Synergy

1. Synergy Group Level Strategy Andrew Campbell Director, Ashridge Strategic Management Centre

2. Potential Benefit Areas • 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

3. Synergy: The Frustrations • 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

4. ASHRIDGE EXPLANATION • Four mental biases Skill presumption Mechanism bias Neglect of downsides Synergy bias

5. Synergy Bias • 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

6. Mechanism bias • 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

7. Skills Presumption • 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

8. Neglect of Downsides • 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

9. FOUR MENTAL DISCIPLINES Recognise current skills Understand why Size the prize Look for downsides

10. Size the Prize • Define the benefits • disaggregate for precision • Assess order of magnitude net benefit • e.g. 1%, 10% or 50% impact on profits • Take account of opportunity and compromise costs • Focus on big prizes

11. Understand why • 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

12. “Synergy Killers” • 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

13. Difficulties that reduce synergy STEPS IN A SUCCESSFUL SYNERGY TYPES OF DIFFICULTY No Benefit possibility is perceived by units Perception Issues 1. No Units evaluate net benefit correctly Evaluation Issues 2. No Units are motivated to pursue the linkage Motivation Issues 3. Units have skills, resources and processes to implement successfully No Implementation Issues 4. No Parenting Opportunity

14. Build on Skills and Context • Lay out the key requirements to implement each synergy initiative in terms of • management skills • corporate context • Determine changes that would be needed • and assess how easily these changes could be made • Prioritise possible initiatives in terms of ease of implementation • use well-grooved mechanisms if possible • build around natural champions if changes needed

15. Look for Downsides • Make explicit any likely knock-on effects • stand-alone parenting • dynamic of organisation culture • cross-unit contamination • sense of motivation/innovation • Revisit cost-benefit analysis, taking account of knock-on effects

16. Choose an Option 1 2 3 Impact on parenting opportunity Ease of implementation Knock-on effects Framework for Choosing Interventions Don’t intervene unless risks are low Size the Prize small unclear large and clear Choose exploratory interventions None exists Pinpoint the parenting opportunity Don’t intervene unclear clear Identify 3 options that address the parenting opportunity Build on skills and context Don’t intervene if risks too high Look for down sides Preferred option

17. Dealing with Uncertainty • 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

18. 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