Synergy

Synergy

Group Level Strategy

Andrew CampbellDirector, Ashridge Strategic Management Centre

Ashridge Strategic Management CentreGLS/MG/Synergy

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• There are six areas of possible benefit:

– shared tangible resources

– shared know-how

– pooled negotiating power

– co-ordinated strategies

– vertical integration

– combined new business creation

Potential Benefit Areas


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• Despite the evident potential,

– parents’ interventions frequently fail

– business units typically complain about parent involvement

– business units often prefer to link with third parties rather than sister units

Synergy: The Frustrations


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Skill presumption

Neglect of downsides

• Four mental biases

Synergy bias

Mechanism bias

ASHRIDGE EXPLANATION


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• Synergy bias arises when managers are “desperately seeking synergy”

– to justify their corporate strategy

– to justify their organisational role

• Synergy bias leads to overoptimism about coordination benefits, neglect of costs and risks, and the pursuit of mirages

Synergy Bias


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• The mechanism bias is the belief that, if the centre doesn’t get involved and knock heads together, the business managers will never work together as they should

• The mechanism bias leads to excessive interference by the parent, failure to recognise compromise and opportunity costs that are clear to the businesses, and poor relationships between the centre and the businesses

Mechanism bias


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• The skills presumption is that, if a synergy is worth going for, the parent should be able to put in place whatever skills are needed to implement it

• Skills presumption overlooks the importance of possessing the right skills to make synergies happen, underestimates the difficulty of building new skills, and causes promising synergies to fail in implementation

Skills Presumption


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• Neglect of downsides is based on the mistaken view that the knock-on, second order effects of synergy initiatives are far more often positive than negative

• Neglect of downsides causes the risks of synergy initiatives to be understated or overlooked entirely

Neglect of Downsides


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Understand why Recognise current skills

Size theprize Look for

downsides

FOUR MENTAL DISCIPLINES


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Size the Prize

1. Define the benefits

– disaggregate for precision

2. Assess order of magnitude net benefit

– e.g. 1%, 10% or 50% impact on profits

3. Take account of opportunity and compromise costs

4. Focus on big prizes


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• Identify why sensible managers are not doing the sensible thing

– “synergy killers” that need to be removed to allow enlightened self-interest to operate well

– “difficulties” that are making enlightened self interest ineffective

Understand why


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• There are some features of the corporate context that can inhibit synergies. For example:

– lack of support from corporate strategy– infighting between the “barons”– culture of secrecy– misaligned incentives – inappropriate targets– domineering corporate staffs– mistrust

• The parent needs, as far as possible, to remove synergy killers

“Synergy Killers”


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Difficulties that reduce synergy

Benefit possibility is perceived by units

STEPS IN A SUCCESSFUL SYNERGY

1.

Units evaluate net benefit correctly2.

Units are motivated to pursue the linkage3.

Units have skills, resources and processes to implement successfully4.

TYPES OF DIFFICULTY

Perception Issues

Evaluation Issues

Motivation Issues

Implementation IssuesNo

No

No

No

No Parenting Opportunity


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Build on Skills and Context

1. Lay out the key requirements to implement each synergy initiative in terms of

– management skills– corporate context

2. Determine changes that would be needed

– and assess how easily these changes could be made

3. Prioritise possible initiatives in terms of ease of implementation

– use well-grooved mechanisms if possible– build around natural champions if changes needed


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1. Make explicit any likely knock-on effects

– stand-alone parenting– dynamic of organisation culture– cross-unit contamination– sense of motivation/innovation

2. Revisit cost-benefit analysis, taking account of knock-on effects

Look for Downsides


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Don’t intervene

Identify 3 options that address the

parenting opportunity

Pinpoint the parenting opportunity

Noneexistsunclear

large and clear

unclear Size the PrizeDon’t intervene unless

risks are lowsmall

Choose exploratory interventions

clear

Build on skills and context

Look for down sides

Preferred option

Don’t intervene if risks too high

Framework for Choosing Interventions

Ease ofimplementation

Knock-on effects

Impact on parenting opportunity

Choose an Option

1 2 3


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• If there is high uncertainty, select “exploratory” interventions that are designed for maximum learning, at relatively low risk/cost, about the size and nature of the prize and the parenting opportunity, and about the impact of possible interventions

– “piggy back” mechanisms– facilitating the network– pilot projects– time limited projects– built-in review procedures

Dealing with Uncertainty


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Synergy: Review

• Many valuable synergies will and should proceed through enlightened self interest and without involvement of parent

– provided “synergy killers” do not get in the way

• Some important synergies will not work well without help from the parent

– do something about the “difficulties

• The parent should be comfortable doing nothing if

– there is no clear opportunity to help– the risks of intervention are too high

Synergy

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Transcript of Synergy