Creating New Value Through Remix Strategy
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Episode 91 Transcript:
This episode is brought to you by Business Advancement Incorporated: Enabling Successful Leaders and Companies to Accelerate to Their Next Level of Success − on the web at businessadvance.com. And now, here’s Pam and Scott!
Pam Harper: Thanks Chris. I’m Pam Harper, Founding Partner and CEO of Business Advancement Incorporated. And right across from me as always, is my business partner and husband, Scott Harper. Hi Scott!
Scott Harper: Good morning Pam! It’s great to join you again for another episode of Growth Igniters Radio with Pam Harper and Scott Harper. If you’re listening for the first time, our purpose is to spark new insights, inspiration, and immediately useful ideas for visionary leaders to accelerate themselves − and their companies − to the next level of growth and success.
So, Pam, what are we exploring today?
Pam Harper: How companies can be reconfigured in so many new ways to create value for customers, investors, and all of the many stakeholders that companies touch these days.
Scott Harper: Yeah, it’s a really kaleidoscope. Of course, there are all the forms that M&A can take. Then there are all the flavors of joint ventures, alliances, and other partnering, not to mention the various kinds of company restructuring that reordering that can go on. There are so many variations and choices that it’s almost mind boggling.
Pam Harper: That’s right. The trick, of course, is to do this so that the interests of all the stakeholders are served to the greatest extent possible.
Scott Harper: Sometimes the challenge of that-
Pam Harper: It’s not an easy feat. That’s why we are so happy to be speaking today with Ben Gomes-Casseres. He is an expert in the strategy of business combinations and re-combinations who’s been studying, teaching and consulting on this topic for 30 years. Ben has published 5 books and many academic and managerial articles. His newest book is called Remix Strategy: The Three Laws of Business Combinations. He’s a professor at The International Business School of Brandeis University. Previously, he was a professor at Harvard Business School and before that, an economist at The World Bank. Ben holds degrees from Harvard, Princeton, and Brandeis. A native of Curaçao, he speaks 4 languages. You can see Ben’s complete bio by going to growthignitersradio.com, selecting Episode 91 and scrolling down to “Resources.”
Ben, welcome to Growth Igniters Radio.
Ben Gomes-Casseres: Thank you Pam and Scott. Good morning. It’s a real pleasure to be talking with you today.
Pam Harper: Oh, we are so glad to be talking with you about this. It’s such a big thing that’s happening in the environment, especially right now with so many of our listeners. Before we get into remix strategy, tell us a little bit about your background and what prompted you to write this book.
Ben Gomes-Casseres: Well, thank you. Pam, I think my whole life has been a remix of sorts. Coming from Curaçao, which is a Dutch island in the Latin American corner of the Caribbean, we learn to remix cultures and ideas from birth. Essentially I’ve been working in this field now for 30 years as an academic, as a consultant, and as a professional. The field has really been about alliances, partnerships, acquisitions − the ways in which companies reach out from their borders to other companies to create new value.
In this book I’m really trying to, in a way, simplify this kaleidoscope that you described, Scott. The world is complex, but we need simple rules to navigate it. That’s what I’m trying to do in the book.
Scott Harper: That’s great. How does the concept of remix strategy relate to the greater idea of corporate strategy and how companies do business?
Ben Gomes-Casseres: Right; that’s essentially what I’m trying to address, because it’s really a strategic question. What I mean by “remix” − to clarify that a little bit, since I’m using it in an unconventional way − the word “remix” come out of art or music where musicians will take tracks from one song and remix it with the tracks from another song and create something new. Essentially from a strategy point of view, when a company looks outside of its boundaries for new assets or for new capabilities or to gain access to some services that it doesn’t have itself, what it’s trying to do is to link that up with its internal assets and capabilities and in a way, remix that bundle.
I think of the world as having a series of combinations. Strategy is about making the right combination and managing that combination for success.
Pam Harper: How has the strategy of creating new value through these business combinations evolved over the years?
Ben Gomes-Casseres: In a way, it’s always been with us. If we go back in history, we will always find companies acquiring, merging, divesting, and forming joint ventures of various sorts. What I think has happened is that there’s been some important underlying trends around technology − the rise of certain technologies, and also around globalization. The rise of important power centers, economic centers all over the world has forced everybody to do this kind of strategy. That has also expanded the types of deals − the formats that we see through which remix can take place. Today we have not just joint ventures, which are traditional, but we have alliances of various sorts, and partnerships and sourcing and channel arrangements, and ecosystems that are very complex and involve lots of partners. That, in a way, is the old trend, but now coming on steroids at us.
Pam Harper: Yes, that’s true; in fact, it’s something that we see as well. We’ve been noticing an increase in it. Can you tell us a little bit about what you would predict, if you were gazing into a crystal ball, about the future of this type of arrangement?
Ben Gomes-Casseres: Yeah, I don’t think there is an end in sight for it. In fact, I think that the notion that companies do things internally themselves and rely on their own best efforts is dying. I think that even the form of competition where we think of our competitors as another firm − even that idea of one firm competing against another firm mano a mano so to speak, is also dying. Increasingly we have competition between groups of firms, between me and my allies and partners versus another firm with its allies and partners. I think that is the wave of the future, so we had better learn how to do this.
It’ll be a different kind of business. It’ll be a different way of managing, and I think that’s what we need to learn, and what I’m trying to help managers to do.
Scott Harper: Okay; so what’s powering this evolution?
Ben Gomes-Casseres: I think what’s powering it is the rise of so many new ideas and new business models and new sources of economic value. In every business today, we need to think outside of our traditional business to see really, not just where the competitors are coming from − new competitors coming from different businesses and different industries − but where the sources of new value can be created. There are more ways to create complementary 1+1 is 3 kind of combinations outside of our traditional industry. I think that’s again happening, not just because of technology and software, but also because of the rise of emerging markets and globalization as part of the important underlying trends that are driving this.
Scott Harper: Okay. Well, we’ve already pointed out how complex this is, and as you said, it’s important to get some simplicity in the complexity so that more effective decisions can be made, more effective relationships can be built. That’s really important, and you’ve developed three laws of remix strategy that we’ll talk about in our next segment in greater depth. How did you come to conceive of these laws?
Ben Gomes-Casseres: It’s been an effort of boiling it down. I know that there are many complicating factors in any combination, any joint ventures, any merger. They range from cultural to personal to economic and finance, regulation, laws, and so in a way, it’s easy to get overwhelmed by the complexity. At the same time, when I look at the research − and I am a researcher as well as a practitioner − when I look at the research, there are some important ideas.
There are important ideas about how you create value and manage a combination, and how you, in a way, return the value to the stakeholders. What I tried to do in the book is to apply these theoretical ideas in a way, but boil them down so they are accessible to every reader and give them a road map. It consists, as we’ll talk about, of those three laws, and those laws will help you navigate the complexities that will undoubtedly face you.
Pam Harper: So, as complicated as this really is, there is a way to make it simpler to understand and to navigate our way through it. That’s what we’re going to talk about when we come back. Now we’re going to take a quick break. When we come back, we’ll talk more with Ben Gomes-Casseres, author of Remix Strategy about the three laws of business combinations. Stay with us.
Scott Harper: We’re so glad you’re joining us on Growth Igniters Radio with Pam Harper and Scott Harper. We’re brought to you by Business Advancement Incorporated, and we’re on the web at businessadvance.com. We focus on enabling visionary leaders to dramatically increase momentum in their companies for game-changing results.
Pam Harper: Does this topic resonate with you? Well, we have more. Check out related episodes to expand your perspectives and take away even more immediately actionable ideas. Just go to growthignitersradio.com, Episode 91, and scroll down the resources.
Scott Harper: And while you’re there, sign up for our weekly alert of upcoming episodes, so you’ll always be up-to-date.
Pam Harper: Welcome back to Growth Igniters Radio with Pam Harper − that’s me − and Scott Harper. Today Scott and I are speaking with Ben Gomes-Casseres, author of Remix Strategy, about creating maximum value from new business combinations. Ben, how can people find out more about you and your books?
Ben Gomes-Casseres: Well, thank you for asking Pam. The book is called Remix Strategy. It is published by Harvard Business Review Press. It is available on Amazon; it’s available from Harvard Business Review Press, and there are additional materials and articles on my website, which is www.remixstrategy.com. There you’ll find blogs, videos, and in the future, this podcast too.
Pam Harper: Sounds good. Of course, you can access this also by visiting growthignitersradio.com and going to Episode 91.
Ben, in the first segment, we discussed the concept of remix strategy, let’s dig deeper into what you’ve termed “the three laws of business combinations.”
Ben Gomes-Casseres: Yes, thank you. The three laws are − they’re going to sound simple, but they’re complex to apply − the first law is really that there has to be the potential to create value from the combination. This means the usual “1+1 = 3.” I use that little math, and I’ll have other ways of thinking about the other laws that are similar to that. But 1+1 is 3 really means that when I take my capabilities and assets together with someone else’s capabilities and assets − however I combine that, either through a merger or an acquisition or through an alliance, partnership, or other form − we can create more value together. That means either better products, better quality, more innovation, or sometimes lower costs − any way of increasing the growth of our business and the efficiency in our business by working together with a complimentary set of assets that so far are still outside our firm.
Pam Harper: That sounds very straight-forward. What makes this challenging, though?
Ben Gomes-Casseres: I think the challenge is to really understand what you’re good at and what the other partner’s good at and why the combination of the two will create value.
Pam Harper: So, for example, if we see our core competency as IT services − just for example, it’s not, but just say it were − and another company was IT services but maybe a little different, would that be something that would be harder for them to find that joint value, or would you say − how would they navigate that?
Ben Gomes-Casseres: They would navigate that. See, joint value comes in different forms. If it’s two companies that are similar in some way, like the ones you just described, it could be that their joint value is by creating a larger scale or a scope of business. Because of that, they may be able to be more efficient, reach more customers, or lower their costs. Joint value can come from that; joint venture can also come from a very different kind of business.
Let’s say I’m in the software business, and you’re in the hardware business, then when we come together in some way; we’re not increasing the scale of my business or yours, but we are making a linkage. By making that linkage, our product may be better, we may be able to develop things faster and reach markets that we weren’t able to reach on our own. That’s sort of a complimentary rather than a similar product kind of combination.
The logic of what creates joint value will vary. I think the challenge is in being very clear about that, in having those goals clear, and trying to quantify it as much as you can. Because that’s the target that we’re going to shoot for when we try to apply the other two laws.
Pam Harper: I can really see where having that clear strategy makes a big difference, because if we know where we’re trying to go strategically, now we understand why it makes sense to have a strategic partner as opposed to developing a capability organically, for instance.
Ben Gomes-Casseres: Absolutely. We also know therefore what’s important to keep our eye on in terms of integration or better coordination − those important assets that need to be combined in some way.
Scott Harper: I think it’s very important that we’re using the word “strategic” over and over again, because even if you have a supplier or you have someone who is providing a service, it’s still part of the remix. The more that both parties think of it as strategic and not just a vendor relationship, and both parties understand each other’s strategy, you’re just going to have a better relationship, and it’s going to work more smoothly, and you’re going to be able to look out over the horizon much more effectively.
Pam Harper: Scott is talking about something that we hear a lot. When we went out and spoke with a number of people and surveyed them about the senior executive level of satisfaction with strategic alliances, there was a high level of dissatisfaction. It could, in part, come from that, could it not, if people don’t understand what they’re trying to accomplish?
Ben Gomes-Casseres: Absolutely. I think the dissatisfaction that we sometimes hear about partnerships has to do with this is not business as usual. Firms are usually organized to manage their internals, and managers know how to manage divisions that report to them. What’s harder is managing and governing a relationship with a party that is outside your firm. Even though that is now required by the strategy, it is a new world. I think it takes getting used to, and it takes training to really get good at it.
Scott Harper: That really segues into your second law of remix strategy, which is governing the collaboration. Tell us more about that.
Ben Gomes-Casseres: The first law, as I said, was the potential to create 1+1 = 3. The second one I like to say, is the rule that is 1+1 is 1. By that I don’t mean that the value is only one; we need to now act is if we were one.
Scott Harper: “We are us.”
Ben Gomes-Casseres: We are us − that’s exactly right. That, of course, becomes more and more challenging the more difference there is between us, and the more diversity there is in our grouping. If we have multiple partners then that becomes an even greater challenge, but strategically we might have to do that in order to grow and to innovate.
How do we govern that collaboration? How do we design it? What kinds of rules of engagement do we have with our partners? How do we manage it? What resources do we put in place for relationship management? Of course, importantly, how do we let this governance evolve and grow and change over time? Because one thing that we know is that the world will be different tomorrow or a year from now than it is now when we first sign that contract.
We have to have a contract which is flexible enough, and a governing system that is able to adjust itself to new conditions. I think that’s part of the challenge that faces all kinds of partnerships.
Scott Harper: Clarity is so very important, as is surfacing assumptions that we’re making so that we aren’t surprised. Also, there’s deciding what exact model is right, whether you’re doing an alliance, a merger, or some other arrangement. How do you do that?
Ben Gomes-Casseres: That’s an important question. It’s a spectrum of relationships that we ought to feel comfortable with. That spectrum goes from a simple transaction that is fairly clean-cut; you might say it’s a buy-sell kind of arrangement to a complete merger integration on the other side of that spectrum, which is obviously a whole organizational transformation. In between, we have a lot of different kinds of deals that may take the form of a joint venture perhaps or co-promotion or co-development or preferred partner relations, supplier relations, preferred channels, things like that.
All of these, in a way, they’re not as simple as that transaction that I described in the beginning, and they’re not as deep and complex as a full merger, but they require careful governance nonetheless. I think it’s that middle zone that we are seeing now becoming more and more popular and more and more important for strategists. Also it feels the most foreign from our traditional way of doing business.
Pam Harper: Where we see it is there’s the most potential for misunderstanding. A lot of people talk about the idea of being an “alliance,” and it’s not really an alliance. That’s what I like about your book so much − you really describe this, all the different forms of relationships and what goes into them. It clarifies on such a profound level.
Ben Gomes-Casseres: Thank you.
Pam Harper: Now let’s talk about the third law − it’s about sharing the value created?
Ben Gomes-Casseres: The third law, again, will sound simple, but it’s hard to implement and to master. The issue here is that we have the potential to create value; let’s assume that − law #1. We’ve found a way to design and manage the collaborations so that that value, in fact, can be realized − that’s law #2. Now we have to split the pie, not in a confrontational way, but each party must earn something from their contribution, otherwise they will not have the motivation to continue to contribute to it.
The third law really is to share the value in a way that maintains the incentives and the motivation of both parties, or three parties or however many, to continue to contribute to it. The simple formula is not 1 and 1 = 3, it’s not 1 and 1 is 1; it really is 1+1 equals − now it gets complicated… 1.4 plus 1.6 or something like that. It’s some division of value, and it doesn’t have to be 50/50. Obviously many partnerships are not 50/50. They could be 40/60 like I just said, or 20/80 or some other formula, but we need to be able to divide and let each stakeholder, in a way, earn their fair value of what they contributed.
Scott Harper: I imagine that’s shaped by the impact of the different partners, the amount of risks that each one is taking on, and so on.
Ben Gomes-Casseres: Yes, it certainly is. In a way, it’s a little bit, at the negotiating table, it gets split up, but more important than that, as I mentioned already, these things change over time very dramatically. Just as the environment might change and the nature of joint value that’s created might go up and down, the way we govern it is going to be adjusted and so too, the share value that’s going to accrue to one side or the other might well evolve. In a way, the more we contribute to making this partnership successful, each of us, the more, in a way, we can take out of it. You get out of it what you put in.
If there are partners that don’t put much in, it’s possible that their earnings will deteriorate. The partners that really make it work are more likely to be the ones that are going to be successful earning something from the combination.
Pam Harper: So these are really three commonsense laws that govern business combinations. Of course, there’s a lot to it, and your book really highlights a lot of this.
Now we’re going to take another quick break. When we come back, Scott and I will talk more with Ben Gomes-Casseres, author of Remix Strategy, about immediately actionable things that you can do to create maximum value from new business combinations. Stay with us…
Scott Harper: You’re listening to Growth Igniters Radio with Pam Harper and Scott Harper, brought to you by Business Advancement Incorporated. We focus on enabling visionary leaders to dramatically increase momentum for game-changing results. We’re on the web at businessadvance.com.
Pam Harper: If you’re finding this discussion of getting the most from your business combinations useful, we invite you to download our free special report “Building Powerful Strategic Alliances,” which is very complimentary to what we’ve been talking about. We developed our findings and conclusions based on responses from senior executives in over 15 industry sectors. While strategic partnering is becoming more important than ever before, over half of the senior executives we surveyed were dissatisfied with the outcomes − they needed to read Ben’s book. [laughter] Find out why and what we found out you can do to increase your return on your partnering investment.
Scott Harper: Learn more by going to growthignitersradio.com, Episode 91. Scroll down to the resources section, and click on the link “Download Strategic Alliances Report”. Feel free to contact us if you have any questions.
Pam Harper: Welcome back to Growth Igniters Radio with Pam Harper and Scott Harper. Scott and I have been talking today with Ben Gomes- Casseres, author of Remix Strategy, about creating maximum value from new business combinations. Ben, can you tell us again how people can find out more about you and your books?
Ben Gomes-Casseres: Of course, thank you Pam and Scott. The book is called Remix Strategy: The Three Laws of Business Combinations; it’s published by Harvard Business Review Press. It’s available on amazon.com, as well as other book sellers. The book and a lot of other material that’s related to it is on my website www.remixstrategy.com.
Pam Harper: Let’s get back to our conversation. We’re at the point of our episode where we like to get into the three immediately useful ideas, and you had a few points that you thought might be helpful. What would be the first one related to, say, identifying potential joint value?
Ben Gomes-Casseres: Yeah, so, let me say that the book has 20 tools in it, which try to help you navigate through the complexities by applying the laws in more specific ways than we’ve been able to talk about today.
One of the things that I think strikes me when I talk to people and work with their partnerships is that we need good chemistry between people for these partnerships to work; we know that. At the same time, good chemistry can lead to bad partnership decisions. I think we have to be careful about that, that when we come to actually creating a deal and finding joint value, it needs to be subjected to some very serious strategic reasoning, and we shouldn’t base it purely on the fact that we do get along well with the other party.
That’s a very important prerequisite. At the same time, we have to work out what the strategic goals are and the economic value, so that 1 and 1 is 3 actually happens. That would be the first thing.
Scott Harper: You have to avoid “strategic infatuation,” if you will.
Ben Gomes-Casseres: That’s a good way of putting it; absolutely right.
Pam Harper: Yes − I see so many people who will say, “I met this person; they were great!” Just like you said. And, “This really seems like a great idea for us! I hadn’t thought of it before.” The first thing to do is go back to your strategy and test the fit.
Ben Gomes-Casseres: Absolutely. Go back to your strategy, and some of the questions that you ask yourself may be tough to ask, if you, as you say, are infatuated with the idea − but it’s due diligence that needs to be done. At the same time, the other part that may be hard is sometimes to even explore options with other partners or potential partners. That doesn’t mean go out and negotiate with 5 people at the same time. It just means strategically to think through before you tie up in some way, that you understand that this is actually a good fit, it’s a good strategic fit, operational fit, economic fit, and of course, personal fit. Don’t rely purely on the chemistry factor.
That would be one tip. The second one is − and I actually wrote a short blog about what we just discussed, and there’s another one that I just recently wrote about, which is that the contract is too important to be left to the lawyers. The contract, or however you define an arrangement that’s put on paper − what matters there is how you manage it; and what matters there is the business model behind it. Therefore, it’s not going to be all in the fine print. Even though you have good lawyers, they’re not going to be able to solve all of the challenges that a partnership will face in the future. In fact, we know that all contracts of this sort are in some sense incomplete. They, in some sense, have gaps in them that will need to be addressed by managers that are working together well in the future.
Therefore, let’s not rely purely on that contract, but let’s make sure we put in place good governance relationships that enable us to address those open parts of the contract.
Scott Harper: Absolutely. Before I joined Pam’s firm, I did a lot of deals with companies, and one of the things I frequently said is, ”If you have to turn to the contract, you’re in trouble.” Let’s go to a second practical idea about governance. How can we really get our heads into thinking about how we’re going to govern a combination?
Ben Gomes-Casseres: I think it’s closely related to what we just discussed. Realize that governance is there in order to make up for the things that are not decided in advance in the contract agreement.
In fact, there have been two Nobel Prizes awarded last week to economists that have studied this area of what we call “incomplete contracting.” It’s very, very relevant, the deep theory that they have, although I make it very accessible in the book. The theory says that the world is too complex for us to know exactly what this deal will look like six months or a year or two years from now. Good governance means to put in place mechanisms that will allow us to make decisions in the future for questions that we haven’t even thought about when we sat down at the table. That kind of governance where you have sometimes a governing board, sometimes a steering committee in a joint venture, there will be an actual corporate board that has a representation from both sides. That kind of governance system is what allows you to go with the flow and to deal with new opportunities as well as new challenges, but very often, new growth opportunities that we don’t often foresee at the beginning.
With that, the good alliances, the good deals that are done are those that have evolved so that they come up with new answers and new solutions and new opportunities that they hadn’t even thought about in the beginning. The ones that don’t work out are the ones that are stuck in the old model that don’t change, that don’t grow with the flow.
Pam Harper: That’s absolutely true. I think the other thing that, what you’re talking about goes to as well, is this issue of mutuality. “We’re in this together.” One of the things that came out of our study was that there were partners that did not feel that they had a mutual relationship. They were calling it the same thing, say an alliance, but meaning something entirely different. One’s an outsource provider, the other really thinks it’s an alliance. Do you see governance, the way you’re talking about it, addressing some of that issue of mutuality?
Ben Gomes-Casseres: Absolutely. Because what happens to that partner that feels they are not getting their fair share or being listened to sufficiently? That partner’s going to withdraw. That partner is going to not cooperate, not contribute the extra ideas, not contribute the extra effort it takes to make the combination work. The whole thing will begin to spiral downward. I think in a way, that’s an application of my third law that you need to have good earnings and involvement from all sides and that feeling of mutuality, that feeling of fairness is what keeps all parties working together for the common good.
Pam Harper: Let’s talk a little bit about an immediately useful idea for sharing the value created. How can partners work together on that?
Ben Gomes-Casseres: Partly, the main thing is to understand the other party’s point of view. To walk in their shoes and to understand what it is that they see in it or what they want out of it, so that when you come with certain goals or changes that you’d like the relationship, you can almost predict what they want and work out an amicable way of resolving any kind of conflict.
I think the thing to do is to manage the conflicts well, because there will be conflicts. Most of these partnerships, even though they start, as you say, with infatuation, over time there will be challenges that we think differently about the solution for that. Those challenges need to be addressed. We don’t want to escalate or go to arbitration or exit or break up because we couldn’t find a way to agree.
Finding the other side, seeing it from the other side and then working through it for the common good is probably the best way to go about it.
Scott Harper: And the ability to really foster an environment that allows for deep, open, frank conversations around these issues is so critical to the success.
Ben Gomes-Casseres: Yes. That’s absolutely right. There’s another aspect to that, another part of that, which is that this kind of relationship building is not only something that takes place between my company and my partner. It also takes place inside my company.
One of the causes of failure that we often see, even though an alliance may be managed well in a way at the interface between the parties, − sometimes internal coordination between our different levels of management perhaps or different functions that need to contribute to the totality have to be addressed. Or others may feel threatened by the relationship from inside the company − all of those issues need to be brought in line in order for this external relationship to work out.
One of the rules of success here is to manage the internal, make sure that everybody is on the same page. Both in the deal-making and managing the relationship over time.
Scott Harper: Absolutely. We’ve seen that as well.
Pam Harper: Yes, so maybe going back and having a meeting with your team about what it means to lead an alliance, for starters, or some other form of business combination.
Well, Ben, this has been great. Can you share with us any final thoughts on this topic? I know it’s huge − remix strategy…
Ben Gomes-Casseres: I think we have to open our minds to the idea that there are great ideas out there that are not part of our organization. We have to find ways to appreciate them and then make them useful for us. The way we do that can take many, many different forms. What I tried to do in this book is to give a roadmap to some of the important tools for creating that type of remix, creating combinations that create value in the end for customers.
Pam Harper: Ben, thank you so much again for being our guest today.
Ben Gomes-Casseres: Thank you for having me. It’s a pleasure speaking with you. I look forward to interacting with your listeners too.
Scott Harper: Ben, thanks so much, and thanks to you out there for listening. To get show notes and resource links for this week’s episodes, including downloads, go to growthignitersradio.com, and select Episode 91.
Pam Harper: Until next time, this is Pam Harper…
Scott Harper: And Scott Harper…
Pam Harper: Wishing you continued success and leaving you with this question to consider with your team:
Scott Harper: What conversations do we need to start today − Inside and outside our company − to determine how we can create even more value in our business combinations?