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Rotman Insights Hub | University of Toronto - Rotman School of Management

Build or buy: What's the best strategy for company expansion?

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Camille Hebert

Expansion is needed for any company to grow and ultimately succeed.

But how do organizations decide whether to buy their way into growth or build out organically? And what role does talent — or an employee base — play?

Those are the questions at the heart of Camille Hebert’s latest research, who — along with Paul Beaumont from McGill University — investigated human capital’s role in company expansion.

“You can think about human capital as someone’s education or experience. But the way we define human capital is the occupation base of the whole company, or the entire workforce,” says Hebert, an assistant professor at the Rotman School of Management and UTM Management.

The researchers looked at a number of business datasets from France, including more than 7,100 M&A deals that took place between 2003 and 2014, as well as a variety of administrative data, to explore the issue.

It turns out when an organization is trying to expand into a similar field — think tech hardware maker Intel trying to break into software development — it’s cheaper in the long-run to hire new staff (what Hebert and her fellow authors call “building” a team) for expansion.

In comparison, when an organization is attempting to break into a totally new category, it’s more cost effective to acquire a new company to gain access to their employee base (what the researchers call “buying” a team). Hebert points to Elon Musk’s acquisition of Twitter (now known as X) to illustrate: The founder of a car and space exploration company purchased a social media company — with a workforce with a vastly different skillset, knowledge and education. “It’s a totally distant sector in terms of human capital,” she says.

In effect, the more similar a company's human capital is to the space it’s trying to expand into, the easier it is to bring new and fresh talent to fuel growth. When an organization is trying to break into totally new territory, that’s where acquiring a company for talent might make the most sense. 

Organization capital is key to building in a distant market

When it comes to entering an entirely new (what Hebert calls distant) market, part of the challenge isn’t just the new workforce; the company’s organizational skills — such as the ability to select, train and integrate new employees, and the number of employees on its HR team — play a big role in a successful expansion. The more distant the sector of entry, the more organizational skills are required to build a team organically, Herbert says. Without this existing knowledge, expansion becomes difficult.

“To grow, you need HR professionals. You need people who will train these people you hire,” Hebert explains. “Basically, firms that are poorly organized cannot grow in some sectors because they are not able to hire or train.”

Long-term success and subsequent decisions

The researchers also found that once an organization has broken into a new sector, it is more likely to continue to expand in that space. There’s a relatively straightforward reason: Talent is one of the biggest barriers of growth into a new sector, and once companies have the human capital in place, they can overcome some of the bigger issues associated with bringing on talent in a distant sector, Hebert says. Theoretically, she says that now that Musk owns Twitter, he’ll be more likely to continue expansion into other social media circles now that he has the team in place.  

“Now that he has specific engineers and social media employees, he can continue to go into close sectors that were initially distant,” she explains.

Current outlook

While organic team growth (build) is preferred — because building out a talent base is generally less expensive than purchasing a company — Hebert says there are some cases where acquisition to fuel growth makes more sense.

“Firms should always build unless they cannot hire key skills in the external labour market — for example, if there is a thin labour market for certain occupations — or, if they do not have the organizational capabilities to hire, train and integrate the new skills,” she explains.

She adds that with recent layoffs in the tech sector, the talent on the market is more specialized and available for distant companies that want to enter the tech sector — making it a bit easier for them to build.

“My expectation is that we should see fewer acquisitions in tech sectors than we used to see, and more organic entries in these sectors in the coming years,” she says.


Camille Hebert is an assistant professor of finance at the Rotman School of Management.