Strategic Management - Strategic Synergy

Strategic Management - Strategic Synergy

The ultimate goal of any company is to increase its profits and consolidate its market positions and in doing so, they develop wide series of strategies. A most commonly used such strategy is given by the joining of forces in numerous alliances as to best benefit from the comparative advantages of each entity. These unions often take the form of mergers and acquisitions and they are beneficial as they create a strategic synergy. The strategic synergy encompasses the benefits derived from the joining of forces by two or more companies and has often been assimilated with the simple equation of 2 + 2 = 5. This basically means that when put together, two companies add up to more value, more core competencies and a stronger and better consolidated position on the market than any one of them could have achieved on its own. The strategic synergy can be used to generate three main effects:

the creation of economies of scale the joining together of complementary skills, and the dissemination of core competencies

Economies of scale

Economies of scale occur when a single entity or group of entities possesses the necessary skills, resources and capabilities to control an entire industry on its own. This company or group has increased access to all types of resources and is able to manufacture and sell products at extremely low and uncompetitive prices. The competition is basically crushed and the situation is often compared to monopolistic practices and it is being accordingly criticized.

However there are various causes at the basis of scale economies, one of these causes could easily be the strategic synergy. In this situation, two or more companies activating in the same industry can chose to work together and detain monopoly on the market. Even if the situation could occur in the case of complementary products and services, it is most commonly met in the case of similar if not competitive products. The manufacturers often possess complementary skills which they then combine to retrieve the most favorable result. By engaging in supporting activities, the two companies are better able to reduce manufacturing and operational costs, increase as such the number of customers, reduce the position held by the competitors and strengthen their own market position - all to lead to the creation of economies of scale.

To best understand how strategic synergies could lead to the formation of scale economies, take the example of two major it competitors on the Japanese market. These two hardware manufacturers possess together 80% of the entire market, with 50% the first and 30% the second manufacturer. They both represent a forceful competitor for the other, but if they join forces, they will be able to control the market. They will be better able to satisfy the needs of their combined customers, improve the quality of their products and services and reduce the manufacturing time and the retail price to the end consumer. The remaining companies, with a 20% market share, are likely to be put out of business due to the newly created economy of scale.

Complementary skills

As it has been mentioned previously, the companies setting the basis for mergers and acquisitions to benefit from strategic synergies operate in the same industry, address the same types of consumers and manufacture similar and competitive products which satisfy the same needs. But what makes their union result in success is the joining of their complementary skills, all to result in a superior quality of the manufactured products, a better and more extensive customer satisfaction and ultimately, increased profits. The complementary skills represent those capabilities that are held by one company or the other, but which could be joined or transferred to offer a better result. To best understand the dynamics of strategic synergies and complementary skills, take the hypothetical example of two French companies manufacturing cosmetics products. Say for instance that the first company produces high quality and reputable products, but they have been severely criticized for their increased levels of pollution and increased waste. The quality of the products manufactured by the second company is reduced in comparison to that of the first, but they have often been praised for their massive investments in newer, better and more efficient technologies which pollute less, eliminate reduced waste and are more environment friendly. Were the two companies to form a joint venture, they could easily combine their skills to produce high quality cosmetics through an environment friendly process.

Core competencies