Is collaboration the new innovation?

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Industrial mash-ups: a powerful way of driving growth is emerging

We’re at the dawn of a golden age of business innovation. The maturing of the cloud, smart mobile devices, big data analytics and social networking has sparked a revolution in how companies create value — from business processes, marketing and governance — and especially their approach to innovation.

A first wave of disruptive tech-enabled businesses has emerged in the consumer space. Companies like Uber and AirBnB created “the sharing economy,” disrupting and transforming their industries almost overnight. As principles of the sharing economy extend to the enterprise, the emergence of the internet of things (IoT) is profoundly altering the corporate landscape. And this connection of industrial assets with digital networks is happening fast: Gartner predicts that in 2016, 5.5 million new things will get connected every day. By 2020, more than half of all business processes and systems will incorporate some element of IoT.

The business value of the opportunity is enormous—the GE Foundation cites research estimating the economic impact of IoT will range between $2.7 trillion and $6.2 trillion annually by 2025.1 To take advantage of this opportunity, indeed, to avoid being left behind, companies must move fast. Of the many challenges companies are facing, none is more pressing than the pace of change.

In today’s business environment, the ever-shortening innovation cycle can make partnership structures like joint ventures and M&A too slow, costly, and cumbersome, even for the largest companies when looking to gain a fast-mover advantage. Mergers and acquisitions require one company to have enough resources to buy another and entail rigorous, time-consuming negotiation and documentation. Joint ventures, although less complex, also require a high degree of rigor around revenue- and cost-sharing. While M&A and JVs will always exist, in response to the current pressures companies are gravitating toward a new kind of alliance: industrial mash-ups.

When is a mash-up the best option — and what makes it work?

In an industrial mash-up, a company shares an asset or capability with one or more partners in a way that creates new possibilities for all—without infringing on the company’s ongoing use of the asset. Participants develop new products and services rapidly by piecing together components from an ecosystem of collaborating partners.

Such mash-ups may take many forms, but unlike mergers or JVs, mash-ups operate under simple collaboration agreements that may not specify financial terms. Aimed primarily at finding mutual benefits through effective sharing and utilization of resources, they don’t tie participants to synergy targets or require complex post-merger integration efforts. There is also no reason why companies cannot be a part of more than one mash-up simultaneously, spreading investment across multiple innovation opportunities – preparing for multiple scenarios in a fast-moving world.

Mash-ups create potentially unique business value by bringing together very different companies well known for their individual areas of expertise. According to Ben Gomes-Casseres, professor of international business at Brandeis University and author of Remix Strategy:

“In a rapidly changing environment like that created by IoT, there’s a lot of uncertainty, and where there’s uncertainty, companies need an option on the future. These partnerships create those options.” - Ben Gomes-Casseres

Ultimately, the advantage of mash-ups lies in the size of the opportunities they produce; the partners involved are effectively creating a bigger pie.

In general, mash-ups offer a better option when:

  • The value propositions are exciting enough for each entity to partner, but the partners are so different that it would be hard to achieve the synergies needed for successful M&A.
  • The scale of each company defies vertical integration via M&A—none of the potential partners could afford to buy and integrate the other.
  • The opportunity motivates partners to share product development risk and go-to-market strategy informally, before they know precisely how they might share business value, which would be necessary to establish a JV.

The transformative power of mash-ups

The enormous transformative power of technology-enabled collaborative partnerships cuts both ways—creating big winners and also big losers. The digital future--forged by cloud services, smart mobility, social media, and big data analytic power — will demand and reward agility and focus.

For established businesses, getting an early advantage in commercializing the internet of things is not only a chance to tap into new markets but also an insurance against the threat of future disruption.

As Gomes-Casseres notes, “In a rapidly changing environment like that created by IoT, there’s a lot of uncertainty, and where there’s uncertainty, companies need an option on the future. These partnerships create those options.”

In some cases the best way to tap into the potential afforded by this digital future will be traditional M&A and JVs. But, as the new business landscape challenges companies to move fast or risk falling behind, this new and innovative way to do business could prove a key driver of success.

Collaborative rather than monolithic, less structured than M&A or joint venture agreements, industrial mash-ups require a more flexible approach to asset ownership. For companies that embrace the challenge of collaboration, mash-ups offer a 21st century approach to deal-making—a fast track to innovation and growth.

Download full report by Harvard Business Review Analytic Services in association with EY

Download full report by Harvard Business Review Analytic Services in association with EY

1 Building the Right Trade Policies to Support the Internet of Things,” GE Foundation, 25 November 2014, © 2016 General Electric Company