To build? To buy? To borrow? Those are the questions.

To build? To buy? To borrow? Those are the questions.

The answers set the agenda for capitalizing on and adapting to a highly uncertain business environment. Old rules are not merely outdated. They may be hazardous.

That’s the upshot from BTD’s 13th May webinar featuring Robin Stopford, Head of Business Development at James Fisher & Sons, David Jones, Integration Manager at RWE Renewables, and Mike Leonetti, CEO and President of the Association of Strategic Alliance Professionals.

Leaders need to create operating models that deliver capabilities valued by customers. Easy. David and his RWE Renewables colleagues are assembling a renewable-energy powerhouse. Robin and his team are identifying and vectoring the right pieces to enhance James Fisher’s product and service offerings. ASAP-affiliated executives are helping their companies capitalize on creative, high-performance alliances and JVs.

A capability is an interconnected set of organizational elements that creates value – assets, IP, people, technology, processes. Someone will pay for using it. It might be Walmart’s keen ability to identify locations for superstores or its ability to manage its supply chain, Marriott’s ability to draw travellers to its properties with its reservation system or to manage those properties with extraordinary efficiency, or Chevron’s ability to extract oil and gas from “tight” deposits.

To adapt and grow, companies need to enhance, extend and modify their capabilities. Leading Business Development, Robin is tasked with identifying those external pieces that accomplish these goals for James Fisher. The leaders of RWE Renewables are focused on combining the major renewable assets in play from the E.ON-innogy-RWE dealings. Mike Leonetti and A.S.A.P. executives use a range of alliances (see chart below) to do this “capability trick.”

The core questions are simple:

  • What do we need to do well to succeed at our strategy? (What Capabilities must we offer?)
  • How are we doing on those Capabilities now?

The differences are the GAPS that the company needs to fill. Options? Build, buy or borrow. Gap analysis identifies which capabilities need improvement, which need expansion or increased scale (“amount” or geography or markets), which need modification, and which the firm lacks and needs to “get.”

This webinar built on Robin Stopford’s observation of the increasing difficulty of finding an acceptable transaction price in a highly uncertain environment. This creates increasing openness to using alliances (borrow) rather that acquisitions. A key question is fad-versus-trend: how much of this is temporary and how much will last. Mike Leonetti described an attitude toward alliances typical of many pharmaceutical executives in the mid-90s and again circa 2005 – “This, too, shall pass.” Well, some did. A lot did not.

Savvy executives will take the time to figure out the right balance between M&A (buy) and alliances (borrow) for their firms. We have long contended that if a client has an “alliance strategy” or an “M&A strategy,” it has a problem. Strategies, used in this sense, are hammers looking for nails. A firm should have “a business strategy.” That strategy should consider both M&A and alliances as tools for implementation. Hammers. Saws. Drills. Goal: House.

One caveat regarding that balance is “it depends” on the company doing the transactions. Not all firms are equally capable of capitalizing on a particular capability. RWE Renewables highlights this point. The executives and operating models being brought together are well tuned for high capital, asset-intensive power-generation and transmission management. Probably less so for consumer marketing. We have found that foresighted executives understand the businesses that they can buy and run, versus those that require a very different skill set and incentives. It’s not as simple as 1+1=. It depends on the “units,” the “1’s.” For RWE a Danish offshore turbine operator seems a safe fit. A consumer-packaged goods firm, no matter how “good,” a much less sensible fit.

In the mid-1990s, PepsiCo invested in commodity petrochemical assets to “protect itself” from fluctuating market prices of PET resin used in bottles. Hmmmm. Selling and distributing cases of Pepsi and running an ethylene-glycol plant. Lotsa “synergy” there. Oh, and all its competitors faced the same market prices for PET that Pepsi did. Competitive Advantage anyone?

A well-managed alliance can allow a firm access to capabilities requiring a far different set of skills, knowledge and incentives. The price may be managerial complexity and incomplete control. An RWE can, for example, tap into the nimbleness of a local firm without “crushing” that firm by buying it, then imposing routines and attitudes antithetical to its success. The chart below is an oldie-but-goodie that lays out a spectrum of alliance types.

Managers need to define their strategies in terms of the capabilities needed for success. Among those capabilities lie a small number that make the difference between success or failure. Others are merely “table stakes.” The critical next step is to assess capability gaps. Ruthlessly. Then a robust, even-handed build-buy-borrow process will inform investment, M&A and alliance priorities.