CORPORATE GROWTH THROUGH SYNERGY: CONCEPT, MEASUREMENT & APPLICATIONS Yoram Wind and Vijay Mahajan August, 1985 ‘Yoram Wind is the Laudec Professor and Professor of Mackecing, The Wharton School, University of Peansylvania and Vijay Mahajan is the Hernan W. Lay Professor of Marketing at Southern Methodist Gaiversity. The auchors would like co acknowledge the financial supoct of the Whaccon Center for International Management Studies. An earlier version of chis paper vas presented at the San Diego TIMS/ORSA Conference October, 1982.IWTRODUCTION Growth 9 one of the major driving forces of the modern corporation, Whether engeged in internal new product and market developaent, expansion to new interaational markets, external nergers and acquisition of products and businesses, or greater penetration of existing markets, annagenent is often seeking growth opportunities waich will allow them to increase their sales, profits, sarket share, and other desirable objectives. Bvea when corporations go through divestiture of individual usinesses of define the savestuent purpose of some of their businesses as "'Defense’, "'Harvest,' ‘Exit,’ or 'Grovth’ (Rothschild, 1984), the motivation is often the expected long term growth of the firm's overall profitability and improved stock market performance. ‘The drive for growth is not Limited to profit-oriented firms but is also characteristic of state-owned corporations, whose objectives might include growth in employment portunities, and of various non-profit organizations, who strive for growth whether in income, recognition, or other desirable objectives. Despite all the internal and external revards associated with growth, the road to the accomplishment of the desired growth objective is fraught with pitfalls and casualties. The major premise of this paper is that one of the major reasons for failure to achieve the desired corporate growth is the neglect of synergy.Synergy, the "2 + 2= 5" effect, denotes the fact that "the firm seeks @ product-aarket posture with a combined performance that is greater than the gum of its parts." (ansoft, 1965, p-75). It has been identified as a key component in various strategic planning frameworks (see, for example, Ansoff, 1965; Newman and Logan, 19T1; Hofer and Schendel, 1978). Yet, despite the desirability of establishing synergies among a company’s diverse activities, it is interesting to note that most of the recent analytical tools used in strategic planning have ignored this concept. Consider, for example, product/business portfolio models. Most of the standardized portfolio models neghect to include the interdependencies among the portfolio unite -- synergy -- in their analysis (for a review of the models, see Wind and Mahajan, 1981). Similarly, the PIMS Program, with the most comprehensive data base and effort to understand the determinants of business performance, has focused primarily on Strategic Business Units (SBU) and the corporation, ignoring possible synergistic effects anong SBU's. Given conceptually the important role synergy can and should play in guiding corporate growth and the paucity of research on synergy, its measurenent and impact, the objective of this paper is to anawer three interrelated questions: Wnat is synergy? 2, What are the various vays of measuring synergy? How can synergy provide guidelines for various corporate grovth strategies? These questions provide the organizational framework for the paperand will be followed by a brief summary and directions for future research. ‘THE CONCEPT OF SYNERGY Four of the major strategic decisions of any firm are to decide which product-markets to add, keep, and delete, and how to allocate resour among them. In the context of a portfolio framevork, optimal decisions regarding these four interrelated decisions are reached when no further changes in the company's portfolio would improve the company's chances of achieving its objectives. For example, if the company's objective is primarily profit maximization, then the product market portfolio is optimal if profits could not be improved by either deleting, adding product-markets, or changing the resources allocated to the company's product-markets. If, at any time t, a company has n possible domestic and international product-markets that it can include in its portfolio, the strategic market planning problem is vhich = of them the company should select to achieve its objectives. If the company's objective is long term profit maximization, subject to an acceptable level of risk, the selection of an optimal portfolio must explicitly consider the Joint synergistic effects among product markets on the overall profitability and risk of the company. This can be further illustrated by considering the framevork suggested by Ansoff (1965, p.77).Let, S, = Annual $ sales for product-market i. |, = Annual $ operating cost (such as labor, materials, administrations, etc.) for product-narket i Investment (for facilities, equipsent, market development, ete.) requirement for product-market 1. If the company's portfolio includes all the n possible Product markets and these product markets are unrelated to each other (i.e., no positive or negative synergistic efects), then the return on investment for the. company for this particular product market portfolic is simply : (3, - 09) (802) a 2 2 a where 8, = 58,3 0p = 50, and Ty=S tet tL si ‘The "2 + 2 = 5" phenomenon implies that the combined return on the firm's resources is greater than the oum of its parts. If (ROI), refers to the return on the portfolio of n product-markets with synergy, the concept of positive synergy implies that (R02), > (ROT), (2) Clearly the difference AROI = ((ROI), - (ROZ),) denotes the synergistic effect on profitability vhere (s,with S,, 0, and T, representing the total sales, operating s cost and investment respectively for the synergistic product-market portfolic. From equations (1) and (3), it follows that = company can achieve higher return on investment on its synergistic portfolio (i.e,, equation (2)) by achieving synergy driven: * higher sales growth * lower operating costs per unit * lover investment per unit ‘ese synergy-driven approaches can be further enhanced by @ fourth type of aynergy -- management synergy -- vhich can greatly affect the level of sales, cost, and investment synergy. The sales, operating cost, investment, and management synergy involves a variety of internal and external synergy components including: * sales synergy ~Common distribution channels Common sales administration Common gales force Common advertising, sales promotion Common market segments * Operating Syneray ~Shared facilities and personnel Shared overhead “Shared Purchasing * Investment Synergy “Joint use of plant and equipmentCommon raw material inventories -Shared R&D and engineering * Management Synergy Risk reduction “Ability to generate better strategies -Shared resurces (eg. MIS, Market Research, etc.) The internal synergy components stem from the internal operations of the firm, vhereas external synergy can be derived from a variety of cooperative arrangements (e.g., mergers, acquisitions, licensing, and Joint ventures), which capitalize on the synergy between the firm and an outside agent who possesses complementary and synergistic skills and resources. Both internal and external synergy is an obvious and important source of improved business and corporate performance (ROI and other objectives). It requires, however, an ability to measure the nature, magnitude, and the impact of synergy and incorporate synergy considerations in the generation and evaluation of strategic growth options. ‘THE MEASUREMENT OF SYNERGY ‘The measurement of synergy can be conducted either across ‘SBU's or firms, or within SBU's or a firm. Acroes firm measurements of synergy have included the synergy measures present in the PIMS data base and numerous studies aimed at the identification of the determinants of business/product success and failure. At thefirm level, the measurenent of synergy can be based on the analysis of market response data (cross elasticity of demand) or management, subjective Judgements. Exhibit 1 summarizes some of the major meagurenent approaches. Across Business Measures of Synergy Across business measures of synergy can provide illustrative operational vays of measuring synergy as well as some empirical reaults on whether synergy has any effect on business and corporate performance. he PINS data base includes six synergy-related questions (Abell and Hammond, 1979, pp.298-299): Sales Synergy, * Approximately what percent of the sales of this business vere to customers also served by other components of the same company? (Q 147) To what extent were the products and services of this business handled by the same sales force and/or promoted through the same advertising and sales promotion programs, as those of other components of the company? (Q 188) Operating Synergy * Approximately vbat percent of the total purchases of materials, supplies, etc. of this business vere obtained from other components of the same company? (q 12) * Approximately vhat percent of the total sales of this business vere made to the other components of the same company? (@ 1sh) Investment Synergy * To what extent did this business share its manufacturing or operating plant and equipment facilities and personnel with other components of the company? (9 186)Exhibit 2 Classification of Various Approaches to the Meacurenent of synergy Across Businesses (or PIMS data Studies focusing on the identification of business/product success aad failure and studies on performance of diversified firms Within an SBU or Pirm Market Management Response Subjective a Judgement Econometric Adaptive Direct Analytic Analysis xperimen— Assessment Hierarchy tation Process (AHP) Synergy matrix Asynetric factor analysisManagement Synergy * Do the managers of other organizational components that are significant suppliers or customers of this business report to the same immediate superior as the general manager of this business? (Q 145) These questions encompass only some of the relevant synergy dimensions and are subject to the general limitations of the PIMS data base and its limited focus on SBU's. Yet, despite these Limitations, the PIMS questions do provide a rich data base on soue of the key dimensions of synergy. These questions had been utilized by Mahajan and Wind (1985) to analyze the effect of synergy on SBU's performance. Their results suggest that synergy does have a significant impact on profitability but that the magnitude of the effect depends on both the specific synergy generating component (sales synergy is consistently the greatest contributor to profitability) and type of business involved, Further insights into the impact of synergy on business performance can be obtained from the various studies conducted on the determinants of business and product success or failure. Many of these studies do not include explicit measures of synergy but often implicitly refer to the positive impact of synergy (Cooper, 1983). The greatest support for synergy is found in the studies of Rumelt (1974, 1977) and others who examined the performance of related vs, unrelated diversification, Rumelt suggests four major diversification categories. ‘vo of them -- dominant and related diversification — do, in fact, offer a definition of synergy. These synergy-related definitions include thesubcategories of: dominant constrained - a dominant firm in which all component businesses are directly related to the base business dominant linked - a dominant firs in vhich all conponent business are related but are not all related to the base business The same two categories of constrained and linked businesses are also present for related businesses — those firms in which the firm derives less than 70% of its revenues from the base business (in contrast a dominant firm is one that derives 70-95% of annual revenues from the base business) and vhere diversification has been achieved by "relating" new activities to old. This relatedness is defined in terms of markets served, distribution systems, production technologies, or the exploitation of science based research. A fitth syneray-related diversification subcategory is the dominant vertically- integrated firm, In contrast to these five synergy-driven diversifi- cation subcategories, Fumelt suggests three cases of unrelated firms (dominant unrelated, multibusiness, and unrelated portfolio) and ‘the non diversified category of single business. In addition to offering these definitions, Rumelt's findings clearly demonstrate the importance and impact of synergy. His major findings suggest that, on the average, related diversification strategies (both related constrained and related Linked) outperform the other diversification strategies. The best performers are related constrained firns in vhich all conponent businesses are related to each other. As expected, unrelated diversification strategies produce one of the lovestperformances. Additional support for the contribution of synergy (as neasured by the level of relatedness of the businesses) to profitability vas found by Bettis and Hall (1982) who found that related linked firms can simultaneously reduce risks (measured as standard deviation of return on assets) and increase returns. Nore recently, Bettis and Mabajan (1985) found that, on the average, related diversified firms outperform unrelated firms, but they offer no guarantee of a favorable risk/retura performance. Within Firm Measures of Synergy. Within firm measures of synergy include two major approsches -. those based on market response data and those based on management subjective Judgement (which can incorporate the results of market response studies). Market Response Based Measures. Most commonly the analysis of synergy is a by-product of the firm's analysis of the market response function to its marketing actions. In these cases, interaction terms suggest the extent and impact of synergy. Most of the studies vaich include such interaction terms focus on synergy among some of the marketing mix elenents (especially advertising and price). ‘A second market response based approach to the assessment of synergy is test market or simulated test market experiments, similer to market response models experiments, that can reveal strong interaction among 2 or more marketing mix variables. -10-A recent test market, for example, tested the effect of 3 levels of advertising spending, and the utilization (or not) of telephone promotion. ‘The results of the test suggested a strong presence of positive synergy between advertising level and the particular promotion employed. These and similar studies can offer management a useful insight into the nature and magnitude of the interaction among the various marketing mix elenents, Similarly, cross elasticity studies on the product markets of the firm can provide useful insights into the interrelationships among the product-markets. Management Subjective Judgements Based Measures of Synergy. Syneray among the various products and markets of the firm can be also assessed by relying on aanagenent subjective Judgements. These Judgenents are often obtained in group context and are ased to synthesize management's current knovledge and experience. fo date, three approaches have been utilized efectively to measure synergy and its inpact using wanagenent subjective Judgements. (A) A Synergy Matrix. The simplest form of these approaches is based on use of 2 KxK matrix which includes all the current and proposed new product-narkets of the firm. The participating aanagers are first asked to construct the rows (and the identical columns) of the matrix, and to evaluate all pairvise relationships with respect to overall syneray or any other eaedesired dimensions of syneray (e.g., 5: 9 force, advertising, ete.). In evaluating the degree of synergy of the various product-markets (or any other entities among vhich it is desirable to determine the level of synergy) ,it is convenient to use @ -3 to +3 scale in which the negative scores indicate negative synergy (e.g, cannibalization) and the plus scores present positive syneray. ‘The scale of 1-3 suggests the strength of the synergistic reationships. Zero indicates no synergy. Exhibit 2 presents the results of such an analysis. An examination of this exhibit suggests that: * ‘There are few positive synergistic relationships among the firm's current product. ‘The current products would help 6 of the 8 new products. Yet only 2 of the current products (3 and 4) will have significant effect. * 2 of the current products (1 and 5) have no synergistic relations with any of the current and new products. + of the new products are likely to cannibalize some of the current products. + There is Limited positive interaction among the set of new products (only 11, 9, 14, and 13). Data Matrix such as the one presented in Exhibit 2 can also be analyzed more rigorously using the recently developed Asymetric Factor Analysis (Harshman, Green, Wind, and Lundy, 1982). ‘This approach is briefly described next. (B) Asymetric Factor Analysis. Since synergy matrices are -12-EXHIBIT 2 PRODUCT SYNERGY OF THE XYZ FIRMoften asymetric (In Exhibit 2, for example, the relation between 4 and 9 is +3 but between 9 and 4 is -2), Asymetric Factor Analysis is an especially appropriate procedure for rigorous analysis of such data. Consider, for example, the following study Five top executives of a large teleconmunications firm vere concerned vith the identification of candidates for mergers and acquisitions (MIA) and internal product-narket development. In a group setting, they identified 7 factors for evaluating new ventures (either internally developed or externally acquired). The seven factors and their associated levels are listed in Exhibit 3. The managers vere asked, ae in typical conjoint analysis studies, among other tasks, to. sort.16 hypothetical businesses (each deseribed on a card following an Orthogonal Array Design) on the compatability of each business to an anchor card. ALL 16 cards served in turn as the anchor card, ‘The resulting Data Matrix, vith average scores, is presented in Exhibit dn examination of this exhibit illustrates the asymetric nature of synergistic relations, For example, vhen considering business 2 as the current business of the firm (an anchor), business 1 is evaluated as highly compatable with it (3.6 score out of 1.0), but when business 1 is considered as the anchor business, 2 is viewed as leas compatible (only # score of 3.0). The results of the analysis using Asymetric Factor Analysis are presented fn Exhibit 5. An examination of this exhibit suggests thet distribution eynergy (the direct aspect of emerged as a major synergy included in the study) cleai . Green this study conducted jointly with Paul -3B-EXHIBIT 3 FACTORS AND LEVELS FOR EVALUATING NEW PRODUCT MARKET OPTIONS IN THE TELECOMMUNICATION MARKET MARKET SHARE . , 1. HIGHEST SHARE OF SERVED MARKET 2. AVrxAGE SHARE OF SERVED MARKET STABILITY OF ROI GREATER THAN 208 1. IN 8 OUT OF 10 YEARS 2. IN 5 OUT OF 10 YEARS PROFITABILITY 1. UPPER 108 OF INDUSTRY 2. AVERAGE, LABOR RELATIONS 1. ONE OF THE BEST RECORDS 2. OCCASIONAL LABOR TROUBLES R&D EXPENDITURES AS @ OF SALES 1, HIGHEST IN INDUSTRY 2. AVERAGE LEVEL OF MARKETING SUPPORT REQUIRED 1. AVERAGE FOR INDUSTRY 2. SUBSTANTIALLY LOWER THAN INDUSTRY AVERAGE DISTRIwULION 1. CAN USE CURRENT DISTRIBUTION CHANNELS AND METHODS REQUIRES NEW CHANNELS AND METHODS OF DISTRIBUTION 1BaiRERENCE ] 2. get worwnn sun 1 3.6 2.2 3.4 3.6 3.4 3.4 3.6 3.0 2.8 3.4 3.2 3.4 3.4 3.2 3.2 3.0 3.0 2.8 2.8 3.2 3.0 2.6 3.0 2.6 3.0 2.8 2.6 2.6 2.6 2.8 abe 2.2 2.0 2.4 2.0 2.2 2.0 16 2.0 18 2.2 1.8 2.4 1,2 2.0 Bie) 3.0 3.0 34 3.4 3.0 3.4 3.2 3.0 3.2 3.0 3.2 2.6 2.8 2.8 3.2 3.6 2.8 3.2 3.0 3.6 3.8 3.4 3.4 3.2 3.0 2.8 3.4 3.0 3.2 3.0 abe 2.0 18 2.6 2.6 RNENRENNNANDND ROowmnwenNoOrEESE ole 2.6 2.4 2.0 2:8 2.6 2.6 3.0 2.8 2.2 2.6 2.4 2.6 2.2 2.6 3.0 Exhibit § RESULTING DATA MATRIX (AVERAGE SCORE) 3. 3.6 2.8 3.6 3.0 3.0 3.4 3.4 2.6 2.6 3.0 3.2 3.2 3.2 2.8 3.0 ea 2.2 2.0 2.2 2.4 2.4 2.8 2.8 17 2.8 3.0 2.4 3.0 2.0 2.6 2.6 40. 3.2 2.8 3.2 2.4 2.4 2.2 2.2 2.0 34 3.0 34 3.2 2.6 2.8 3.0 ee 3.2 2.6 3.0 2.8 3.2 2.6 3.6 2.8 3.8 3.4 3.6 3.6 3.2 3.6 34 1,8 2.4 2.0 1.6 18 1.8 1? 1? 2.6 2.0 2.4 2.6 18 2.2 2.8 2.0 2.2 2.6 2.4 2.4 2.4 2.4 2.2 2.6 2.4 2.2 2.6 2.8 2.8 2.8 5.4 3.2 3.0 3.0 3.6 3.0 3.0 3.0 4.0 3.6 3.6 3.4 3.6 3.6 3.8 2.8 24 2.8 3.0 2.6 2.8 2.0 3.0 2.2 2.6 2.4 2.4 3.0 2.2 3.2 1.6 2.0 2.0 2.2 1.8 16 1.8 16 2.2 2.2 1.8 2.2 2.0 12 2.4ba Beapit 5 COMPATIBILITY ANALYSIS (RESULTS OF THE ASYMMETRIC FACTOR ANALYSIS) B c D é fee FACTOR LOADINGS ___ Varket STABIL, PROFIT- ~ LABOR RAD, MRTG, ‘DISTRI- SHU = OF ROL. ABILITY SALE. SUPPORT RUTION ce selec teers |e | \ fetest) 1 (ar) 1 (at) 1 Gest) 1 (Hiest) 1 (ave) 1 (cur.) Tur) 1 (un) 2 (o.t.) 2 (ave) 1 Cave) 2 (new) 1 (a1) 2 (Lo) 1 (pest) 1 (Hest) 2 (Lo) 2 (new) C37] 1d) 2 (co) 2 (o.t.) 2 Cave) = 2 (Lo) 1 (cur) | 2 (co) 1 (ur) 1 (Best) 2 (ave) = 2 (Lo) 1 (cur.) ] 2 (co) 1 (ut) 2 (o.t.) 1 Cutest) 2 (Lo) 2 (wew) 2 (Lo) 2 (Lo) 1 (pest) 2 (ave) 1 (ave) 2 (new) 2 (Lo) 2 (co) 2 (o.t.) 1 (Hest) 1 Cave) 1 (cur.) 1 (a1) 1 Git) 1 Gest) 2 (ave) 2 (Lo) 2 new) C36) 1a) 1 (Hi) 2 (o,t.) 1 (Hiest) 2 (Lo) 1 (cur. C41) ? 1 (Hr) 2 (Lo) 1 (pest) 2 (ave) 1 (ave) 1 (cur.) a) ? 1 (H1) 2 (to) 2 (o.t.)- 1 (atest) 1 (ave) 2 (new) 82] 2 avo) 2 (Lo) 2 (Hi) 1 Gest) 1 (Hiest) 1 (ave) 2 (new) C30 2 wave) 2 (Lo) 1 (Ht) 2-(o,7.) 2 Cave) 1 (ave) 1 (cur. 2 (ave) 2 (Lo) 2 (Lo) 1 (pest) 1 (Hiest) 2 (Lo) 1 (cur) C20 ? (ave) 2 (Lo) 2 (Lo) 2 (o.t.) 2 Cave) = 2 (Lo) 2. (new) (49) 40OF J'SPER ATTRIBUTE 7 PROFIT & ; ; 3 ; i ; ; cone INTERNAL 1 3 2 4 4 2 2 STRENGTH * ISTRI u 2 2 1 1 2 3 $$ te SYNERGY THe R MATRIX 1 PROFIT. SHARE 7.19 0.28 442 TL INT. STRENGTH 6.00 2,67 6.30 TIT DISTRIBUTION 3.22 0,73 4.83 CORRELATION BETWEEN ACTUAL AND FITTED VALUES IS .89factor. Furthermore, the R Matrix of the Asymetric Factor Analysis (Exhibit 5) shows strong overlap between the distribution synergy factor and the other 2 factors. The study also illustrates that a task focusing on the compatability aspect of synergy is meaningful and can help management in the selection of a grovth direction. (C) the Analytic Hierarchy Process (AHP), ‘he third approach for the assessment of the level and nature of synergy is via the Analytic Hierarchy Process (Wind and Saaty, 1981), vhen used as the framework and methodology for a customized portfolio model with explicit synergistic considerations. In a recent application of this approach by a Portune 500 firm, for the determination of the portfolio of market segnents and products, synergy was identified by managenent as one of the key criteria for evaluation of the current and proposed products and market segments. The complete hierarchy, which illustrates the place of synergy in the overall portfolio planning process and its relative inportance, is presented in Exhibit 6. An examination of the exhibit and other supporting material suggeste: * synergy is vieed by management together vith business attractiveness and strength as the 3 key criteria in generating and evaluating strategic options * The relative importance of synergy (vs. the other two criteria) in accomplishing the corporate objectives (of margins, ueeT EXHIBIT 6 INTERNAL AHP HIERARCHY PLANNING HORIZON: OBJECTIVES: BUSINESS A ATTRACTIVENES| RITERIA? : (278) MARKET SEGMENTS: ‘CURRENT PRODUCTS Probucts: (163) (689)profit grovth, and reduced risk), both in the short and long term, is extremely high -- close to 30%. * one of the aajor reasons for the very high weight placed on needed new "blue sky" products is the limited synergy among the current and proposed new products of the tira. In generating ideas for specific new "blue sky" products, 5 products vere identified, with potentially strong synergy with the current and proposed products with respect to the selected target segnents. This application has, thus, resulted in the identification of @ set of new products which satisfy the needs of selected target segments. The segments vere selected based on their attractiveness, the company's current strength in then, and the synergy among then. These criteria vere in turn veighted based on their contribution to the 3 objectives of the firm (e.8-, margins, profit growth, and reduction of downside risk) vkich in turn vere evaluated on their importance to the achievement of the short and long term mission of the firm. this applications illustrates the importance of supplenenting the assessment of the degree of syneray among current and proposed products, market segments, and strategies, (as {llustrated, for example, in Exhibit 2) with approaches such as the AMP for the generation and evaluation of synergistic competitive and cooperative strategies. -5-An Approach to the Generation and Evaluation of a Synergy-Oriven Corporate Growth Portfolio Given the various ways of measuring synergy, the questions which Still have to be addressed are: vhich of the various measurenent approaches to use and hov to implement the selected approach. Since each of the approaches discussed measures either a different aspect of synergy or views synergy from a different perspective, no single approach can be identified as the "best" approach. Rather, it is suggested that a number of the measures be integrated in the broader context of a growth portfolio. Such an approach is outlined next; it offers an operational way for implementing'a synergy-driven growth portfolio analysis and strategy. Exhibit T outlines the proposed approach which is based on 8 steps, Since most of these steps are also common to any other planning model, the following discussion will focus on these aspects unique to the synergy perspective we propose. The 8 steps are as follows: (1)determining Corporate Mission and Objectives. The first set of decisions has to focus on _- the desired mission of the firm, Folloving an explicit and visionary mission statement, management has to identity a set of objectives and assess their relative importance for the short and long term under a variety of environmental conditions as well as determine the trade off between the short and long term perspective. Both the nission and objectives are not viewed as fixed but rather as determined by management. Most mission statements ~~EXHIBIT 7, An Approach to the Generation and Evaluation of a Synergy-Driven Corporate Growth Portfolio Corporate Mission Current knowledge on and Objectives determinants of business success and failure, and studies on synergy provide conceptual hypotheses and published and internal empirical, findings Monitoring and forecasting the relevant markets; competitive and environmental conditions in all target countries. Assess the external opportunities and threats Assess the corporate internal strengths and weaknesses Match the external and internal analyses--requirenents for success and business strengths~-and conduct a synergy analysis Generate creative growth options Portfolio mode for generation and evaluation of portfolio strategies Recommended strategy 16ainclude a corporate grovth component and it is, thus, desirable that the objectives, which serve as the criteria for evaluating the strategic options, explicitly inelude synergy. (2)Monitoring and Forecasting the Current and Projected Envirooment = s Opportunities and Thre In this phase, management has to assess the likelihood of occurence and impact of trends in market denand, competitive structure and behavior, distribution systens, technological developments, legal/political environment, social/cultural forces, economic conditions, and other environmental factors. In addition, it is important to assess the Likely interdependencies among the external forces (cross impact analysis). Such analysis provides the basis tor assessing the market opportunities and threats and the development of appropriate planning scenarios as input to the generation of creative strategic options and their evaluation. (3)ourrent knowledge Jo assure the generation of creative and effective corporate growth strategies, it is important to utilize all available internal and external imoviedge. Internally, it is desirable for a company to build e cumilative data base which will lead to the development of empiricalgeneralizations. In this context, special attention should be given to the identification of synergistic relationships. Externe] studies and publications, such as the ones reviewed in section two of this paper, can also be used to generate hypotheses as to possible synergistic relations of value to the firm. (4 )Assessment of Internal Strengths and Weaknesses ‘This phase offers the crucial input on the firm's ovn strengths and weaknesses in each of the product-markets vithin each of the target countries. In addition, it is often helpful to assess the expected strengths and weaknesses in future product~narkets. A critical component of this internal evaluation is the assessment of the historical and projected growth of the business and its determinants. Part of this evaluation should also include synergy analysis such as the one outlined in Exhibit 2. This adds an important dimension to the assessment of the firm's internal capabilities and its potential grovth areas, The higher the synerey auong the firm's current resources and operations, the stronger its comopetitive posture. Similarly, the higher the current and expected synergies, the more promising are these areas as directions for (synergy-driven) grovth. For example, having an effective distribution system in a given foreign country suggests the attractive synergistic option of growth via the addition of new -18-products to the product line currently distributed by this network. Such a synergistic grovth strategy may be much more desirable than expansion to nev markets vith the current products. (5)Requirenent, for Success ve. Company Strengths A critical component of any syneray analysis is the assessment of the requirenent for success for operation in any target product-market-country vs. the company's strengths on those required functions, skills, and resources, Exhibit 8 illustrates graphically how such an analysis can be conducted. Having completed this, the next step is the identification of those areas which are important for success and on which the fira is veak, These areas provide guidelines for the identification of options for cooperative arrangements (eg. MBA, Leensing, Joint venture, ete.). A combined entity based on such a synergistic acquisition (or other cooperative arrangenent) could compete more effectively in the selected target warkets.and countries, It is this expected syneray which increases the chances that M&A and other corporate arrangements will be successful. Recently 4 medium-sized multinational fira followed ‘this approach and developed strength charts such as the one outlined in Exhibit 8 for a large set of candidates for cooperation from which they selected a partner, It is premature to tell how successful the "match" vas but igREQUIREMENT For Success INDEX in0 MANUFACTURING 80 DISTRIBUTION 75 ADVERTISING/ * PROMOTION 60 Red 50 FINANCE 40 BHIBIT 8 FUNCTIONAL SYNERGY ANALYSIS Company's STRENGTH INDEX 19athe management of the nev entity are extrenely optimistic that the acquisition would lead to significant synergistic improvements in the performance of the nev entity. (6)Generation of Creative Growth Strategies Given the previous analysis, a critical part of the process is the generation of creative growth options. The AHP has been an extremely useful franevork and methodology for the generation of innovative strategies. Utilizing this approach, a group of relevant managers are encouraged to generate innovative options using a variety of approaches to idea generation and integrating the results of the previous analysis vith their subjective judgments. Creative synergy-driven strategies can include options such as: * Growth in current market(s) by adding synergistic products * Growth in current market(s) by employing synergistic marketing strategies * Growth by acquiring synergistic operations such as distribution outlets, manufacturing facilities, RED activities, ete. * Grovth by adding new synergistic markets (T)Portfolio Analysis and Strategy Portfolio analysis and strategy is vieved as the core of the process. It allove both the evaluation of the current portfolio of the firm and generation and evaluation of new = 20 -portfolios leading to the selection of a target portfolio. This analysis cen be done at any level —- whether at the corporate (with SBU's as the units of analysie vithin the portfolio) or at the SU or product group level (vith segment/positioning as the units of analysis). The portfolio analysis can involve any aurber of portfolio models. Given, however, the Limitations of some of the more common standardized portfolio models (day, 1977; Wensley, 1981; Wind, Mahajan and Swire, 1983) and the advantages of customized portfolio models (Mahajan and Wind, 1982), it is recommended that managenent employ a customized approach such as the one based on the AHP. The resulting portfolio can be presented in the context of a hierarchy such as the one outlined in Exhibit 6. In this case, the portfolie output is in terms of the desired portfolio of products and their relataive weight and a desired portfolio of market segments and their relative weights. Both of these reflect the various management objectives under various scenarios. The AEP approach can be used to generate creative growth options, evaluate then on a set of criteria, vhich includes synergy, when the criteria are evaluated on their importance for the accomplishment of the short and long term objectives of the firm under a variety of scenarios. The resulting synergistic portfolio, which ideally shouldbe globally in scope (Wind and Douglas 1985), can then be subjected to sensitivity analyses, to assess the expected impact of changes in assumptions and judgments. This provides a range of priorities for each option, which can be interpreted as a measure of the uncertainty involved. This AHP-based porftolio approach has been used in @ number of cases and the experience to date has been very encouraging. (8)Reconmended Strategy ‘The AHP framevork and methodology increases the chances of generating creative synergistic new growch strategies. In addition, it assures that the resulting output offers rigorous prioritization of all the considered growth options, taking into account all the relevant criteria ineluding synergy. concLusrows synergy, despite its trenendous intuitive appeal and eritical role in determining the directions for corporate and business grovth in both domestic and global markets is one of the most ignored managenent concepts. Our purpose in this paper was to redirect attention to the concept, focus on its meaning and measurenent,, and suggest an operational approach to its incorporation in a broader portfolio context. ‘This approach combines @ number of the approaches to synergy analysis with an AEP based portfolio analysis which is geared tothe generation and evaluation of creative synergistic grovth strategies. This approach, as outlined in Exhibit 7, has been employed successfully in one case and components of it in a number of other situations. Wnile the experience, to date, suggests the viability of the approach, there are still a number of issues concerning the measurenent and management, of syneray vhich have to be resolved before the concept could achieve the place it deserves as one of the critical determinants of corporate and business growth and the fira's resource allocation decisions. These issues, vhich also constitute an agenda for future research in the synergy area are: * What are the components of synergy and do they vary across situations? = An initial List of synergy componente has been proposed here. Yet, further vork is needed to refine and adapt it to varying conditions. ow reliable and valid are the various measurements of syneray? = The procedures proposed here-have been implemented but they still require larger scale testing for their reliability and validity. + How to best generate synergy-driven strategies? = the synergistic strategies, in the example presented in this paper, were generated and evaluated by a number of key corporate executives in a group session. Yet other approaches, like those used for generating new - 23 -Product ideas, can be utilized, further exploration of the costs and benefits of the various approaches should be undertaken. * How to best implement a syneray strategy? = Yajor obstacles to implenentation, such as decentralized organizational structure which does not: encourage cooperative activities anong synergistic units (e.a-5 products, markets, etc.), should be identified and, creative strategies to overcoae the obstacles should be designed and implenented, thus facilitating the implemen tation of the chosen synergistic strategies. These and similar issues provide challenging directions for future research in the synergy area -- an area vhich has the potential to substantially increase managenent productivity, provide direction for grovth, and offer guidelines for better utilization of resources. abeREFERENCES Abell, Derek F, and John S. 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