The Company at the Crossroads. Part 2: Build or Buy?

"Build or buy" is only convenient shorthand for a wide range of possible courses of action.
Nov 01, 2008
Volume 21, Issue 11

Conrad J. Heilman, Jr., PhD
In the previous installment in this series, we explored how emerging biotech companies should approach one of the most critical questions they face: what kind of company they ultimately want to be. Should they pursue the path of the idea factory that generates innovative therapeutic products and develops them to a point where they can be outlicensed to another company? Or should they become a fully integrated firm that takes innovations from discovery all the way to the market? Although the decision is a defining one, it is by no means the end of major decisions that either kind of company faces. Among those decisions, one of the most difficult and recurring is whether to build or buy critical capabilities.

Further, build or buy is only convenient shorthand for what in practice can be a wide range of possible courses of action, each of which involves differing risks and rewards. Consider the case of a rapidly growing, fully integrated firm that needs additional capacity. The company could:

  • Build: Construct a new unit of its own.
  • Buy: Purchase a company, business unit, or facility that already has the desired capacity.
  • Upgrade: Enhance the capacity of the company's existing units by installing new technology or extending a current line.
  • Optimize: Enhance the yield of a current unit by cutting waste through Lean or Six Sigma.
  • Outsource: Contract with a third party, such as contract manufacturing organization (CMO) or another pharmaceutical company, to deliver to specifications.
  • Leapfrog: Stop investing in old processes and wait to spend money on next generation technology or processes.

There are also many possible permutations involving combinations of two or more of these solutions, which greatly multiplies the choices. In addition, many people in the organization are capable of generating even more alternatives.

To complicate matters further, assume that the company has faced similar decisions before and in both cases failed. On the first occasion, the CEO was sure he just knew the right thing to do. Nobody dared to protest and important showstoppers weren't brought forward until after the decision was made. On the second occasion, the opportunity disappeared while the decision process stretched on interminably.

Given the many choices and the possibilities for organizational dysfunction, one thing is certain: an ad hoc or intuitive approach to weighing risks and rewards is simply inadequate for such a complex and important decision.


Fortunately, there is a way to avoid the pitfalls of intuitive decision-making and poor processes, find the best alternative, and retain alignment among all the constituencies involved in implementing the decision. This proven approach to decision-making has been successfully applied in thousands of complex and valuable decisions over the past twenty years.

This method is marked by two interdependent characteristics. First, it treats the weighing of risks and rewards as a science with adequate and controllable inputs, repeatable processes, and measurable results, much as in core scientific processes. Second, it accommodates the human factor by encouraging wide participation and providing the kind of neutral decision criteria that satisfies participants about the objectivity of the process.

In both the quantitative and human dimensions, this disciplined, structured approach offers many important advantages.

Superior clarity in complex situations: Relatively inconsequential or uncomplicated decisions can of course be dispatched straightforwardly and without concern for issues of mobilization and alignment. Large, complex, value-laden decisions, however, require a process that can comprehend all of the complexities, as in the case of the integrated firm weighing the options for adding capacity. In this case, the issue of building or buying—and of all alternatives in between—involves a potentially significant capital expenditure, requires a complex weighing of difficult-to-compare choices, and risks that range from issues of adequate market supply to quality, and many more.

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