What are the Best Routes to Innovation Success?
New research offers some useful information to companies concerned about their innovation portfolio.
In Make, Buy, or Ally? Choice of and Payoff to Alternate Strategies for Innovations the authors analyze the question of whether it is better for companies to make, buy, or ally for innovations.
They found that R&D and alliances had a higher payoff than acquisitions which generates a negative payoff.
The research was carried out by Abhishek Borah, an assistant professor of marketing at the University of Washington, and Gerard J. Tellis, a professor of marketing at the University of Southern California.
To reach their conclusions the professors analyzed 3,522 innovation announcements of make, buy or ally. They covered 192 firms across 108 industries over a five-year period.
On average, a company’s stock rallied following an announcement of an R&D drive and fell following news of an acquisition.
Why?
A Market Watch piece in The Wall Street Journal covers the reasons for this. It points to an interview with Tellis where the professor explains the market is able to see through a company’s acquisition strategy and focus on a fundamental issue. Namely, whether their store of innovations is so low that acquisitions are a desperate bid to catch up with competitors.
It’s almost as if this is a cry for help. Despite, the negative payoffs many companies still pursue the acquisition route. According to the study’s authors there are two reasons for this:
“Firms seem to have no memory for the payoff to buy even though they have a memory for the payoff to make. Second, firms tend to buy when they lack commercializations, even though the strategy seems not to pay off.”
To read the study abstract and download the full paper, click here.
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