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We've seen the financial perspective and we've seen the uncertainty perspective.

In this video, we'll look at the synergy perspective.

Let's go back to our earlier example.

We're still looking at our three businesses.

Each would like to get 60,

but in total we have only 100 available.

This time, the return or the NPV for Beauty depends not

only on how much it gets but also on how much Health gets.

If we give Beauty 60 and nothing to Health,

the NPV for Beauty is 0.

If we give 60 to Beauty and at least 10 to Health,

the NPV for Beauty is 25.

In other words, synergies exist between Beauty and Health.

How should we allocate our resources?

The 25 NPV for Beauty is by far the highest,

even higher than the NPVs for Health and Home combined.

What do we need to do to capture the 25 NPV for Beauty?

Two things: we need to invest 60 in Beauty,

and at least 10 in Health.

What do we do with the remainder?

We need to make an assumption where the remaining 30 has the higher return.

If we fund each with 60,

then Home has the higher return.

Perhaps then, we'll get the highest return if we allocate the remaining 30 to Home.

The key point here is that now we would give at least something to Health,

whereas in the absence of synergies,

Health would get nothing,

as we discussed in the video on the financial perspective.

Thus, synergies matter in resource allocation.

We've seen the importance of synergies for

corporate strategy and in particular, for corporate advantage.

Now again here, we see the importance of synergies for resource allocation.

Now, what's surprising is that synergies are

absent from the main frameworks on resource allocation.

For example, let's go back to the BCG matrix.

There, an investment in one business did

not affect the value or returns of another business.

Moreover, the classification of the businesses in

that framework relied on concepts of business strategy,

that is, industry attractiveness and competitive advantage within that industry.

But that classification did not review the synergies between the businesses.

Now, if we want to aim for not competitive but corporate advantage,

we need to take into account the synergies between the businesses.

With my co-author, Phanish Puranam,

we sought to address this issue by building our own framework.

We call it the Synergistic Portfolio framework.

And the key idea is in the title.

We analyze a portfolio not as

independent businesses but as businesses that may have synergies with each other.

The two axis are Incoming benefit and Outgoing benefit.

Incoming benefit is how much does

this business gain or lose from belonging to this portfolio.

Outgoing benefit is how much do

the other businesses gain or lose from the presence of this business.

Thus, if you are a business,

then Incoming benefit is how much you benefit,

Outgoing benefit is how much others benefit.

Synergies for a business is the sum of the Incoming and Outgoing benefit.

If the business is above the diagonal,

then synergies are positive.

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If the business is below the diagonal,

then synergies are negative.

We can distinguish six categories.

Fits, the business benefits and the rest of the portfolio benefits as well.

Misfits is the opposite; no one benefits.

Givers and Altruists are businesses that don't benefit from

the portfolio but the portfolio does benefit from them.

In the case of Givers,

the benefit outweighs the cost.

In the case of Altruists,

the benefit does not outweigh the cost.

And lastly, Takers and Parasites are businesses that

benefit from the portfolio but the portfolio does not benefit from them.

In the case of Takers,

the benefit is greater than the cost,

and in the case of Parasites,

the benefit is less than the cost.

If you want corporate advantage,

then invest in businesses above the diagonal: Givers, Fits and Takers.

And not invest in businesses below the line: Altruists, Misfits and Parasites.

How can we find for each business,

the Incoming and Outgoing benefit?

One way is to compare the current situation with

the situation where we would divest the business through a spin-off.

That is, we would make the business

independent while leaving the rest of the portfolio as is.

We can calculate the Incoming benefit as the value of

the business Before spin-off minus the value After spin-off.

Let's say for business A,

we estimate its value as part of the portfolio as 150,

and if spun-off only 100.

Then the Incoming benefit is 150

minus 100, is 50.

We can do the same calculations for businesses B and C. For B,

that gives 180 minus 160 equals 20.

For C, that gives 110 minus 160 equals -50.

Thus, A and B have Incoming benefits,

C has Incoming costs.

The Outgoing benefit is the value of the rest of the portfolio

Before spin-off minus the value After spin-off.

Let's say if business A is part of the portfolio,

then the rest of the portfolio is worth 830.

Whereas without business A,

it would be only 600,

hence, the difference is 230.

Similarly for B, we would have an Outgoing benefit of 800 minus 810, which is -10.