Many business development teams experience that the company lacks some vital skills or resources in order to launch the new product or service. This is specially true when it comes to diversification initiatives. A discussion quickly arises. Should the company buy a player with the assets needed or would it be better to sign a partnership with the same player?

Most innovation teams lack the authority to take such a decision alone. Usually, they have to present the case to the top management or some kind of advisory board first. The discussions then tend to get polarized on two sides: The side of the innovation team wants usually to buy. They may assume it would be quicker and they may assume that the technology they want to acquire  (yes, usually it is some kind of technology or platform) is unique to the acquisition target. The company just can’t let the potential competitors get access to it!

The management or the decision board side may reply that technology, skills or resources can quickly become outdated, leaving the company «stuck» with a new legacy problem to deal with. Another valid argument these decision makers use is that it may be better for the company to have the flexibility of changing partner in case a new «best of breed» player arises.

And still, in some cases it is realistic to develop the skills, technology or resources in house and keep them there.

How to decide?

One of the most powerful tools I know to promptly deal with these situations is a modified version of the Rolls Royce matrix. It was originally developed in order to decide whether the manufacturing of a piece of equipment should be done in-house or outsourced. However, I have used it in the innovation context and it works very well in that setting too.

The matrix is based on two factors only: 1) How critical the asset (technology, resource or skill) is to the future of the new business. 2) How competent the company trying to develop the new business is in that concrete area.

Partnerships are best when the asset isn’t really that critical or many suppliers with similar capabilities are available. Depending on the grade of relevancy, the type of partnership may be strategic, with well defined common objectives, or just a standard supplier/ customer contract. It is critical to carefully decide whether the asset is indeed critical or not. The original PC team at IBM decided to enter in a partnership with Microsoft, instead of acquiring a controlling stake in the company. One of the most critical parts of the new product, the operative system, remained under the control of Bill Gates. That decision prompted the merciless rise of the PC clones and the unmaking of the whole IBM corporation. Indeed, ten years later, the company once called «the environment of the computer industry» was on the brink of bankruptcy.

Acquisitions are always a distraction and usually more expensive that planned, specially in industries characterized by buzz words or growth companies with good stories. However, if the internal competence is low, but the asset is critical, the recommended action is to carefully screen the market and promptly acquire the selected owner of the asset. That’s what we see the main internet ecosystems are doing. From Apple acquiring Siri to the furious series of acquisitions in the artificial intelligence arena carried out by Google and Facebook, the logic behind is this combination insufficient competence/ critical asset. This is specially true when time is of the essence, future scenarios are unclear and the company has to cover all bets to guarantee the success of the initiative. What happens when the best suited acquisition target cannot be bought? In that case the alternative is to create a Joint Venture. However, keep in mind that this is always a dangerous move. It is short-lived in nature and frequently involves governance issues that can paralyze the whole initiative.

In some cases the asset isn’t that critical, and the company has a basic replacement in its portfolio or catalogue of resources. In that case, the best move is to invest a minimal amount of time and resources into replicating the asset or barely keeping it relevant. This is exactly what Microsoft is doing now with the rests of the Lumia cellular phone series, now that it isn’t relevant for the mobile strategy of the company anymore.

Finally, in some rare cases the company has to take a bet and stick to it. When the asset is critical and the company has the know-how to replicate and improve it, it should do it. Apple’s entire business philosophy rests on the concept of tightly integrated hardware, software and services. As a result, the company designs its own chips and invests heavily in order to beat any other smartphone manufacturer on specs and performance. Another example are car makers. They outsource an impressive amount of parts, but most of them still design their motor engines.

As a conclusion, it is essential for the management of any company to have an informed knowledge of what the real competitive advantage of the company is or should be and protect it. At the same time, the business development team must do a realistic assessment of how critical for the project the discussed asset really is. Poor judgement or political and ideological stands from one or both sides of the table can lead to serious and unnecessary consequences for the management, the team and the entire company.

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