Your book begins with a bold statement: “Something is broken in the way businesses obtain the resources they need to grow.” What has gone wrong?
Organizations are constantly looking for new technologies, new markets, new business models, new production techniques and new products. Most of them are pretty good at seeing opportunities. They’ll make a choice and then say, ‘OK, let’s make this internally’, or ‘Let’s do a collaboration with X’, or ‘Let’s buy this other firm’ — and then they put a huge amount of effort into trying to do that well. Our premise is that there is an important step that comes before that: before busting your tail to make something work, you need to make sure to pick the right way of gaining access to the new technology/business model/product in the first place. If you get this right, you’ve got a reasonably good chance of implementing it well; but if you get the method wrong, in many cases, no matter how hard you work at it, it’s going to fail.
The book’s title is more than just pleasing alliteration — what do the terms build, borrow and buy represent?
The notion for ‘build’ is to walk through a very simple decision model that says, “under certain conditions it makes sense to do it inside.” If you know enough about the technology and if it doesn’t conflict with your organization, by all means, do it inside: it’s faster, it’s often cheaper, and you’ll have more control over it. But if neither of those things is true — if it’s a long ways away from your existing resource space, or close to your resource space but it’s really going to change the business model, and create a lot of conflict — it makes more sense to look outside of your organization, and that gets us into the ‘borrow’ realm.
There are two types of ‘borrow’; one is for basic, simple things where both parties can describe the relationship clearly and the intellectual property regimes are strong enough to protect a contract. If those two things hold -- clarity and protection – my advice is, just do a license. If not, consider doing an alliance. But only do an alliance if there are small enough points of contact that it’s not going to overwhelm you. There are cases where we get into an alliance with a firm where there are just so many people involved that we can’t manage it — goals aren’t compatible, time isn’t compatible — and it doesn’t work. In these cases, you move into considering the ‘buy’ option.
You caution against rushing into M&A. When is it okay to buy?
Buying is the ‘sexy’ option, because it gets lots of press and it requires lots of money. As a result, it’s the sort of thing CEOs and senior management teams like thinking about. And the truth is, I have yet to encounter a firm that, at some point -- and often sooner than it thinks -- is not going to have to think hard about a buy option if it wants to stay in the market. But what we’re saying is, consider this only after ruling out the other two options, and only if you feel you have a viable integration plan. And don’t get trapped: don’t say, ‘That won’t work, so therefore we have to do this.’
Why is the borrow option so often overlooked?
Because we hate the idea of giving money to somebody else. We tend to say well, ‘Hey, wait a minute: if we sell it for $10 and I’m doing it with a partner, they get $5 and I get $5; if we do it ourselves, we get all $10.’ But what people hugely underestimate is that there are cases where if you do it with someone else, it’s not going to be $10 -- it’s going to be $20. And if you do it by yourself, it’s not going to be $10, it’s going to be $5, if you’re lucky. What would you rather have, $5 or half of $20?
Here’s an example. Eli Lilly did a collaboration with Icos to develop Cialis, for erectile dysfunction (ED). This was a thoughtful play, because it was a space where Lilly didn’t have a lot of skills, but they knew there was a market opportunity. They also knew that if they hired some people to bring it inside, it just wouldn’t fit. So they created this relationship with Icos in Seattle, managed it really well, got them to the point were they brought Cialis to the market and it was a huge success. But they also looked at the product and said, ‘This is a really cool molecule, because not only can we use it for ED, we can use it for cancer’ – which is one of their major themes as a company. Being able to take something from this kind of peripheral thing – ED -- and use it in their Oncology group was a huge deal, but it also made things too complicated to continue to do it through an alliance, so they ended up buying Icos.
You write about a lot of potential pitfalls companies can fall into in pursuing growth, including ‘the implementation trap’. Can you explain what that is?
In some sense it goes back to Peter Drucker, who talked about putting a lot of effort into ‘doing the wrong thing well’. For example, Schering Plough pharmaceuticals killed itself as a company because it tried really, really hard to come up with a follow-on drug to Claritin, which had enabled it to create the non-drowsy allergy space. They built the new drug in their own labs, created a marketing system for it, did a pioneering direct-to-consumer advertising campaign for it even before you were allowed to do direct-to-consumer advertising, knew that it was coming up patent, knew that they needed a replacement, and spent hundreds of millions of dollars on a thing called Clarinex, which was so similar to Claritin, it had absolutely no chance of making it. Clarinex has done OK, but not anywhere near the Claritin model. They completely missed the opportunity to go out and license something else, or to buy something else.
In the book you make reference to steam locomotive manufacturers, who, in facing the threat from diesel trains, started making even better steam trains. Can you think of a modern-day equivalent?
[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]