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International Strategy Implementation Build, Borrow, Buy By Laurence Capron Will Mitchell Definition Resources: • Assets that a firm needs to create goods and services for customers. • Types: - Physical (plants, equipment); - Intangible assets (know-how, intellectual property); - Human resources (employees, other internal/external stakeholders) . Strategic Resources: • Resources necessary to: - Reinforce current competitive advantages; - Lay the groundwork for future advantage. Existing Resources: • Resources a firm currently owns or controls or to which it has established a reliable access. Targeted Resources: • Resource a firm currently lacks and wants for opportunities to create valuable new goods and services for existing customers. Resource Gap: • Distance between existing resources and targeted resources. Selection Capability: • Firm’s ability to select the appropriate pathways to fill resource gaps. Build – Internal Development: • Changes that a firm undertakes on its own to create value by recombining existing capabilities or developing new ones. • Efforts involve:  Hiring & training internal staff; executing internal product development; building new plants Build – Internal Exploratory Environment: • Independent space where teams (independent units) can experiment with new ideas, resources and business models. • Valuable approach as a way of buying time to learn about uncertain opportunities. Borrow – Contract: • Arm’s-length agreements to buy existing products or services from 3rd parties. • Arrangements include: - Purchasing outright off-the-shelf technologies and services - In- or out-licensing the use of specialized knowledge sources, software, & services. - Basic market agreements; Consulting contracts Borrow – Alliance: • Ongoing collaborative partnerships with other firms/institutions

International Strategy Implementation • Agreement to commit resources to work together for a period while retaining strategic autonomy (i.e. one firm cannot force its partner to do something) • Examples include: - Equity & non-equity JV; - R&D and marketing alliances; - Corporate venture capital investments; - Multiparty consortia; - Franchises - Detailed outsourcing agreements Buy – Acquisition: • A firm purchases at least a controlling interest in another firm (or its individual business unit) to obtain unfettered use of its resources. • Provide unified strategic direction for both the buyer and the target firm (which sometimes operate as an independent business entity). • Allow the integration of people, resources and knowledge. Divestiture: • Sale of business units, product lines and major assets.

International Strategy Implementation Chapter 1: The Resource Pathways Framework • Fast-evolving, dynamic markets (technologically, regulatorily, competitively, demand-wise) “Firms that learn to select the right pathways to obtain new resources gain sustainable competitive advantage.” Root causes for failure to obtain new resources: 1) Firms often struggle to implement the paths they have chosen for obtaining resources. 2) The paths chosen are often the wrong ones  implementation trap: trying harder to achieve objectives with wrong pathway.  think harder about the path, not the implementation! Case: Compaq & Hewlett-Packard (HP) • 2002: HP acquires Compaq for $25bn.  Successful: HP’s transformation from: scientific instruments  personal computing (not at first: low profitability until 2005) • Compaq’s previous round of acquisitions led to its demise: - Goal: compete with IBM & Dell as a broad-based computer manufacturer. - Purchased: o Tandem Computers (1997; high-end business computers producer) o Digital Equipment Corporation (1998; leading maker of minicomputers) - Why did it fail? 1. No blueprint for integrating and exploiting the acquired properties  no assessment of the feasibility of post-acquisition integration  fragmentation of the business 2. No assessment of the difficulties of absorbing two large, very different acquisitions in such short timespan. 3. Because of 2., Compaq overlooked potential problems that might have pushed for walking away from the deal  Compaq did not recover from these M&A failures, & HP purchased Compaq to fit its expansion strategy. Why did HP succeed where Compaq did not? • Considerable attention paid to: - How it would select the necessary resources for this strategy. - Feasibility of post-acquisition integration - Ways of complementing the acquisition with both internal development and alliance support.  HP had various ‘integration team’ to: o Specify internal activities to be undertaken to integrate Compaq’s resources; o Identify HP resources that would become redundant once the firms combined.  HP’s senior leadership recognized complementary resource gaps, to be filled through build / borrow strategies  developing software & hardware bridges. (e.g. worked closely with SAP to develop software HP needs to expand its businessoriented services) Over time, organizations develop a dominant way of obtaining resources:

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Strong R&D firm  default to building through internal innovation. o Still, they draw on external sources to complement organic growth. o Examples: pharma-industry; Research In Motion (2004; build strategy to make the BlackBerry more ‘smartphone-like’) Firm that grew through M&A  keeps on purchasing to fill the resource gap. o Fastest way to acquire & control a portfolio of resources. o But…expensive & difficult post-acquisition integration o Example: Nokia & Psion (1998-2004)  developed the Symbian OS first under alliance, then purchasing the entire operation. HP (2009)  Acquired Palm (personal digital assistant, webOS) to use in its devices (smartphone to PCs) Company that values rapid response & high flexibility  borrowing o To achieve comparative advantage, it is not needed to control the resources.

Mixed strategies: • Apple: - Build: iOS - Borrow: technology licenses and alliances (Intel for chips, Samsung for screens) - Buy: Next (VR), etc.

Recognizing Resource Gaps “Garbage in, garbage out” A ‘Myopia’ prevents companies from seeing that their existing core resources are unequal to the competitive demands of the moments. • Companies’ past habits, successes and expectations  misjudge needed resources. e.g. when leading steam locomotives manufacturers responded to new diesel and electric locomotives by producing the most advanced cost-competitive steam locomotives ever seen. e.g. Nokia & BlackBerry (Research-in-Motion) struggled to respond to advances in consumer smartphones  overvalued their existing internal resources’ relevance when responding to advances from Apple, Google, HTC and Samsung.  Did not follow-up with market & technology changes.

Assessing the Different Resource Pathways:

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Q1: Are your internal resources relevant?  Organic growth is only effective than inorganic when internal resources (knowledge, processes, incentive systems) are: 1. Similar to those needed to develop; and 2. Superior to those of competitors in the targeted area. Q2: Are the targeted resources tradable? Which types of external sourcing mode to use? - Weigh resources from the simplest, most straightforward, to those of higher cost, complexity and commitment. Borrow via contract: simplest way. (e.g. pharma firms licensing the rights to register and market other companies’ drugs in particular geographic markets.)  requires clarity in defining the targeted resources & current gaps Why do firms overlook this option? - Trust-issues (obsessing about control) o Overestimated ‘need’ for strategic control  underestimating the likelihood of achieving adequate control through 3rd party relationships - Wanting a shortcut  acquiring seems ‘easier’ - Overestimating frictions - Misinterpreting previous failures Q3: What is the extent of closeness needed with the partner? Borrow via Alliances: R&D and marketing partnerships, freestanding JVs

International Strategy Implementation  rely on ongoing interactions in which independent actors involved commit resources to a join activity.  viewed as “a route to diminishing skills” and “way of shopping core competencies rather than sharing knowledge” Why do firms overlook this position? - Paranoia: o Concerns of exclusivity, control and [key] resource protection. Q4: Is the target firm ‘ integratable’? • M&A are (almost always) more time-consuming and expensive than most pessimistic scenario. • Depends on the level of resource control required • Would only work if the acquired resources could be fully leveraged to generate investment opportunities and strong investment performance • The acquirer needs to provide value by bringing expertise in legal, compliance, and risk management • “The tremendous power and potential of the buy mode is matched by the severity of its challenges”

International Strategy Implementation Chapter 2: When to Build? • How to assess the relevance of the existing resources for internal development? • How to recognize when it is best to outsource? Internal development is most effective when: 1. Existing resources—including your knowledge bases, processes, and incentive systems: a. Relate closely to the new resources needed; and b. Outshine competitors in the targeted area. 2. The existing organization must be compatible with the needed resources.

Cases: • The Romanian automaker Dacia manufactured licensed versions of French Renault models for more than thirty years before exiting the industry without ever having developed a single indigenous model (Renault acquired Dacia in 1999). • Korean automaker Hyundai initially developed cars in collaboration with Ford, but ultimately absorbed enough internal expertise to design and successfully market its own models.  Firms that rely excessively on internal development fall prey to rigidity and inertia: • Atari lost ground to Sony and Sega in the gaming industry during the mid-1990s when it used internal development in attempting to keep the Atari Jaguar at the front of the market in software, core hardware, and accessories such as game controllers. • Netscape, meanwhile, lost ground to Microsoft’s Internet Explorer by focusing on internal skills to develop the inferior Navigator 4 browser rather than searching externally for new skills that would help it respond to Microsoft’s advances • Coca-Cola FEMSA entering the Mexican coffee-vending market in 2010 (redeploying internal resources into new uses) to challenge Nestlé’s dominant position: ‘Blak’ product  Rely upon innovative and robust distribution system in Latin America and successful launch of ‘similar’ beverage-product portfolios worldwide.  Initial difficulties: underestimating the resource gap o Customers disliked the flavor of the new coffee product (milk powder had short shelf-life) o Distribution and maintenance of coffee vending machines poorly executed  Carried-on similarly as with the soft-drink machines located right near them  requires training!  Warehouses lacked adequate space for the coffee product line (interfered with regular loading processes and cycles)  coffee-vending is a brand-new category! o Different knowledge base, processes and organization  Coca-Cola FEMSA optimized to handle soft-drink bottling, not ‘nonsofts’  Truck drivers sacrificed space for sure-selling soft drinks to carry coffee supplies cut into their income.  New drivers needed to clean the machines, restock them with coffee, milk & sugar powder  different skills .: higher pay than soft-drinks drivers (created tensions!)

International Strategy Implementation o Skills and knowledge of the soft-drink business had little relevance to the coffee market.  Reaction: In 2011, it relaunched as a pilot program in Mexico City. The company modified the product, upgraded internal resources, selectively obtained some external resources, and developed dedicated functions—including a separate development team, a dedicated coffee call center, and a new logistics platform exclusively for the coffee business. o Although the changes increased the cost of implementing the business, they overcame the mismatch of resources and incentives and, in turn, generated much higher sales and profitability. To assess how relevant internal resources are, two important determinants:

Knowledge Fit:  How closely your existing knowledge base aligns with the targeted resources—the exploitable compatibility between new and existing resources (does it require training?)— together with the strength of your existing resources––relative to competitors or potential resource suppliers (can the needed resources be developed faster, more cheaply and at a higher quality than can other firms?).

Organizational Fit:  the compatibility of your established systems (procedures, incentives, control) and values (culture) with those needed to develop the targeted resources. Fit with current systems: Firms benefit from sourcing externally when they enter a new market segment: (different organizational requirements) • e.g. Carrier, a unit of United Technologies Group, decided to develop an environmentally friendly refrigeration system, and bought Swedish manufacturer Green & Cool (2009), which had appropriate technology and was already serving this market.  Carrier could have used its internal skills to build a full range of products, but it instead sought to avoid organizational conflicts about potential cannibalization and channel conflict, while preserving its core premium brand as it experimented with new market segments. Internal Competition: internal barrier to entry

International Strategy Implementation  when adopting practices and integrating skills from outside the organization  for change to succeed across an organization, it must be made to work in the lower echelons. Implementation challenges:  re-allocation of scare resources (human, financial, technological): new projects often disrupt existing activities.  the key is not to be constrained by past priorities, and to focus on changing dynamics in the market or tech to build, more up to date (as opposed to obsolete) competitive advantages.  need to identify and interconnect the right internal people (and right resources)

 Determine whether your company’s functional capabilities—R&D, marketing skills, and production processes––provide a relevant base upon which to create targeted resources quickly and effectively. Why do firms reflexively choose internal development? Reflexively = without 1st assessing the resources needed to develop.  either out of ‘historical bias’ (long-standing preference for organic growth) [will lead to implementation trap]  Executives often forget that no pathway is inherently superior to others:  Superiority is a function of context. What triggers such behaviour? Hubris: holding unreasonably high opinions of a firm’s in-house skills vs. competitors’. Misalignment of Stakeholders’ Incentives: Across functions such as R&D, information technology (IT), and marketing, leaders believe that their job is to “keep on keeping on”—keep researchers researching, developers developing, and marketers marketing—whether or not it’s the best use of company resources  This mind-set leads functional leaders to skew toward increasing the use of internal resources as focusing on external resources would dimmish the perceived value of in-house resources. Limited Horizons: • Leaders grow accustomed to using traditional internal resources that reflect a limited set of suppliers, competitors, and market opportunities. • Executives may not recognize that growing technical and market strength beyond their traditional purview might hold new opportunities for external sourcing. Lack of External Sourcing Skills: • Many firms simply don’t develop/own the skills needed to identify opportunities for external sourcing.

International Strategy Implementation • Firms that have traditionally focused on organic growth are seldom adept at seeking and exploiting external resources.

Implication for the Resource Sourcing Strategy:

Close-Knit Projects: e.g. Eli Lilly –– developed the drug Zyprexa within its existing research labs: • High Knowledge Fit: building on internal skills/knowledge/expertise it used when developing Prozac. (drugs requiring similar technical expertise) • High Organizational Fit: Zyprexa has a market similar to that of prior products, uses compatible regulatory and marketing procedures, and uses familiar evaluation technique Unrelated Projects: e.g. Abbott Laboratories –– decision to expand its pharmaceutical business in India: • Low Knowledge Fit: the firm lacked knowledge of how to develop and market drugs specifically in the Indian context (despite Abbott’s global strength through experiences in North America, Europe) • Low Organizational Fit: Indian market requires very different marketing, regulatory systems and incentives from those in developed markets or even emerging markets. Results: external sourcing  Abbott acquired an Indian “branded generics” business.  Enhanced the company’s global knowledge & organizational capabilities base about the branded generic drugs business. Homeless Projects: • If easy external solutions are unavailable, reconsider a variant of internal development: the creation of an internal exploratory environment  effective way of sidestepping organizational barriers to internal development.

International Strategy Implementation • With this approach, corporations experiment with new resources in an internal organizational context that keeps the experiments protected from the firm’s dominant cultural and other pressures.  Even when an external source will satisfy immediate resource needs  consider running this approach in tandem: o External relationships can help reduce organizational barriers to newly developed internal resources when an appropriate opportunity knock. e.g. Telia, Swedish company in the 1990s  created the Telia Light venture to develop its IP telephony at the periphery of its mainstream organization. Resourceless Projects: • Weal knowledge base projects, but high organizational fit for operational routines and cultural values. • Initial external search desirable: borrowing or buying lets the firm learn and quickly integrate new functional skills  organizational compatibility will facilitate importing knowledge into the firm so that future development in that area can be internal. e.g. AMD – wants to integrate graphics processors with its core computer processors: • First considered an internal development project (which was fully compatible with AMD’s organizational context and values.) Yet: necessary technical and market skills different substantially from AMD’s existing knowledge base. Result: AMD bought ATI Technologies (leading Canadian graphics processor company)  When AMD built internal competencies as a result of the acquisition, the firm removed ATI brand from its graphics-processor products. e.g. LEGO –– tapping insights from current and prospective consumers: crowdsourcing • Open innovation by encouraging “lead users” to become cocreators in product design. e.g. InnoCentive –– open innovation with broad set of external stakeholders: • Since 2006 (and in earlier years as part of Eli Lilly), InnoCentive has enlisted clients such as P&G and NASE to sponsor crowd-sourcing challenges for its roster of more than two hundred thousand “solvers.” • InnoCentive pays solvers cash awards for solutions that best meet clients’ criteria.

Internal Exploratory Environments: (IEE) • In case where firm lacks relevant skills or organization to develop a targeted resource: - IEE can generate information that may help resolve the uncertainties of a promising project (or lead to a breakthrough) - People can experiment with projects radically different from their ongoing activities - Independent business unit can be created to develop new resources outside the mainstream organization. Skunk Works Projects: - Small-scale undertakings within an active operating unit - Typically consist of few people who work and experiment to create new goods...