What is Synergy in business?

Synergy in Business

Synergy in Business

The pursuit of synergy is practiced by most businesses in the world. The boardrooms are full of brainstorms about ways to collaborate more effectively. Cross-business teams are set up to develop key account plans, coordinate product development, and proliferate best practices. Synergy is the concept that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Synergy is a term that is most commonly used in the context of mergers, acquisitions, strategic partnership, joint venture, franchise etc. The reasoning behind strategic alliance is generally given is that two separate companies together create more value compared to being on an individual stand. Synergy is also explained as 1 + 1 = 3. Synergy is when the sum is equal to more than the two parts.

Some negative facts about synergy are that many of the attempts to synergise never get beyond a few obligatory meetings. Others generate a quick burst of activities and then slowly fade out. Others become permanent corporate fixtures without ever fulfilling their original goals. In short, the attempts are termed as ‘learning experience’ to coax the failures. The quest of synergy often represents a major opportunity cost as well. It distracts managers’ attention from the nuts and bolts of their businesses, and it gushes out other initiatives that might or might not generate real benefits.

At times, the synergy programs actually backfire, eroding good relations with customers and marketing channels damaging brands, or damaging employee morale. A simple fact is, many synergy efforts end up destroying value rather than creating it. Synergy is sought in all functional areas by businesses.

Types of Synergistic Effects

Corporate synergy refers to the benefits that two firms are expected to gain when they merge or when one firm acquires another. The synergistic effect of such transactions often forms the basis of the negotiations between the seller and the buyer. The following are the main types of synergies that corporations enjoy:

Marketing synergy

Marketing synergy refers to the marketing benefits that two parties in an M&A transaction may enjoy when promoting their products and services. These synergies include information campaigns, marketing tools, research and development, as well as marketing personnel.

For example, an IT company may acquire a smaller IT company that lacks infrastructure but has a strong marketing and PR department. The smaller company has qualified personnel, marketing tools, and experience in selling their products that can help the larger IT company boost its public image and formulate new marketing strategies to win more customers.

Revenue synergy

When two companies merge, they often become synergistic by virtue of generating more revenues than the two independent companies could produce on their own. The merged company may gain access to more products and services to sell through an extensive distribution network.

The company will also benefit from a larger number of sales representatives to sell more products than they previously owned before the merger. Also, the merged company will incur fewer costs of marketing and distribution due to the corporate synergies.

Financial synergy

The combined entity also stands to benefit from various financial synergies such as access to debt, tax savings, and cash flow. A merged company achieves a strong asset base inherited from the former companies, which allows the company to access credit facilities and use the combined assets as collateral. It reduces the level of gearing since the company can use debt rather than equity that reduces the percentage of ownership stakes of the founders/owners.

Also, the merged company may enjoy more tax breaks and pay less tax than the two former companies before the merger. Lastly, when a cash-rich company acquires a cash-starved company, the former can invest in the revenue-generating projects of the latter.

Management

When two companies merge, there is a reorganization of the management teams. Depending on the goals and character of the management team members, the synergistic effect may be positive or negative. When the management teams of both parties to the merger work in harmony, the company will experience better service delivery, proper utilization of resources, improvement in employee motivation, and more opportunities for growing the business. A merger can also reduce job duplication and multiple levels of management.

However, when the team members are in constant conflicts with each other, it can result in decreased quality of products and services, reduced efficiency of operations, and poor utilization of resources.

Cost synergy

Cost synergy is the expected cost savings on operating expenses from the merger of two companies. Typically, when two companies merge to form one company, the combined company will enjoy synergistic cost benefits brought by the parties to the merger.

Savings on human resources costs

One of the cost benefits is the amount incurred in paying employees’ salaries and wages. The merger process may make some roles redundant, and the company may lay off employees whose input is no longer needed or whose roles are duplicated. The move will result in cost savings, which will increase the amount of profits for the combined entity.

Costs incurred in acquiring technology

When contemplating a merger or acquisition, a company may prefer transacting with a company that owns a superior technology that will benefit it. Such a merger helps the company save on costs that it would’ve used to acquire the technology on its own. The company also benefits from increased efficiencies and streamlining the production process.

Distribution network

Companies that operate established distribution networks in specific geographical locations may enter into an M&A transaction with companies with distribution networks in other geographical markets. For example, assume that Company A has established strong distribution networks in North America, while Company B has established distribution networks in Europe.

The merger of the two companies can give Company A access to the European distribution networks while Company B will gain access to the North American distribution networks. This will result in cost savings since the new entity will be able to distribute more products using the existing networks. The company will also achieve strong bargaining power when sourcing products from suppliers.

Synergy Approach to Strategic Analysis

Synergy describes the benefits a business experiences by strategically organizing itself to maximize cooperation and innovation. In simple terms, a synergistic organization achieves more as a group than its parts could in isolation. Increasing synergy requires a careful analysis of your organization’s current strategies to identify better ways of doing business. Such as-

  1. Complementary Skills:

    Analyze the different departments of your organization to identify the key skills of each section. Find a way to connect the departments so that the skills and insights of each complement and support the others. For example, say you have a sales department that excels at creating new accounts and a research team devoted to designing new product lines. A synergistic connection between these two departments might consist of a joint team that combines the disparate skills in a complementary way. You could task the group with identifying product innovations that can overcome specific sticking points, such as product usability, that salespeople currently encounter while negotiating with clients.

  2. Increase Communication :

    Identifying and eliminating communication blockages also can increase synergy by developing coordination. For example, ask department heads to meet discuss current activities. The proceedings might spur conversations that lead to innovative ideas for cooperation.

  3. Efficient Performance:

    Eliminating structural redundancy also can increase synergy by identifying ways to streamline operations, allowing each department to focus on being maximally efficient within its own role. For instance, forcing several departments to deal with customers in addition to their production responsibilities is less efficient than creating a single, dedicated department for handling customer service. With the creation of the new customer service department, the other departments can hand off difficult client issues to the experts.

  4. Sharing Best Practices :

    Another way to increase synergy is to allow employees to share successful strategies, according to the book “Strategic Management: Awareness and Change,” by John Thompson and Frank Martin. For example, if the manager of your sales department discovers that an incentive program motivates her staff well, that same approach might work well in other departments.

  5. Alliances:

    You also can create synergistic alliances with other businesses that have resources or strategies that sync well with yours. A chocolate maker, for example, might supply its products at a steeply discounted rate to a local bakery, which in turn will promote the chocolate supplier to its patrons.

Both businesses benefit from the synergistic connection in ways that neither could alone.

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