Corporate Synergy Typology

What types of synergies can I realize within my organization? TIAS professor of Strategic Leadership Ron Meyer presents an insightful tool to kickstart your thinking: Corporate Synergy Typology.

Key Definitions

There is synergy when the whole is more than the sum of the parts – when bringing together two or more elements leads to the creation of something extra. In organizations, we speak of synergy when operating in two or more markets leads to additional value, that wouldn’t be realized if the organization had focused on only one task environment.

Organizations can strive for cross-business synergies by working in more than one product market (different lines of business) and cross-border synergies by working in more than one geographic market (different countries or regions).

Conceptual Model

The Corporate Synergy Typology outlines the three types of synergies that organizations can create (in red). In this model only two business units are used to illustrate the three types, but these synergies can also be realized across more than two units. The synergies are found between the three layers of each unit’s value creation system (usually called their business system – see model 47, the Corporate Strategy Framework for an overview). Organizations can focus on just one synergy or pursue them all simultaneously. In general, the closer the synergy is to the market, the more difficult it is to realize. How the synergies need to be organized is not addressed in this model (see model 8, 11C Synergy Model). 

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Key Elements

The three types of synergies are the following:
1. Leveraged Resources. Each business unit has a variety of resources at its disposal that it employs as inputs for its activity system. These resources include tangible assets such as buildings, machines, and money (basically everything on the balance sheet), as well as intangibles such as knowledge, capabilities, data, and relationships. These resources can be leveraged across business units in two different ways:
a. Replication. Most intangibles, like best practices, can be copied and transferred to other business units without the owner losing the resource.
b. Reallocation. Most tangibles, like money, can’t be copied, but need to be partly or fully moved from one business unit to another, where their use will be more valuable.
2. Integrated Activities. A business unit needs resources to perform a variety of activities that will result in a value proposition. These value-adding activities include primary activities like production and sales, support activities like finance and R&D, and control activities like legal and risk management (see model 50, Activity System Dial). These activities can be integrated across business units in two different ways:
a. Horizontal sharing. Business units can bring similar activities together to create economies of scale and/or develop more expertise (horizontal integration).
b. Vertical linking. Business units at different steps in the industry value chain can link up to improve efficiency, quality, speed and/or market power (vertical integration). 
3. Aligned Positions. A business unit’s reason for existence is to bring a product or service to market that customer will prefer to purchase. To achieve this, it needs to select a defensible market position – a specific customer need that it can satisfy with a fitting value proposition, better than competitors. This position in the market can be strengthened when business units work together in one or both of the following ways:
a. Joint offering. Negotiation power vis-à-vis the customer can be increased by offering an aligned portfolio of value propositions or even an integrated solution.
b. Collective bargaining. Negotiation power vis-à-vis other market and contextual actors can be increased by aligning influencing efforts (see model 31, Market System Map).

Key Insights

• Synergies are created between two or more business units. To some people, ‘realizing synergies’ sounds like a euphemism for cost savings. But although reducing cost can be the advantage sought, synergies can also lead to increased expertise, higher speed, better quality, and/or more market power. A synergy is any additional value that is created when two or more business units work together instead of separately.
• Synergies are created between business systems. Each business unit creates value by taking inputs (it’s resource base) to perform a variety of coordinated tasks (it’s activity system) to produce an output (it’s value proposition) that can be brought to a specific market. Together, this value creation approach is called the unit’s business system. Synergies can be realized by building bridges between various business systems.  
• Synergies can be created at three different levels. Synergies can be achieved by leveraging resources across units, integrating activities between them, and/or aligning positions they have in the market. All can be realized separately or simultaneously.
• Synergies are created at the expense of responsiveness. To accomplish synergies, units need to work together, which can slow them down and require compromise. So, pursuing synergy can cut into units’ ability to be responsive to market needs. Therefore, the selected synergies need to be more valuable than the loss of responsiveness.
• Synergies also need to be organized. Synergy is the value derived from working together, but this collaboration needs to be structured and managed in a smart way.

INSPIRED BY THIS KICKSTART?

During the six-day Masterclass Organizational Leadership you will work on solutions for a problem of your own definition, such as transforming with your organization and getting employees moving. You will also reflect on the performance of your Management Team and your organization. This will help you realize effective growth for your organization.

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Corporate Synergy Typology is part 64 of a series of management models by prof. dr. Ron Meyer. Ron is managing director of the Center for Strategy & Leadership and publishes regularly on Center for Strategy & Leadership.