So you've devised a plan for a more synergistic organization. But have you properly weighed the risks?
Synergy is one of the more elegant concepts in business, and every successful company strives to achieve it. But it's not idiot proof. Because synergy requires so much of our energy and focus, it can cause damage that can creep up on us. In this way, synergy can actually hurt the company more than it can help it.
But by recognizing the risks of synergy, managers can execute the strategy more wisely. Below we first explain synergy in more detail. Then, we discuss its risks. Finally, we go over some common managerial mistakes that often foil the company for synergy's sake.
WHAT IS SYNERGY?
When two separate entities join forces, they can produce benefits far greater than either one could have produced on its own. In other words, the whole can be greater than the sum of its parts. This is synergy.
We see this in business all the time. Two different business units in the same company, for instance, may align their strategies to reduce cannibalization of each other's products. Or two divisions may want to combine manufacturing facilities to reduce machine downtime, cut overhead, and increasing economies of scale. Departments may even want to share their knowledge to improve processes and avoid future mistakes.
In each of these cases, the success created by joining forces is far greater than the success any of the business entities could have reached on its own.
WHAT ARE THE RISKS OF SYNERGY?
But sometimes, the frenzy to create synergy can create grave collateral damage.
Imagine an international firm that seeks to create a stronger focus on the customer. It plans on doing this by joining its marketing departments together to align strategies, budgets, overhead, knowledge, and resources. Management may first set up an exploratory committee to assess the synergy strategy.
What are the consequences of this? Members of the marketing departments may misconstrue this as a corporate downsizing. Or, they may mistakenly see it as a sign of renewed centralized corporate control. In their concern for their own hides, members of the marketing departments may start focusing their efforts inward rather than on the customer - foiling the goal of the synergy initiative.
There are other possibilities. By combining marketing departments the company virtually eliminates inter-departmental competition. This may extinguish creativity and lead to stale marketing efforts. Also, in combining advertising efforts, this multinational corporation removes the local marketing efforts so crucial in some markets like Europe and Asia.
HOW DO WE AVOID THE DOWNSIDES OF SYNERGY?
It's clear that however well-intentioned the manager, a careless synergy strategy can also hurt the company. Fortunately, marketing academics and professionals have come up with ways to mitigate the downside risks.
Synergy is a vague concept to start with. Economies of scale, vertical integration, knowledge-sharing . . . each of these terms has any number of meanings. And that's what can lead to misconception on the part of the rest of the firm.
For this reason, the first and arguably most important step in creating synergy is to precisely and accurately define your goal. That means identifying the type of synergy you plan to create, the units involved, and the benefits you aim to gain. From there, dig-down deep and analyze the synergy strategy. Use the same scenario techniques that marketers use in predicting competitive reactions (for more on this technique, see our tutorial). When you combine units, how will your employees and customers respond? How will you counter respond? How will they react to that?
By playing out the scenario you can both anticipate and prepare for fallout, thus better understanding the undertaking. This allows you to be more specific in creating your synergy strategy.
DECIDE WISELY: HANDS OFF OR HANDS ON
Often, when managers see an opportunity for synergy, they also feel compelled to shepherd the project through. They assume that it's best to let the local managers keep doing what they're doing so that they, the executive, can focus on this high-level strategic issue. Research shows, however, that most of the time it's best for the executive to stand back and let the synergies form naturally. A successful synergy occurs when the executive knows when it's best to get involved.
THIS BEGS THE QUESTION: WHEN SHOULD MANAGEMENT GET INVOLVED?
Management should involve itself heavily in the synergy effort when 1) they can identify a specific problem with the effort; 2) show how they can solve the problem; 3) prove that they have the skills to get the job done.
Often, shepherding a synergy effort is appropriate when the business units are unaware of its benefits. They may suffer from a lack of information or interest; it is your job to fix that. Also, it is not uncommon for business units to be intoxicated by the potential benefits of synergy to the point of ignoring the downside risks. Executives then may take this opportunity to help the departments better understand whatever risks accompany the effort.
Third, departments that fear synergy efforts may put them out of a job or stifle their career aspirations may be unmotivated to implement a synergy effort. Here is yet another opportunity for upper management to get involved. Finally, it is not uncommon for business units to have all their ducks lined up, but simply don't have the skills or tools to get the synergy strategy done. This is the executive's chance to get involved and help see the effort through.
EXPOSE THE BAD
A key to avoiding synergy disasters is to expose whatever downsides the effort may bring. By exposing the risks of the effort, you may better find a solution. For instance, if combining marketing departments ends inter-unit competition, thus stifling creativity, exposing this risk may inspire the units to formulate a solution. Also, uncovering the downside of synergy often clears up any misunderstandings. For instance, a synergy effort may send a flurry of rumors flying about calamitous layoffs and restructurings. This could lower motivation and productivity. By exposing this risk, unit managers may make a more concerted effort to head this disaster off with communications efforts.
1 This tutorial is based in part on the article "Desperately Seeking Synergy," by Michael Goold and Andrew Campbell in HBR. Copyright 1999 by the President and Fellows of Harvard College.
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