University of Southern California

Make, Buy or Ally?
Gerard Tellis and Abhishek Borah publish research in Marketing Science
October 29, 2013 • by News at Marshall

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, have an article forthcoming in Marketing Science, titled “Make, Buy or Ally? Choice of and Payoff to Announcements About Alternate Routes to Innovations.”

The authors analyzed 3,522 announcements of make, buy and ally innovation for 192 firms across 108 industries over five years. Since no prior research had analyzed the choice of and payoff of these three alternate routes to innovation within the same firm, their findings offer significant implications for managers.

Tellis and Borah found that make, buy and ally are widely used as strategies to obtain innovations, but buy is the most prevalent — even though make and ally 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. “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 opt to buy because either they have no memory for the payoff of announcements of buy or they lack commercializations. For example, the authors 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 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 buy 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.

Tellis, who is also associate editor of Marketing Science, noted that doctoral students are often involved in this kind of consequential work. “Graduate students who join the USC Marshall marketing Ph.D. program have the opportunity to work on cutting-edge research that can get published in the top journals in the field and have a big impact on business practice.”

About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.