BLOOMINGTON, Ind. – As companies seek to expand, they often look to outside options such as acquisitions or alliances. Whether they choose to “make” or “buy” that growth differs greatly among largely tech-oriented firms and those that are marketing-driven, according to research from the Indiana University Kelley School of Business.
A study of more than 6,000 relationship decisions made by about 1,000 publicly listed U.S. firms from 2009 to 2016 found that firms spending millions more on research and development relative to marketing mostly sought growth through alliances as opposed to acquisitions.
Firms with a stronger emphasis on marketing to find new customers and increase revenues most often grew through acquisitions.
Girish Mallapragada
“It’s a little counter-intuitive, because most firms try to acquire others, thinking it is a faster way to grow, in general. But research also shows that acquisitions destroy value, because it is difficult to integrate companies,” said Girish Mallapragada, professor of marketing, Weimer Faculty Fellow, and lead author of a forthcoming article in the Journal of Marketing Research.
“The challenge we found lies in how companies safeguard or protect their assets. R&D is easier to protect because it comes with patents — they are codified in law … You don’t have to worry about your partner stealing your intellectual property,” he added. “Because your asset is very well defined and it costs a lot to acquire, the more cost-effective approach for tech firms would be to form an alliance.”
On the other hand, marketing assets, such as brands, are much harder to protect, despite the presence of trademarks and copyrights which are difficult to enforce.
“Just ask Gucci,” said Mallapragada, referring to the popular fashion brand whose trademarked designs have been readily copied, and the fakes resold.
“If the relationship involves a marketing asset, it’s going to be expensive to create rules and procedures with a partner who is not bound by law to do this. Therefore, you acquire them,” he added. “The heart of the argument is we have two types of assets – one is easy to govern, and the other is difficult to govern. If it’s easy to govern, form an alliance; difficult to govern, acquire.”
The paper, “To Acquire or to Ally? The Impact of Strategic Emphasis on Governance Mode Choice,” cites several examples, including Coca-Cola Company, known for its marketing, and its 2007 decision to acquire the Glacéau energy drink brand, and pharmaceutical company Merck’s decisions to form alliances with other firms.
Another growth option not explored in the paper is growth through direct and organic expansion. The decision whether to grow through partnerships or acquisition often is based on an economic value called transaction cost.
Other authors of the paper are Raghu Bommaraju, associate professor of marketing at the Indian School of Business; Alok Kumar, the Steve & Jennifer David Chair and a professor of marketing at the University of Nebraska’s College of Business; and Kiran Pedada, associate professor of marketing at the University of Manitoba’s Asper School of Business.
Their research uniquely explains why a company’s strategic emphasis affects a firm’s structure, in addition to financial performance.
A significant number of companies – not all — have chief marketing officers. The researchers also studied the impact of their presence in the c-suite on corporate growth decisions. Interestingly, they found that when a company has a CMO, they push firms that have a marketing emphasis more toward alliances, rather than acquisitions.
“Marketing is about relationship building. When there is a CMO, they are a lot more careful, they’re experienced, and that allows them to understand relationship management better, so they are less likely to go down the acquisition path,” said Mallapragada, who also is a Weimer Faculty Fellow and chair of the Kelley Undergraduate Honors Program. “If companies are thinking about hiring a CMO, or already have a CMO, they will help you form all these relationships – irrespective of what your assets are.”
Marketing traditionally has had an elevated role in building and managing cooperative structures, which can help safeguard brand-customer assets. CMOs have been uniquely positioned help safeguard them, but some prominent firms have retired this job title, raising questions about the role of CMOs in practice.
In the paper, Mallapragada and his colleagues said their work suggests that CMOs can “help shape internal decisions regarding the need and suitability of exchange structures for value management.” A marketing presence in the top management team may be a “unique filter to judge the appropriate deployment of assets in growth pursuits.”
The paper also briefly examined the effects of another group of people – outside financial analysts – on companies’ decisions to growth through acquisition or an alliance. Analysts typically react negatively to the high costs of a merger, which can affect stock value. When there is more scrutiny from outside analysts, companies with an emphasis on marketing were less likely to acquire other firms.