Remix Strategy: The Three Laws of Business Combinations
September 01, 2015
In which Benjamin Gomes-Casseres teaches us how a common method used deejays and artists can be applied to business.
Remixes are common in the world of music and art. Different medias are used to create new styles. Musicians remix tracks to create new and unique sounds. But what about business?
In his new book, Remix Strategy: The Three Laws of Business Combinations, Brandeis University professor Ben Gomes-Casseres uses the word to describe the mixing of resources, assets, and capabilities of one organization with those of another to create value, and presents three laws that provide a powerful, systematic approach for creating and capturing value from business combinations of all sorts.
Harvard Business Review Press was kind enough to provide us with an excerpt from the book on...
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 fi rm. 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 fi t 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.