What is internal resource development?
Internal resource development is the creation of new resources and capabilities within the organization. This is in comparison to either partnering within another organization, or acquiring or merging with another firm.
Examples of internal resource development include:
- Marketing: Building a marketing department to understand your customers or launch advertising campaigns.
- Software: Developing machine learning capabilities to be able to automate areas of the firm.
- Technology: Creating expertise in a specific area to be able to launch a new product.
When does internal resource development make sense?
Some of the situations where internal resource development makes sense includes:
- Connected capabilities: If the resources that you are developing are similar to resources the firm already has. If you already have some connected experiences, you are much more likely to be able to draw from those resources, relative to if you have little to no similar experiences.
- Organizational slack: If the firm has some degree of organizational slack – free resources that can be drawn from to undertake the development of a new resource. If the company is already operating entirely at capacity, there may not be the individuals to be able to develop new resources within the organization.
- Lack of easy ability to acquire externally: For some areas, there may be a much easier alternative to internal development – potentially a specialized supplier, or the ability to easily license a particular technology. In such cases, the costs of internal development vs the ease of acquiring it may make internal development a poor choice.
The advantages of internal resource development
Fully under the control of the firm
One of the first advantages of internal development is that the firm has full control over the resources. You are not using it at the discretion of a partnered firm – rather, you have the ability to use and further develop it as you see fit.
The organization captures the value of the resource
Another advantage of internal development is that the firm captures the full value of the development. There is no other firm that is looking to make a profit from the relationship – if the development takes off, you capture its full value.
The disadvantages of internal resource development
Specialized firms may be able to do it better
A reason for using specialized external firms rather than internal development is that the external firms may have much greater skills and be able to offer a better service than you would be able to provide. If they have been developing a particular area for many years, and have dedicated employees working on the product or service, they may be able to offer a much higher standard than you could internally develop.
Specialized firms may be able to spread the development costs over a large number of clients
Specialized firms can also spread the development costs over a large number of clients. While the resources developed internally are only used by you, they can re-use the same resources across a large number of customers that they serve – spreading the development costs.
It can be time-consuming to develop the resources
A final limitation of internal development is that it may be time-consuming to undertake. If there is a need to be quick to market, there may be other faster approaches to acquire the necessary resources.
Final thoughts: Consider the build-borrow-buy framework
The build, borrow, buy framework is one good way of thinking about the decision of how the company should acquire resources. It illustrates how as well as building (internal development), a firm can also borrow resources through partnerships with other companies, or buy them through an acquisition or a merger. Particularly if it would be difficult to develop the technology internally, there can be merits in a firm considering other means of acquiring resources.