Should You Build or Buy Your Way to Growth?
As we've worked with companies of various sizes to build businesses, we've noticed an interesting correlation between the size of the company and its growth approach. Small companies typically view business building as a "do it yourself" organic approach, while large companies tend to think first about acquisition.
The truth is that companies of any size should be able to build a business using either method: organically or through acquisition. The key is building the right business case. Here is one approach we are currently using with a client.
Step 1: Define Your "Burning Platform"
Our client was experiencing a clear deterioration of its core business. There was no imminent survival danger, but the business model was changing as the company's primary distribution channel eroded. Other companies may see a change in preferences of their core customer segment or new competitor offerings. Each of these business model changes creates a "burning platform" to build a new business.
Step 2: Outline the Case for an Organic Build
After identifying the platform, you then need to outline the case for building it from scratch. This is most often the cheapest option and the one that offers the best chance to pivot as you learn more. But it may not always be the best approach. Here are the key questions to address:
- What are the opportunities to pilot the new business model? Are there specific geographies or customer segments where you can pilot a new offering?
- Who is your target customer?
- What potential target segments are neglected by current competitors? What operating model would best and most profitably serve those customers?
- What products and services would you offer / not offer?
- What marketing messages should you convey?
- How do you avoid being just another competitor in a standard market? How do you competitively differentiate?
Step 3: Outline the Case for an Inorganic Build
Buying a company may be a faster and sometimes most valuable way to build the business. Ask these questions to determine whether it's the optimal approach:
- What acquisition opportunities are available?
- What are the financial and organizational costs and benefits to making an acquisition?
- What are the funding options? Is this easier or harder on the balance sheet than an organic build?
- What advantages can you capture in terms of time to market, customer acquisition, and overall investment cost?
- What is the cost of failure, and how does this compare to the organic option?
Step 4: Align On an Action Plan
The action plan needs to ensure that the management team has a clear path to follow, with accountability and the ability to make decisions without sinking too much investment in the process. Make sure you address the following:
- Is an organic or inorganic build a clear optimal choice, or should you create a hybrid approach and learn more?
- Who will be accountable for delivering critical elements of the plan?
- When and how will you make go or no-go decisions for each stage in the process?
It's possible to develop a better and more profitable route to growing a business. It starts with asking the right questions to determine whether building or buying is the best approach.
Send us your questions on build vs. buy strategies. We can be reached at firstname.lastname@example.org.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.