What is Synergy in Business Management: Definition, Types, Approaches

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Why to study Synergy in Management

Studying synergy in management is important because it allows businesses to understand and harness the potential benefits of collaboration and integration. 

Synergy is the concept that the value and performance of two companies combined will be greater than the sum of their separate parts. 

By studying synergy, managers can learn how to effectively collaborate with other businesses, develop key account plans, coordinate product development, and proliferate best practices. 

So basically we can say that this knowledge is very important for businesses. That is considering mergers, acquisitions, strategic partnerships, joint ventures, or franchises. 

As these endeavors are often pursued with the belief that combining two separate companies will create more value compared to operating individually. 

However, it is also important to study the potential drawbacks and challenges of synergy, as many attempts to synergize fail to go beyond initial meetings or end up destroying value rather than creating it.

Overall, studying synergy in management provides insights into how businesses can optimize their operations, increase efficiency, and achieve growth through collaboration and integration.

synergy in management

First Introduced

The concept of synergy was introduced by R. Buckminster Fuller, an American architect, engineer, and inventor. He coined the term “synergy” in the Mid-20th century to describe the idea that the whole is greater than the sum of its parts.

Definition of Synergy

Harold Koontz and Heinz Weihrich said that “Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.”

Michael Porter saif that “Synergy is the ability of two or more companies or business units to achieve greater collective results than they could achieve individually.”

Igor Ansoff said that “Synergy is the increased effectiveness that results when two or more companies or business units combine their resources and capabilities.”

Richard Rumelt said that “Synergy is the creation of value through the combination of two or more companies or business units that is greater than the sum of the values of the individual companies or business units.”

Pfeffer said that “Synergy is the value created when the whole is greater than the sum of its parts. It arises from the interaction and integration of two or more entities, such as individuals, teams, or organizations.”

Contractor and Lorange “Synergy is the creation of a new entity that is more valuable than the sum of the values of the entities that were combined to create it. It is the result of the interaction and integration of the resources, capabilities, and knowledge of the entities that are combined.”

Teece “Synergy is the creation of new value through the combination of complementary resources and capabilities. It arises from the ability of two or more entities to achieve more together than they could achieve separately.”

Zollo and Singh “Synergy is the emergence of new properties or capabilities that are not present in the individual components of a system. It is the result of the interaction and integration of the components of a system.”

Types of Synergy

There are several types of synergy that can be observed in management. These include:

1. Operating Synergy

2. Financial Synergy

3. Marketing Synergy

4. Strategic Synergy

Operating Synergy

Operating synergy refers to the potential for increased efficiency and improved performance that arises from the combination of two or more companies.

It can result from economies of scale, greater pricing power, the combination of different functional strengths, or higher levels of growth from new and expanded markets.

In short we can say that operating synergy can lead to increased efficiency and improved performance through economies of scale, greater pricing power, the combination of different functional strengths, or higher levels of growth from new and expanded markets.

  • Greater pricing power and higher margins can result from increased market share and reduced competition.
  • Combining different functional strengths, such as marketing skills and a strong product line, can lead to improved performance and efficiency.
  • Operating synergies can also be realized through the expansion into new and expanded markets, resulting in higher levels of growth.

Financial Synergy

Financial synergy relates to the improvement in financial metrics of a combined business, such as increased revenues through a larger customer base, lower costs through streamlined operations, and talent and technology harmonies.

It can also result in benefits such as increased debt capacity, greater cash flows, lower cost of capital, and tax benefits.

In Short we can say that financial synergy can improve financial metrics such as revenues, costs, debt capacity, cash flows, cost of capital, and tax benefits.

  • Financial synergies are often evaluated in the context of mergers and acquisitions, as well as strategic partnerships.
  • Increased revenues can be achieved through a larger customer base, cross-selling opportunities, and expanded market reach.
  • Streamlined operations and cost efficiencies can lead to lower costs and improved profitability.

Marketing Synergy

Marketing synergy occurs when the marketing mix of a combined business leads to overall effectiveness. It involves leveraging existing marketing and distribution facilities to enhance sales revenues without causing a proportionate increase in costs.

Marketing synergy can be achieved by combining the expertise and resources of two companies to better meet customer needs and market demands.

In short we can syh that marketing synergy can enhance sales revenues without causing a proportionate increase in costs by leveraging existing marketing and distribution facilities to better meet customer needs and market demands.

  • By leveraging existing marketing and distribution facilities, businesses can enhance sales revenues without proportionate increases in costs.
  • Marketing synergy can be achieved by combining the strengths and resources of two companies to better meet customer needs and market demands.
  • Successful marketing synergy can result in increased market share, improved brand recognition, and enhanced customer loyalty.

Strategic Synergy

Strategic synergy refers to the benefits that a business experiences by strategically organizing itself to maximize cooperation and innovation.

It involves aligning the strategies and goals of different departments or companies to achieve more as a group than they could individually. Strategic synergy requires a careful analysis of current strategies to identify better ways of doing business.

We can also say that strategic synergy can maximize cooperation and innovation by aligning the strategies and goals of different departments or companies to achieve more as a group than they could individually.

  • It requires a careful analysis of current strategies to identify better ways of doing business.
  • Strategic synergy can lead to improved coordination, efficient performance, and the sharing of best practices among different departments or companies.
  • Synergistic alliances with other businesses can also be formed to leverage resources and strategies that align well with each other.

Benefits of Synergy

Cost Savings: To begin with, synergy is like a financial wizard that accidentally turns cost savings into a fluffy rabbit. Imagine manufacturers trying to reduce the expenses of building a distribution network by acquiring a distributor, only to find themselves in a magical forest full of whimsical creatures.

This is akin to buying a piece of a puzzle that may or may not fit your existing pieces, leading to a perplexing jigsaw puzzle.

Growth Opportunities: Consider international companies seeking to expand their horizons. They often join forces with local companies, thinking they’re creating a force to be reckoned with, but end up forming a joint venture that feels more like a quirky circus act.

These ventures are designed to seize growth opportunities that might be hiding behind rainbows, just out of reach individually.

Stronger Market Position: Synergy is also the catalyst for strengthening your foothold in the market, or so we think. It’s like a company acquiring another that makes products that might, or might not, complement its own.

This strategic acquisition allows the company to diversify its product range and generate more income, creating a market presence that is either mightier than the sum of its parts or just more confusing.

Increased Bargaining Power: Mergers and collaborative efforts create a business behemoth that wields a greater bargaining sword. This newfound size not only influences suppliers.

But also sways customers in its favor, leading to more favorable deals and terms, unless they start using swords in their negotiations, which could get messy.

Strengthened Competence: Synergy is like a think tank that forms teams from different departments such as marketing, production, and research and development.

These teams enhance effectiveness by pooling their diverse perspectives, experiences, insights, and knowledge, but they sometimes end up with brainstorming sessions that feel more like a game of charades gone wrong.

Better Decision Making: Imagine synergy as a brainstorming session with a diverse group of individuals. This diverse knowledge pool generates more ideas, creative solutions.

And grow greater acceptance of decisions, making the decision-making process more robust. Unless, of course, someone brings a magic eight ball to the meeting.

Financial Benefits: Synergy also acts as a financial virtuoso, magically making bigger entities enjoy reduced borrowing costs due to their size, like they’re getting a discount because they’re taller.

This translates into a smaller premium paid when borrowing money, as compared to smaller companies who are still trying to reach the top shelf.

However, despite its immense potential, synergy isn’t a guaranteed success story. It often falters for various reasons:

  1. Resistance to Change: When companies merge, it creates uncertainty among employees about their future roles. This uncertainty can lead to resistance, as individuals are unsure whether they will retain their positions or face layoffs, causing some to stage silent protests in the office with their favorite stuffed animals.
  2. Corporate Culture Conflicts: Synergy can fall flat when the corporate cultures of merging entities clash. These cultural conflicts can cause discord, hampering productivity and harmony within the organization. Sometimes it feels like they’re trying to merge oil and water, with a pinch of glitter for good measure.
  3. Slower Decision Making: The decision-making process becomes more intricate in a synergistic environment, as it requires careful consideration of the interests of each group or entity involved. This often results in a more time-consuming and costly decision-making process compared to making decisions independently.

Synergy Approaches for Strategy Building

  1. Complementary Skills: Identify the key skills of each department and find ways to connect them so that their skills and insights complement and support each other. This can be achieved through joint teams or collaborative projects that combine different skills in a complementary way
  2. Increase Communication: Eliminate communication blockages and develop coordination by encouraging regular meetings between department heads. This can foster conversations that lead to innovative ideas for cooperation and synergy.
  3. Efficient Performance: Streamline operations to eliminate structural redundancy and allow each department to focus on being maximally efficient within its own role. This can involve creating dedicated departments for specific functions, such as customer service, to improve overall efficiency.
  4. Sharing Best Practices: Encourage employees to share successful strategies and practices across departments. If a particular approach or incentive program is effective in one department, it may also work well in others. Sharing best practices can lead to increased efficiency and improved performance
  5. Alliances: Create synergistic alliances with other businesses that have resources or strategies that align well with yours. This can involve partnerships, joint ventures, or supplier-customer relationships where both parties benefit from the synergistic connection

Basically these approaches aim to maximize cooperation, innovation, and efficiency within an organization or between organizations to achieve greater overall value and performance.

Sources

Motivations behind mergers. (2022). Retrieved from https://analystprep.com/study-notes/cfa-level-2/motives-for-merger/ 

R. Buckminster Fuller Institute. (n.d.). About Bucky. Retrieved from https://www.bfi.org/about-bucky

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