University of Southern California

Make, Buy or Ally?
January 17, 2014
Category: 
Marketing

Which strategy—making (producing one’s own) innovation, buying (acquiring) innovation or allying (partnering) for innovation: generates the best response from the market? Gerard J. Tellis, director of the Center for Global Innovation at the USC Marshall School of Business, and Abhishek Borah ’13 (who earned his Ph.D. from Marshall’s department of marketing) analyzed 3,522 announcements of make, buy and ally innovation for 192 firms across 108 industries over five years.

Their research forthcoming in Marketing Science, is titled, “Make, Buy or Ally? Choice of and Payoff to Announcements About Alternate Routes to Innovations.” Their findings offer significant implications for managers.

“Buying” or purchasing innovation through acquisition was the most prevalent strategy used by companies — even though making and allying generate a significantly positive and much higher payoff.

“For large corporations, innovation through acquisition is costly and not an effective long-term strategy,” said Tellis, the Jerry and Nancy Neely Chair in American Enterprise and professor of marketing at USC Marshall. “Such acquisitions tend to occur too late, tend to cost too much, and are difficult to integrate successfully with the business of the acquirer.”

Tellis and Borah found that a company’s announcement to buy generates a payoff of -0.28%, and the total dollar value for a buy on average is a negative $42 million. Yet many companies continue to buy because they have no memory for reaction to their previous acquisition or they lack commercializations.

Tellis and Borah wrote, “HP has lost billions of dollars in value by purchasing Palm for its mobile software, EDS for its information technology services and Autonomy for its textual software. When screening Autonomy, HP had a choice between ally and buy. However, it chose to buy: That eventually led to a mammoth write-down of $8.8 billion.”

In contrast, the total dollar value for a ‘make’ on average is $165 million, and the total dollar value for an ‘ally’ on average is $62 million, the researchers found. Apple is a perfect example of a business that has boomed through a ‘make’ strategy, having innovated within the firm and entered the markets of music, phone and books outside of its core area of computers. Procter & Gamble successfully employs the ‘ally’ strategy through its Connect+Development initiative and, in 2009, achieved 70 percent higher than average Net Present Value from its C+D projects.

Nevertheless, Tellis and Borah noted, firms can obtain higher payoffs to buying by developing acquisition experience and by acquiring innovations that both relate to their current capabilities and yield high customer benefit. Cisco has a well-tuned acquisition process, for instance, while Parker Hannifin’s buy of Airtek brought a customer benefit that allowed the company to earn $319 million in the three-day window surrounding the announcement.