Finding the Right Path

Most companies default to the same approach for executing each new strategy. Here’s a framework for your journey.

by

Laurence Capron

and

Will Mitchell

by

Laurence Capron

and

Will Mitchell

From the Magazine (July–August 2010)

Summary.

Reprint: R1007J

Executing a new strategy nearly always requires new resources and capabilities—and most firms seek them out the wrong way.

In a 10-year study of 162 telecom companies, the authors found that organizations deploying all the methods available to them outperform those that stick with a narrow approach. Yet most firms doggedly pursue one chief method, whether it’s developing what they’ve already got internally, entering into contracts with providers, forming partnerships, or using M&A. The framework in this article will help companies weigh their options more strategically.

To select the best tactics for the situation you face, ask whether your existing resources are relevant to your new needs. If the answer is yes, internal development makes sense; otherwise, you’ll need to go outside the firm. Next, to figure out what kind of relationship you should pursue with a provider, determine whether all parties would have a shared understanding of the resources’ value. If so, a purchase contract is a sensible choice; if not, consider a partnership or a corporate acquisition. Because M&A is the most complex option, reserve it for cases in which it really pays to have a deep relationship with the resource provider.

The Idea in Brief

The typical firm relies on one chief path to growth. Some companies develop most resources internally, others focus on licensing or joint venturing, and others are M&A specialists.

When firms fail at resource development, they tend to see it as an implementation problem. But research shows that the mode of acquisition is crucial to success. What’s more, companies acquiring resources in multiple ways are 46% more likely to survive the next five years than those relying mainly on alliances, 26% more likely than those focusing on M&A, and 12% more likely than those sticking with internal development. To select the right mode for the situation, ask three basic questions:

Are the resources you have relevant to the ones you want? If so, opt for internal development; if not, go outside the company.

How easy is it to agree with resource providers on the value of what they have to offer? You need a shared understanding of value to make a purchase contract work effectively. Otherwise, consider an alliance or a business acquisition.

How close a relationship do you need to have with your provider? If generating the resources you want requires the involvement of many people and units, M&A may be a better solution than a partnership.

Executing a new strategy nearly always involves acquiring new resources and capabilities. Since firms can’t possibly get everything they need through internal development, it seems reasonable in theory to expect that they’ll often turn to licensing agreements, alliances, and M&A as well.

A version of this article appeared in the July–August 2010 issue of Harvard Business Review.

LC

Laurence Capron is a professor of strategy at INSEAD in Fontainebleau, France.
WM

Will Mitchell is a Professor of Strategic Management at the University of Toronto’s Rotman School of Management, where he holds the Anthony S. Fell Chair in New Technologies and Commercialization.

Finding the Right Path

The Idea in Brief

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