Companies must continually evolve to stay relevant, innovative, and competitive. Choosing the right approach to adaptation and growth is difficult; as a result, many companies find a model and stick with it, even in contexts where it might not be effective. In Build, Borrow, or Buy: Solving the Growth Dilemma, Laurence Capron of INSEAD, a member school in the Global Network for Advanced Management, and Will Mitchell of the Rotman School of Management outline an approach mixing organic growth (“build”), licensing and partnerships (“borrow”), and acquisitions (“buy”). Capron discussed the model with Global Network Perspectives.

Q: What are the factors prompting companies to evolve?

There are a number of reasons, some good and some bad. I define growth as increase in the scope of activities and/or renewal of capabilities. One good reason for growth is to become more competitive. Maybe the core business is under threat or the firm has reached the limits of its natural market so it’s time to stretch. Dell, and many other firms in the PC industry, reached a point where they had to figure out what was next. Another good reason to grow would be the company’s existing resources aren’t being used effectively. Perhaps that leads to developing an internal exploratory environment complemented by alliances-based activity that bring access to new technology and new people.

Less rationally, when business leaders feel pressure from their investors to grow for growth’s sake, they may seek results at any cost which can result in aggressive and often expensive acquisitions. The idea is that acquisition is going to be a convenient shortcut. In fact it’s not. We know that 70% of acquisitions fail. Post-purchase integration is a nightmare. Acquisition is very often the most disruptive, costly, and painful option.

Q: How should companies think about what’s next?

People spend a lot of time monitoring opportunities and threats in their industry, and they are generally very good at identifying the resources they need. The “build, borrow, buy” framework addresses the question of how to obtain those resources because when firms decide on the direction for growth they often jump straight to execution using their default mode of growth.

It’s important to carefully select a mode. If you pick the wrong one you are going to waste a lot of time or simply fail.

Often managers overestimate how competitive their internal resources are and underestimate what it takes to get where they want to go. An example would be the traditional media companies. They thought the move online could be done through redeployment of their journalists and existing newsrooms. Many companies tried internally, failed, and lost momentum. Only then did they look to buy native internet startups. They easily wasted three or five years. I've seen that pattern across industry; media groups trying to become digital, telecom groups trying to develop voice over IP, and so on.

I'm not saying that companies should not explore their internal resources, but if the gap is large they should very quickly do an internal exploration while at the same time complementing it with external sourcing approaches.

Q: How do companies typically choose a means to evolve, adapt, or grow?

What I've seen at many companies, is they become good at executing a specific mode and so they repeat and repeat and repeat even in contexts and under conditions which might not be suitable. It creates a huge path dependency and becomes very hard for a company to break the mold.

If the CEO has an engineering background, loves the products, and knows the DNA of the company, that firm is going to be focused on internal innovation. A CEO with more of a financial or investment banking background will go after deals. Even a specific type of deal. Inter-organizational relationships cover a broad spectrum, but some companies will do only 51/49 equity joint ventures. They have succeeded with it before, so they just keep duplicating it. That preference eventually shapes the structure of the company. If the CEO is M&A driven, the M&A team is going to be powerful and able impose its view throughout the organization, while the alliance team will be at the bottom of the food chain.

Big pharma firms were very internally focused before they realized that their pipeline was empty. R&D had gotten so powerful that external sourcing projects received a much harsher screening. For the process to be effective, all the modes should be on equal footing.

Apple was very inward-focused, but they became a good example of breaking from old habits. They loved their products; they were very proud of their internal innovation. Their preference was the build mode, but over a few years they were able to develop borrow and buy skills by creating a very active ecosystem of external partners and making a few focused acquisitions on areas of technology that they didn’t handle well.

Q: How do you create a structure to make sure all options for growth are considered?

If you want to choose the path to growth smartly, you first need to shape the decision-making context in such a way that you have diversity of opinion. There has to be enough diversity either within the board or the top management to have expertise in each type of growth.

Someone needs to be able to think through approaches to alliances or sequential options. That might be someone who has done a lot of alliances or has emerging market experience, where you first need to team up with local partners if you don’t have people on the ground. Someone else, perhaps the CFO, would think about companies that could be acquired. And finally, you might have people who have been around for a long time so they have a strong sense of the company. They can be thinking about intrapreneurship, internal evolution, and R&D.

There may be some behavioral or psychological components to this, too. People who are good at making deals and acquisition can be ineffective when it comes to managing alliances, because managing alliances is a soft-glove approach, while acquisition can be top-down—it can be about restructuring and so on.

Some companies are designating a head of innovation—someone to oversee growth—which means that they track what's going on internally, what's going on externally, and for those that have the option what’s going on with the venture team or internal VC.

Q: What sort of balance among modes of growth should companies look for?

Each firm struggles to find the right mix of internal and external projects.

L'Oreal, the French cosmetics firm, has mainly grown through acquisitions. But they are very good at building organic growth once they have bought a brand. So L'Oreal is a build and buy company, for instance.

Cisco is also very well known for their acquisitions—more than 170 in the last two decades. They pick an early winner, they are very good at integrating, and they give acquired firms a lot of independence. For a time, so much of the growth was coming from acquisitions that people within Cisco started to become demotivated. The job was to screen, evaluate, and buy stuff; it was no longer about doing the innovation. They realized that they had to slow down for a few years to digest, to link the acquired labs, to find the right mix between acquisition and organic growth. And they put more emphasis on sequential engagement through alliances, minority stakes, and so forth. Firms can go through cycles.

Q: How should companies expand into new areas, whether that’s an emerging market or a new type of product?

As firms tackle emerging markets or new fields, the notion of sequential engagement is very important. When Cisco enters emerging markets where they don’t have corporate development or R&D people on the ground, they use sequential engagement. It might be a minority stake in a company; it might be alliances with local VCs.

The idea is not necessarily to target one company but to get to know the local ecosystem. Even a minority investment typically gives them a seat on the board. That’s a window for observation. Once they better understand the ecosystem they can decide whether to buy the company or maybe another company because they’ve learned it would be a better fit.

When you cross borders, whether it’s an emerging market or not, the informational asymmetry gets amplified. You have multiple gaps to close—cultural, often language, and institutional gaps. If you think of an acquisition, you also have the uncertainty around leadership team chemistry.

If you buy a distant partner it may be more difficult to integrate or absorb the acquired company, but, at the same time, you may have more diversity and opportunities to learn than if you were purchasing the firm next door that is already very similar.

Sequential engagement can be very useful because you can really structure it in such a way that closes the gaps with early steps. Then, as you become more comfortable, you can then go for full control. Or not. The options remain open.

Group Danone, the French multinational food company, is an example. They were trying to get into the organic yogurt market in the U.S.  They identified Stonyfield as a leading brand in that segment. Initially, they thought they would buy it, and then they realized, “Oh, organic is a very different business model. It's a different supply chain, different stakeholders.”  Plus, they didn’t know if they would get along with Stonyfield’s management team. So, they first established an alliance by buying a minority stake. Three years later, as the combination was doing well, they acquired control. Stonyfield has scaled in the U.S. and the unified firm launched an organic brand in France, Les 2 Vaches.

It’s an interesting path—first they borrowed expertise and access with an alliance; then they bought to grow in the new market, and they used the acquired knowledge to build at home.

Q: What limits do you see to this framework?

The framework is simple and robust, but it is not exhaustive. In some countries, for instance, acquisition is not even an option. In some countries you cannot enforce contracts, so licensing might not be viable. And while we’ve selected the key criteria we found consistently important across our case studies, our research, and our engagement with companies, each company based on the industry or the country will need to adapt the model to their specific circumstances.

We know that, in some cases, companies might choose a mode not because it's necessarily the best mode but because they have to go fast. They know if they don’t move immediately an opportunity will be lost forever.

Even then, decisions are not final—you cycle back after a few months or a few years. You have to set priorities within a portfolio of resources and projects. Maybe an alliance relationship should be upgraded to an acquisition or downgraded to a simple supplier. Sometimes growth can take the form of a fourth B, which is “bow out.” You cannot just stick with everything you bought; at times you need to divest.

Interview conducted and edited by Ted O’Callahan, Yale School of Management.