapter 2 we will review how to assess the relevance of your existing resources for internal development and how to recognize—even at the outset of the selection process—when it is best to go straight to external sourcing.

      Question 2. Are the Targeted Resources Tradable?

      Once you’ve determined that you need to look externally for resources, you must weigh which type of external sourcing mode to use—from the simplest and most straightforward to those of higher cost, complexity, and commitment. (By tradable, we mean that you can negotiate and write a basic contract that will both protect the rights of the contracting parties and specify how they will exchange resources.)

      The first option is obtaining what you need via contract, a basic form of borrowing resources that another firm has created. Arm’s-length contracts often help companies identify, evaluate, and obtain bundles of new resources and absorb them quickly. Pharmaceutical firms commonly license the rights to register and market other companies’ drugs in particular geographic markets. Chemical firms have long used contracts as a way of obtaining new molecular compounds. In turn, the companies sometimes out-license the rights to compounds or applications that they do not want to develop themselves. For example, W. L. Gore and Associates licenses the rights to use DuPont’s PTFE polymer for use in medical implants and rain-resistant clothing. The two companies have always managed these relationships using basic contracts.

      Contracting is often the simplest way of obtaining needed resources. However, companies often overlook it. Instead, they seek first to pursue an alliance or acquisition. We found that many firms overestimate their need for strategic control while underestimating the likelihood of achieving adequate control through third-party relationships. Overvaluing your need for control can lead you to paths that waste resources and, worse, deny you the opportunity to learn from independent partners. Yes, you need to protect your firm’s core resources, but selecting the wrong sourcing mode can inhibit your ability to replenish that core.

      Trust plays a role in answering this question. Firms often fear that an external party may not play fair in the agreements or that they may have to give up too much revenue to a contractual partner if they do not control commercialization. Only a third of the telecom firms we surveyed actively use contracts to obtain new resources. In fact, 70 percent said they would choose an alliance or acquisition over a contract, especially when the targeted resources affect core parts of their business. Only 30 percent of the surveyed firms had made systematic efforts to assess external resources available from suppliers. Thus, most firms decide on more complicated external sourcing options without first considering the simpler expedient of licensing through a basic contract. Such an oversight is often counterproductive.

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