What in the hell does “synergies” mean?

201512-synergies-239HI work for a large public company going through an acquisition process. That means, over the past year or so, I’ve heard a lot about “synergies”.

As you might expect, the more often a word is used, the better the chance for misuse. With misuse comes confusion. Let’s try to clear some of that up here.

Part of my advice in yesterday’s post was to avoid getting caught up in jargon. I offered “synergies” as one example.

Here’s the definition of synergy, according to Investopedia:

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 and acquisitions.

You might also hear about synergies in a supply chain. In that case, we’re often talking about alignment between the vendor and the customer.

Think of an electronics manufacturer. That manufacturer will look for parts suppliers that can meet its unique production demands. In this case, you might talk about synergies between the supplier and the manufacturer.

You will find the concept of synergy anywhere you find an interface. What do I mean by interface? A boundary between two businesses, between two functions in the same business, et cetera.

When you think of innovation around business models, your mind can go any number of directions. Maybe you think about entering new markets. Maybe you think about reconfiguring existing customer relationships. Maybe you think about eliminating, blurring, or creating interfaces in the existing business model.

What are some examples of changing interfaces?

  • Eliminating: the proposed merger of the Budweiser and Miller beer giants. Here you’re eliminating the interface between two competitors, bringing them under a single corporate umbrella.
  • Blurring: Starbucks restaurants inside of grocery stores. In the past, grocery stores and coffee shops were separate businesses. Starbucks deliberately blurred that interface.
  • Creating: Hewlett-Packard (HP) is splitting into two companies. One will focus on computers and printers for consumers. The other will focus on software and services for businesses. HP created a new interface between these two separate businesses.

Okay, what do synergies have to do with these examples?

  • Eliminating: Budweiser and Miller have cost synergies. That means they both spend money on similar manufacturing and marketing efforts. Think of economies of scale here. Combining brings them cost advantages from running a larger business.
  • Blurring: Starbucks and grocery stores have customer synergies. Many grocery shoppers enjoy drinking coffee, so offering the convenience of coffee in a grocery store helps customers and both businesses.
  • Creating: The synergies of the two HP businesses could no longer overcome the costs of serving two customer bases with two different offerings. In this case, the value of a narrow focus exceeds the value of keeping two different businesses together.

It’s easy to articulate academic arguments around synergies. One problem with many arguments is synergies aren’t set in stone.

Two businesses may appear very similar at first glance. But when combined, they’re like oil and water, because their cultures are different, or customers choose them for very different reasons, et cetera.

Likewise, two businesses may appear very different at first glance. But when combined, they’re like peas in a pod, because they target complementary segments of the same market, or they’re two links on a longer value chain, et cetera.

As you see, synergy is a high-level concept. It doesn’t mean a whole lot on its own. You need context.

Synergy is a fine word to use, but know that it makes you sound pompous. It makes you sound like you’re trying too hard to get on the business speak wagon. But if it’s the right word to use, and you can explain it properly, fire away.

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