Buy, Build or Partner: A Primer
No business is everything to everyone from the outset. At some point, in order to grow, a company will need to take steps to expand its capabilities. And when a company wishes to grow, it generally has three options: buy, build, partner.
Product teams, too, have the same options when it comes to rounding out their product solutions and portfolio. Where you have gaps in your offering, you’ll need to analyze whether to buy, build or partner to complete the solution for your market.
Here’s everything you need to know about how to decide which option—or options—are best for you.
Defining buy, build, partner in product management
When a company decides to expand, it has three options: It can buy (acquire) another business, build (innovate) new products and services, or partner with another company to expand its offerings. Similarly, product teams also face the buy, build, partner decision when developing products to meet their customers’ needs.
If you’re at all familiar with Pragmatic, you know we have to back up a bit and put this concept into context. While many companies put the cart before the horse and choose to buy, build or partner because they think it will attract new customers, we first need to consider our market problems.
The buy, build, partner concept really only comes into play after you’ve conducted your win/loss analysis, mapped your competitive landscape and determined your market problems. Once you have identified the ideal solution, then—and only then—can you determine whether it’s appropriate to buy, build or partner to fulfill it.
Who owns the buy, build, partner decision?
Good buy, build, partner decisions are really based on what the market needs. And who should know a business’ market best? The product manager.
There’s a clear role for the product team in terms of identification of the problem, and working with your counterparts in design, architecture, engineering, etc., to figure out what the right solution should look like. And so there’s a three-step order of operations to make a good buy, build or partner call.
- Figure out what problem you’re trying to solve. This is done by conducting a market analysis and mapping your competitive landscape.
- Determine the ideal solution. Work with your product architect, lead engineer or CTO, and ask yourselves, “Given this problem, what does the right solution look like? What does it need to do?”
- Decide whether to buy, build or partner to create the solution.
All too often, organizations get into trouble when they take those three steps and flip them around or skip straight to the last step. They get distracted by an innovative company or new technology and then try to fit it into their business model, which is very often a bad idea. How can you know what the right solution is before first determining what problem you’re going to solve?
Once you’ve done the legwork of the first two steps, choosing the right answer to the buy, build, partner question should be relatively clear.
Good buy, build, partner decisions are really based on what the market needs.
When to buy, build, partnerWe’ll go into further detail below, but here’s an at-a-glance guide on when to buy, build or partner.
Why and when to buy
At Pragmatic, we recommend that you buy the basics. That includes anything where there’s already a vibrant market of companies who sell a particular product. For example, when thinking about hardware, the basics would include things like processors, hard drives, memory, ports, chips, etc. If you’re building a new Internet of Things (IoT) device, it probably doesn’t make any sense to create your own hard drive. There’s just no need to reinvent the wheel.
Technology licensing falls under “buy” as well. While it’s tempting to view that as a partnership, if you’re paying to license a technology from somebody, that’s considered to be a buy. Same with using open-source technology. Even though you’re not really buying it (because it’s free), you’re acquiring somebody else’s technology and you’re going to employ it in your own solution. That’s a buy. Another one is acquiring a company. If you acquire a company to incorporate its technology into your product, that’s initially a buy, although it’s likely to turn into a build later when you start tinkering with the technology to solve your customers’ problems.
Benefits of buying:
- Faster than building from the ground up
- Allows you to stay focused on what you already do well and capitalize on other companies’ strengths
Drawbacks of buying:
- Not proprietary
Why and when to build
Defining “build” is pretty simple. It refers to anything you’re going to create or develop in-house, be it a product, part, technology, service, delivery system, etc. Building is generally regarded as more cost-efficient than buying, but you must factor time into the equation—executive time, engineering time, time for testing, etc. It adds up. You also need to consider whether you’ll need to recruit and hire new talent, train existing talent, or invest in new equipment or technology in order to take on a build. And that all costs money too.
As such, we recommend you only build things that reinforce your distinctive competencies, or your DNA as a company. In other words, build things that no other company has the resources, know-how or passion to build.
Benefits of building:
- You’ll be the only/first organization with your solution
- You’ll be able to build the exact right solution to solve a market problem
Drawbacks of building:
- Generally slower than buying or partnering
- Ties up a lot of resources
Why and when to partner
Once you’ve decided what to buy and what to build, now it’s time to look for partners to fill the remaining gaps in your capabilities. Partnering involves joining forces with another company to round out or complement your product portfolio, cross-sell to each other’s customers or utilize each other’s strengths in a mutually beneficial agreement. Partnerships have the ability to propel your business to the next level—in the right context. But they must be vetted and entered into cautiously and conscientiously because otherwise, they could end up costing you both money and reputation.
Benefits of partnering:
- Can open up new revenue streams
- Avoids having to compete in a space you’re not familiar with
Drawbacks of partnering:
- Could be detrimental if not negotiated fairly
- Could harm your company’s reputation by aligning with a business you have no control over
There are generally three types of partnerships:
- Technology or development
- Sales channel
You may end up having partners in one, two or all three areas. And one partner may engage in more than one type of partnership. It’s whatever makes the most sense for your business. But it’s important to consider them separately because you might choose to emphasize one over the other.
Examples of technology partnerships
Technology partnerships are ubiquitous these days. It’s rather difficult to find examples of modern companies that don’t have technology partners. One example is the partnership between Nike and Apple.
When the companies initially came together, they worked to develop one of the first fitness wearables—Nike+. It was a true technology partnership in that Apple supplied the technology for the sensor that then slipped into the insole of Nike running shoes to track a user’s steps and pace. Their partnership continued even after the release of the Apple Watch and has evolved over the years. Today customers can buy the Nike+ Apple Watch that offers running-specific features and a Nike-inspired interface.
There are even more examples of technology partnerships on the B2B side, including Cisco and Oracle. Oracle has built a set of applications that run on top of Cisco UCS (unified communications system). Their development teams work together to make their APIs and SDKs seamless.
Examples of promotional partnerships
Promotional partnerships result when companies use their brand power to jointly promote and hopefully get a better result in the market. A B2C example of a promotional partnership is Doritos and Taco Bell. Around 2006, Taco Bell released the Doritos Loco Taco, which is a taco in a Doritos-flavored taco shell, and they put forth a huge promotional campaign around it, leveraging each company’s brand power.
You also see this on the B2B side, although it might not be quite as flashy. One example is Intel partnering with Red Hat, certifying that certain Red Hat operating systems would run on Intel chips. This partnership was about going to market with a joint promotional message that said, “Our products work well together. As a buyer, you can have confidence that these things are going to work together.” And this provides a lift to both Red Hat and Intel, and they can both sell more of their products and services as a result.
Examples of sales channel partnerships
In sales channel partnerships, one or both companies sell the other’s product. A B2C example of this is Pottery Barn and Sherwin-Williams. The companies worked together to develop a palette of paints that accentuate a line of Pottery Barn furniture—and the furniture retailer sells the exclusive colors on its website at a premium. This created an opportunity for Sherwin-Williams to access a whole new sales channel that it might not have otherwise reached. And Pottery Barn can now make an overall larger sale, so both companies benefit. They’re each getting access to something they wouldn’t have had on their own. And that’s what makes a really good sales channel partnership.
On the B2B side, we see these all the time as well, especially with large organizations like Cisco. This is essentially the value-added reseller, distributor or vendor model. Cisco has a massive partner program in which companies use a combination of Cisco products and their own to build a solution or customize a system for a particular set of customers. And oftentimes, as with Cisco’s partner program, the vendor is incentivized to sell its products with discounts and the like.
And one partner may engage in more than one type of partnership. It’s whatever makes the most sense for your business.
Learn more about buying, building and partnering
Knowing when to buy, build or partner is essential for every product manager. Learn more about each of these options and how to make the right decision for your business in Pragmatic Institute’s Focus today.