STRATEGIC MANAGEMENT AND BUSINESS POLICY

BBA-VI SEMESTER
UNIT-V
 Syllabus of Unit V
Concept of Synergy :
 Types of Synergy
 Evaluation of Synergy
 Capability profiles
 Synergy as a component of strategy and its
relevance
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 Synergy
 According to the American Heritage Dictionary , the term "synergy" is
derived from the Greek word sunergos meaning "working together."

 Synergy, also known as synergism, refers to the “combined effects

produced by two or more parts, elements, or individuals”.

 Simply stated, synergy results when “the whole is greater than the sum of
the parts”.
 The 2+ 2 =5 effect means that operating independently, each subsystem
can produce only 2 units of output. However, by combining their efforts
and working together effectively, the two subsystems can produce 5 units
of output.
 If the firm is broken into smaller units performing the same function, this
would lead to reduced output or ultimately increases the costs.
 For Example, 2 people can move a heavy load more easily than the that 2
working individually can each move their half of the load.
 In the context of organizational behavior, “synergy is the ability of a group
to outperform even its best individual member”.
 In a technical context, its meaning is “collection of different elements
working together to produce results not obtainable by any of the elements
alone”. The elements or parts, can include people, hardware, software,
facilities, policies, documents: all things required to produce system-level
results.

 If used in a business application it means that “teamwork will produce an

overall better result than if each person was working toward the same
goal individually”
 Synergy can be a positive or negative outcome of combined efforts.

 Positive synergy is sometimes called the 2 + 2 = 5 effect.

 Operating independently, each subsystem can produce two units of

output. However, by combining their efforts and working together
effectively, the two subsystems can produce five units of output.

 Positive synergy resulting from group decisions may well include the
generation of more ideas, more creative solutions, increased acceptance
of the decision by group members, and increased opportunity for the
expression of diverse opinions.

 Positive Synergy At The Organization Level -Organizations strive to achieve
positive synergy or strategic fit by combining multiple products, business
lines, or markets.
 Negative synergy can be called the 2+2+=3 effect.

 Individuals operating alone can each produce two units of output.

 With negative synergy; the combination of their efforts results in less

output than what they would have achieved if they had each worked
alone.

 Negative synergy can result from inefficient committees, business units

that lack strategic fit, and from other poorly functioning joint efforts.
 GROUND RULES FOR POSITIVE SYNERGY-
 Develop A Win-Win Mentality. Believe that all parties involved will gain
more insight, enthusiasm, learning and growing by working together.

 Keep minds, hearts, and expressions open to new possibilities.

 Recognize others different opinions, views, and perspectives as helpful

when seeking solutions. Valuing the differences lets people discover things
together that they would much less likely discover individually.
 Nature of Synergy

 Synergy usually arises when two persons with different complementary

skills cooperate.

 Synergy is the highest activity of life, it creates new untapped (not yet
used) alternatives, it values and exploits the mental, emotional and
psychological differences between people.

 It will help the firms to work as a team to achieve their goals with
increase in their output and reduction in the cost.
 Types of Synergy
Management
Sales Synergy
Synergy

Operating
Synergy Investment Synergy

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 Management Synergy
 Synergy in terms of management and in relation to team working refers to
the combined effort of individuals as participants of the team.

 The condition that exists when the organisation’s parts interact to

produce a joint effect that is greater than the sum of the parts acting
alone.

 Positive or Negative synergies can exist.

 In these cases, positive synergy has positive effects such as improved

efficiency in operations, greater exploitation of opportunities ,and
improved utilization of resources.
 Negative synergy on the other hand has negative effects on production in
the firm with effects such as reduced efficiency of operations,
underutilization of resources and disequilibrium with the external
environment.
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 Sales Synergy
 It is used for products which is obtained through use of common
marketing facilities such as distribution channels, sales staff and
administration and warehousing. Supplying a range of complementary
products increase the productivity of the sales force.
 Shared advertising ,sales promotion and corporate image generate a
much higher return than average per rupee spent.

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 Operating Synergy
 It arises from the better use of operational facilities and personnel, bulk
purchasing, a greater spread of fixed costs and the advantages of common
learning where the experience gained by the employees in making one
product can be transferred to making new products.

 For Example, Two small firms are merge, they can saved fixed costs by
moving into the same premises/business and sharing the same office staff,
then there will be definitely savings in cost for both firms.

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 Investment Synergy
 It can be achieved from the joint use of plant ,common raw materials
stocks, transfer of research and development from one product to another
i.e. from the wider use of a common investments in a fixed assets or
working capital or research.

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 Synergy as important concept for
managers as
 Reinforces to work together in a cooperative manner
 Organizational units tend to be more successful working together than
working alone.
 Synergy is applied to marketing for measuring overall effectiveness
through the coordinated operation of many implements.
 Greater the synergy a firm can manage to achieve through its selection of
products and markets, the more flexible will be its competitive position.
 Advantages of Synergy
 Generally synergy is created “when the combination of buyer and seller
eliminates weaknesses and leverages strengths". The following benefits and
advantages can be observed from synergy-
 Functional Advantages i.e. Economical Benefits
 Greater Outputs
 Financial Benefits( cooperation by Mergers & Acquisitions or other strategy)
 Increased Market Share
 Gain Efficiency
 Gain Competitive Advantages to the firm
 Encourages Creativity
 Decision Making
 Risk Reduction
 Company Image Building or enhancement in Company’s Image
 Skills Sharing
 Disadvantages of Synergy
 Easy Theory, Practical Difficult
 Thinking Problems due to different groups
 Sometimes cost may be high
 Lack of clarity of roles & responsibilities may lead to conflicts
 Loss in Jobs( disadvantage for workers)
 Increased number of persons or authorities, Longer Decision time,
increased work.
 Organisational Capability
Profiles
• An organizational capability profile describes the skills, knowledge and
resources that enable your company to provide quality products or
services to customers.
• Organizational capability factors are strategic strengths and weaknesses
existing in different functional areas within an organization, which are of
crucial importance to strategy formulation and implementation. The
organization into six largely accepted and commonly understood
functional areas. These are: Finance, Marketing, Operations ,Personnel
,Information and General management
 Example
• In January 2018, Oil and Natural Gas Corporation Ltd. (ONGC) announced
the acquisition of a 51% stake in Hindustan Petroleum Corporation Limited
(HPCL) in a deal aimed at helping the central government meet its
disinvestment target for 2017-18
• In May 2018, Tata Steel successfully submitted the winning bid for
bankrupt rival Bhushan Steel in an auction. The 352 billion ($4.9 billion)
offer for a 73% stake in Bhushan Steel
• In September 2018, India’s Finance Minister, Arun Jaitley, announced the
consolidation of Bank of Baroda (BoB) and Vijaya Bank, which had a bad
loan ratio of 5.4% and 4.1%, respectively, with the struggling Dena Bank,
which had a bad loan ratio of 11%. As a result of its poor financial health,
Dena has been placed on the RBI’s Prompt Corrective Action (PCA)
watchlist .