Remix Strategy

The Three Laws of Business Combinations

Benjamin Gomes-Casseres

• Publisher: Harvard Business Review Press
• Year: 2015
• Print ISBN: 9781422163085
• eBook ISBN: 9781625270573
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

How to Create Joint Value Alliances, partnerships, acquisitions, mergers, and joint ventures are no longer the exception in most businesses—they are part of the core strategy. As managers look to external partners for resources and capabilities, they need a practical roadmap to ensure that these relationships will create value for their firm. They must answer questions like these: Which business combinations do we need? How should we govern them? Will their results justify our investments?Benjamin Gomes-Casseres explains how companies create value by "remixing” resources with other companies. Based on decades of consulting and academic research, Remix Strategy shows how three laws shape the success of any business combination:• First Law: The combination must have the potential to create more value than the parties could create on their own. Which elements from each business need to be combined to create joint value?
• Second Law: The combination must be designed and managed to realize the joint value. Which partners best fit our strategic goals? How should we manage the integration?
• Third Law: The value earned by the parties must motivate them to contribute to the collaboration. How will we share the joint value created? Will the returns shift over time? Supported by examples from a wide range of industries and companies, and filled with practical tools for applying the three laws, this book helps managers design and lead a coherent strategy for creating joint value with outside partners.

Part One

Creating Value by Combining Resources

IN CONTEMPORARY MUSIC AND ART, A REMIX IS A PIECE OF media that is created by combining bits and pieces from other media. A collage is a remix of pictures. New songs can come from remixing the sound tracks from other songs. Even text created by cutting and pasting is a remix.

In this book, I use the word to describe the mixing of resources, assets, and capabilities of one organization with those of another to create value. It happens through business combinations of various sorts. An alliance between Apple and IBM. A joint venture of Novartis and GlaxoSmithKline. A merger of Walgreens and Boots. A partnership of Oxfam and Marks & Spencer. A consortium of General Electric and internet-of-things players Verizon, Intel, and Cisco. Joint development by NASA and SpaceX. In today’s fast-paced, interconnected business environment, this remixing of assets is fundamental to competitive advantage. It brings in new ideas, provides access to new capabilities and markets, and lets companies leverage what they do best.

Most likely, you have considered acquisitions, alliances, joint ventures, and other kinds of business combinations. The key strategic questions you face are not whether combinations such as these are necessary but, rather, how will these business combinations create value, and how are you going to capture that value?

As executives look to external partners for acquiring resources and capabilities, what they need most is a practical roadmap to key questions: What combinations do we need? How do we manage them over time? What profits will we earn? Will they justify our investment? Part one introduces a simple but powerful framework to help you make these critical decisions. This roadmap—and the practical tools that follow in subsequent chapters—will show you how to profit from your own business remix.

Chapter 1

The Three Laws of Business Combinations

BUSINESS IS BEING TURNED OUTSIDE-IN. ACQUISITIONS, mergers, joint ventures, alliances, partnerships, and other business combinations are bringing in resources from outside the firm. And they are no longer exceptions in most businesses—they have become central to gaining competitive advantage.

This is not surprising. At the most basic level, new value often comes from combining ideas and effort from disparate sources. Labor and capital. Technology and brand. Hardware and software. Global and local. In today’s world of fleeting advantage, combining assets, capabilities, markets, and talent pools is even more important than ever. This combining of resources to create new value is what I call the business remix.

Every technology company knows what I mean—the firm is often inundated by deal opportunities, and its success usually depends on a network of allies. (Think of Google and its Android partners.) Large companies surrounded by start-up innovation have learned to tap into new ideas. (Think of big pharma’s many investments in biotech start-ups.) Combining assets in older, industrial companies is no different; these manufacturing firms of ten have global supplier networks and partners in emerging markets. (Think of General Motors and Shanghai Automotive Industry Corporation.) Service industries, too, have their own way of combining forces through networks and joint projects. (Think of Star, oneworld, and SkyTeam, the three global airline alliances.) The business remix applies to everyone.

Although the remixing of businesses is not a new phenomenon, we have not previously recognized fully how to use it to advance strategy. The real issue is not whether you should be looking outside your walls for resources. The question is how are these ventures going to enhance your competitive position? How will they create value? And how are you going to capture that value? Whether you are at the top of the company driving the remix, in the middle managing an acquisition or a partnership, or among the operating ranks keeping the pieces humming, you need to know the answers to such questions.

I wrote this book because, in my work with executives, I’ve noticed a distinct gap in their toolkits. Managers already have a great deal of information and best practices for implementing alliances and acquisitions. The strength of these playbooks is their concrete detail about the legal, managerial, and financial ins and outs of every deal type and the tips on how to manage people and cultures in these combinations on a day-to-day basis. But managers lack a set of guiding principles for actually making the deal create value for the company. That’s what this book is designed to do. It gives you a simple but powerful framework to see clearly what the key decisions are and then to navigate those decisions successfully. I have dubbed these guiding principles the three laws of business combinations.

Successful business combinations—those that turn out to be a profitable use of resources—all follow the three laws. These laws are not formulated as commandments or orders, but are necessary conditions for success. All business combinations must have the potential to create joint value, must be governed to realize this value, and must share value in a way that provides a reward to each party’s investment. Each law points to a set of practical implications:

• First law: The value created by the combination should exceed the total value that would be generated by the players acting alone. The first law asks these practical questions: How much more value can we create in the market together? What specific resources must we combine to create this value?

• Second law: The combination must be designed and managed to realize this joint value. Which partners and structures fit this goal best? How do we manage the risk and uncertainty inherent in such combinations?

• Third law: Each participant must earn a return sufficient to justify the investment. How do we divide the joint value created? How will value be shared over time?

I’ve arrived at the three laws of business combinations through my thirty years of consulting, teaching, and academic research on partnership strategy. Taken together, the laws provide a powerful, systematic approach for creating and capturing value from your partnerships. The management tools in this book help you apply the laws to specific decisions—from when to form a combination, to how to manage collaboration, to how to ensure that you get a return on your efforts.

Regardless of your actual role in combining businesses, you can benefit from the practical remixing approach that I advocate in this book. If you are a deal-maker at a company, then of course you must be able to make strategic decisions, such as selecting the right partner and the right structure for a deal. If you are managing an alliance or implementing an acquisition, then too, many decisions you will face need to be consistent with strategy and sometimes will need to reshape that strategy. Functional managers in sales, R&D management, finance, legal, and human resources will also make better decisions if they understand the strategic thinking behind a combination.

Your decisions—as a general manager, functional manager, or project manager—will shape how well your organization follows these laws. For example, think of the due-diligence task in an intended combination. This technical and complex task has been covered in other books and practical manuals. But you need to know the strategic elements in your research on a potential partner. What are potential sources of value? How well will the key resources of the partner fit with your own internal resources? This book will help you step back from the details of the deal and see how the deal affects your profitability overall.

The same is true of other tasks, such as financial analysis, legal agreements, and the implementation and governance of a combination. Each of these tasks has an impact on how value is created and earned by your company. Your decisions will depend, of course, on the competitive, regulatory, organizational, personnel, and cultural conditions you face—and getting these specifics right is essential to implementing any deal. But this book takes you up a few levels to give you a set of core principles to help you navigate the details. The approach can be applied consistently from one deal to the next and from one partnership to the next, so that you are not managing your combinations in an ad hoc way.

While this book is based on my own experience, observation, theorizing, and testing, I have also incorporated the thinking of fellow scholars, thought leaders from other fields, and the many practitioners with whom I have worked over the decades. I try to forge a bridge from the best thinking of researchers to the best practices that managers seek. My previous two books anchored the two ends of this bridge— The Alliance Revolution was an academic treatise, and Mastering Alliance Strategy offered how-to tips. This book brings the two perspectives together—a remix, if you will. It relies on research in economics, law, organization design, negotiation, and other fields, but does not present this material in an academic fashion. The theory is merely the foundation—the three laws, and their practical implications for you, are my focus. The book also presents telling and instructive examples from a wide range of cases and industries; these cases are meant to elucidate and illustrate ideas rather than to test their validity. Further evidence and key ideas from scholarly research are referenced in the back of the book.

Why Business Combinations Are Now Vital

Business combinations have long been recognized as a key factor in competition and innovation. The first to see this relationship was Joseph Schumpeter, the great political economist of the early twentieth century. He is well known today for the idea of creative destruction, a forerunner of what we now call disruptive innovation. In his lesser-known work on entrepreneurship, he described how the normal routine of a business could be upended by new combinations of the elements of the business. Entrepreneurs, he argued, are the ones who made these new combinations—combinations of existing and new manufacturing processes, of markets and new sources of supply, of new products and technologies, and even of new corporate structures and strategies. These new combinations were at the heart of his theory of innovation.

Schumpeter’s observations still describe what is now happening all around us—but today it is not only start-up entrepreneurs who are coming up with the new combinations. Executives in established companies are now driving this innovation process too. The last decade has seen a proliferation of strategies of this sort—strategies that combine assets and resources from inside and outside a company. The details of these combinations vary: they may be temporary or permanent, be governed by a loose or an iron-clad contract, be exclusive or not, and so on. But, fundamentally, they all seek to create value by combining or repurposing resources. Here are just a few ways that companies do this:

• Acquisitions: Buying assets from another company, or buying the whole company
• Outsourcing: Contracting for another firm to perform a role in operations
• Joint ventures: Sharing the investment (and returns) in an operation or plant
• Codevelopment: Sharing R&D for a product, usually to be licensed
• Comarketing: Sharing the marketing or channel for a product
• Licensing: Buying or selling rights to use a technology (respectively, in-licensing and out-licensing)
• Alliances: Any external collaboration (also called partnerships or teaming)
• Ecosystems: Collections of external firms or technologies that support a firm
• Consortia: Multipartner organizations formed to develop technology or other common interests
• Supplier networks: Sequence and tiers of supplier relationships providing inputs to a firm
• Open innovation: Gathering ideas and technologies from sources outside a firm

To be clear, this book is not about the details of these alternative deal forms or how to choose among them. Rather, I hope to give you a way of thinking and a set of tools for managing all these choices strategically—how to create value with them, how to manage the remixing of assets, and how to gain benefits from the deal in the long term.

Why should you care about these deals? Because dramatic changes in the competitive environment may be putting the survival of your business at stake. Competition today has become a battle not of isolated firms against other firms, but of groups of firms against other groups. These groups represent bundles of resources that compete against other bundles. Deals like acquisitions and partnerships are some of the tactics you’ll need in this battle, but you can’t just be tactical in times of fundamental change. That’s why remix strategy is so important. This book will show you how to dissect the logic behind each business combination you consider.

Understanding this logic is critical to success because the new style of competition is not business as usual. Most managers prefer strategies that rely on resources they own or that they obtain through contracts that give them substantial control over critical decisions. Dependence on a partner that has its own interests and goals seems risky. Sharing decision making seems like a recipe for delays and possible deadlock. Cultural differences between the parties add complexity and uncertainty to these deals. No wonder managers worry about the odds of success in alliances and acquisitions. This book will help you beat those odds. But I also believe that this worry is often overstated. The sidebar “Recalibrate Your Odds of Success” explains why.

I learned about remix strategy from the ground up. Early in my career, while I was working for the World Bank, I saw powerful examples of how combinations between foreign investors and local entrepreneurs in emerging markets created new industries, jobs, and profits. Later, I conducted statistical studies of thousands of companies and uncovered broader patterns of when, why, and how companies connected with others and what effects these alliances had on perfo...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Part One: Creating Value by Combining Resources
• Part Two: Using the Three Laws to Shape Combinations
• Part Three: How Remix Strategy Changes the Way You Compete
• Complete Collection of Remix Strategy Tools
• Further Reading
• Acknowledgments
• About the Author
• Index