Synergy

What other concepts are associated with external growth?

• Takeover

• Merger

• Joint Venture

• Strategic Alliance

What is synergy?

It arises when the whole is greater than the sum of the individual parts

What does synergy look like as an equation?

1+1=3

What are examples of synergy?

• Sainsbury’s buying Argos for £1.4bn

• Lloyds Banking Group is paying for the MBNA credit card business

What are the costs and revenues of synergies?

• Cost savings:

  • Eliminate duplicated functions and services

  • Better deals from suppliers

  • Higher productivity and efficiency from shared assets

  • Economies of scale

• Higher Sales:

  • Cross-selling to customers of both businesses

  • Access to new distribution

  • Brand extensions

  • New geographic markets opened up

What are benefits of synergy?

• Improved problem-solving:

  • When team members have different perspectives and skills, they can brainstorm and debate to find solutions. 

• Increased productivity:

  • Team members can distribute tasks based on their strengths, avoiding duplication of effort. 

• Positive work environment:

  • Team members feel valued and part of a cohesive unit, which can lead to higher job satisfaction and lower stress. 

• Effective conflict resolution:

  • Teams can address issues openly and find resolutions that benefit everyone. 

• Innovation:

  • When people with different perspectives share ideas, they can create more sophisticated products. 

• Competitive advantage:

  • Companies can gain a competitive advantage by combining complementary products or expanding their customer base. 

• Financial benefits:

  • Companies can get loans with more favourable interest rates, and they may be able to reduce the cost of equity. 

• Cost savings:

  • Companies may be able to save money on human resources costs by laying off employees whose roles are redundant.

What are drawbacks of synergy?

• Cultural clashes:

  • Differences in corporate culture, management styles, and employee expectations can lead to friction, reduced morale, and talent leaving the organisation.

• Financial risks:

  • Overestimating the financial benefits or underestimating the integration costs can lead to disappointing returns. Taking on too much debt to finance the merger can strain the merged entity's financial health.

• Short-term costs:

  • The integration of two companies can incur non-recurring expenses and short-term inefficiencies.

• Loss of creativity:

  • Combining marketing departments can eliminate inter-departmental competition, which may extinguish creativity.

• Loss of local marketing efforts:

  • Combining advertising efforts may remove local marketing efforts that are crucial in some markets.

• Distraction from business:

  • The pursuit of synergy can distract managers' attention from their businesses' day-to-day operations.

• Brand dilution:

  • Co-branding can confuse customers and dilute the visual identity if there aren't clear, cohesive branding guidelines.

• Misaligned brand values:

  • Partnerships with brands that have different core values can harm your brand's reputation and customer trust.

• Unequal effort and rewards:

  • Ensuring that all parties contribute equally and reap proportional benefits can be challenging.