Wednesday April 17, 2013
10:30AM - 12:30PM
USC Marshall School of Business
Make, Buy, or Ally: Patterns and Paradoxes in Making versus Buying for Innovations
Firms constantly grapple with the question of whether to internally develop (make), acquire (buy) or partner (ally) for innovations. The literature has not analyzed the choice of and payoff to these alternate routes to innovation for the same firm. To address this issue, the authors collect and analyze the choice and payoff to 3260 make, buy, and ally for innovations for 192 firms across 108 industries over a period of 5 years. The authors find that on average, make and ally generate positive and higher payoff than buy, which generates a negative payoff. Nevertheless, firms continue to buy for two reasons. First, 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. These results suggest that firms see buy as a quick fix for what may be a deep strategic problem. Nevertheless, buy can pay off if acquirers are experienced and the target is related and offers high customer benefit. Conversely and surprisingly, make and ally each pay off for unrelated innovations. The authors offer explanations for and implications of the results.