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Synergy

Book cover

by Andrew Campbell and Michael Goold, Capstone, 1998.

Abstract

How to make the value of an organisation greater than the sum of the parts by creating linkages between them. This requires realism about what really is synergistic and ability to pinpoint opportunities, while not ignoring downsides and knowing when parent company intervention would help.

(Reviewed by Kevin Barham in July 2000)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

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As Andrew Campbell and Michael Goold say, both managers and academics are fascinated by synergy - how to make the value of an organisation greater than the sum of the parts by creating linkages between them. While it seems a great way to get extra performance, create new businesses, and make more profit from the existing situation, synergy in practice has proved, say the authors, as elusive as the Holy Grail.

Some examples make the point. ICI, for example, whose activities used to cover a wide range of different chemicals businesses, used the synergy argument successfully to fight off a hostile bid from Hanson, arguing that the latter would not understand the important technical linkages between the businesses. A year later ICI announced a demerger as the synergy between its businesses had not just disappeared, but there were actually big disadvantages in staying together. In another example, a multi-business retailer sought to develop core competences in supply chain management, marketing and customer service across its businesses. But, as its different businesses were competing in different ways and offering differing levels of customer service to their customers, internal benchmarking and common skill development were inappropriate. And, in an office furniture company with factories in five companies, a project to co-ordinate component manufacturing and capacity sharing ran into problems because the local manufacturing directors did not respect the parent manager leading the project who was an accountant, and who they feared, would suggest impractical solutions. A similar project launched later by a parent manager with a different background and a track record of successfully rationalizing operations in a rival company, achieved major improvements in the cost base as he was quickly able to gain the respect of the manufacturing directors.

Building on their previous research into how parent companies and head offices add value in multi-business organisations, the authors show how managers in the parent organisation can overcome the obstacles and make more effective synergy interventions among the businesses. Synergy, they say, can come from six sources - shared know-how, shared tangible resources, pooled negotiating power, co-ordinated strategies, vertical integration and combined new business creation. But synergy is difficult to achieve, they say, because of four biases that exist in the minds of most managers - synergy bias, parenting assumption, skill presumption and neglect of downsides. The antidotes to these biases are four mental disciplines - size the prize, pinpoint the parenting opportunity, build on parenting skills, and look for downsides.

Synergy bias is the result of over-enthusiasm for synergy by managers in the parent organisation. This results from the pressure to justify the existence of the portfolio of businesses and from parent managers' natural desire to justify their own jobs. They think that they can see a valuable linkage opportunity when, in reality, it does not exist.

Parenting presumption stems from parent managers' belief that the business unit managers will not work together unless pushed and that they need to 'parent' linkages if synergy is to occur. This presumption stems from managers' natural belief that that things need managing. It may also result from a belief that business unit managers suffer from a 'not-invented-here' attitude. The authors claim that the parenting assumption is false and that a parenting presence may actually get in the way of co-operation - just as siblings fight more vigorously when the good opinion of their parents is at stake, but get along more easily when the stakes are lower. Interference by the parent manager is not always necessary or appropriate.

The third bias arises from the frequent assumption by parent managers that they have the skills to correct the situation when they see a synergy opportunity that is not being addressed. Frequently, however, they do not have the necessary operating knowledge, relationships with the people who matter, or the time, patience or force of character to follow through with implementation. Or they don't have the facilitative skills to bring about agreement. Linkages work best when they are led by someone who is a 'natural champion' of the issue who does have these skills and who can be one of the business unit managers.

The last bias, neglect of downsides, is the tendency of parent managers to ignore the negative knock-on effects of their co-ordination initiatives. Knock-on effects are the costs and benefits that occur as indirect outcomes of linkages between businesses. They will often consider the upside effects - the benefits - but rarely consider the downside. For example, parent managers may support a synergy initiative because it will 'help move us to a more co-operative philosophy' or will 'encourage teamwork', but it is rare for them to hold back an initiative because it might 'reduce ownership and commitment at the business unit level' or because 'managers in business unit A might contaminate the thinking of business unit B.' Managers who overlook potential downsides are prone to ill-judged or damaging interventions.

So how can organisations counter these biases to bring about true synergies? The authors offer two-part practical guidance. The first part consists of 'mental disciplines' that act as antidotes to the biases. The first antidote - against overenthusiasm for synergy - is to 'size the prize'. Parent managers too often think about benefits in vague terms such as 'best practice sharing' or 'co-ordinating relationships with customers.' It is certainly not easy to estimate how big a synergy will be but three practical steps help managers size the benefits:

  1. disaggregate benefits to gain greater clarity and precision.
  2. frame the initiative to help separate primary from secondary benefits and give focus for action.
  3. make order of magnitude financial and strategic judgements noting opportunity and compromise costs.

Defining the benefits as precisely as possible keeps synergy bias at bay, helps point to appropriate interventions and provides a priority ranking for important issues.

The second antidote, 'pinpoint the opportunity', overcomes parent managers' presumption that they have to intervene to bring about synergy. There is, however, no reason for parent managers to intervene unless something is stopping business unit managers from doing the commercially sensible thing. Parenting opportunities occur because business managers have not perceived the benefits, have mis-evaluated the size of the benefits, are not motivated to help create the benefits, or do not have the capabilities or mechanisms to create the benefits. In each of these four areas of parenting opportunity there are different causes of the opportunity and different roles for parent managers to play.

It requires skills to influence business unit managers to do something that they are not choosing to do already. The third antidote for parent managers is to build on parenting skills by explicitly listing the skills needed to make an intervention work and deciding whether they have or can acquire those skills. The skills needed are different for different areas of synergy. Some interventions will be 'well-grooved', requiring no new skills to implement. Others, however, will involve unfamiliar actions requiring new skills. By defining these skills as precisely as possible, parent managers can assess how difficult and risky implementation will be, and can choose interventions that build on available skills. Campbell and Goold say, however, that without a well-grooved mechanism, an intervention that has been used successfully before to achieve similar kinds of synergy benefits, or a 'natural champion', the chances of success for an intervention are low.

Most interventions will have a complex mix of positive and negative knock-on effects. The last antidote is for parent managers to look for downsides in such areas as business mindsets (will links between business units improve or contaminate current mindsets?), organisational dynamics (will linkage interventions support or hinder organisational and cultural changes that are underway?), other parenting influences (will an intervention facilitate or disrupt the impact parent managers are trying to have in other areas such as performance management?), and motivation and innovation (will links reduce or enhance feelings of ownership, teamworking and competitiveness?). Looking for downsides will counter the mental bias in favour of upside thinking.

A striking feature of this book is not only its original insights into a notoriously difficult challenge for organisations, but its practicality. The authors have tried, for example, to make the four mental disciplines as practical as possible by giving rules of thumb and guiding thoughts. The second part of the practical guidance is a decision framework that integrates these disciplines in a flowchart to help managers make 'tough choices'. Campbell and Goold say that the process should start with sizing the prize followed by pinpointing the parenting opportunity. If the benefit is small, the intervention may be abandoned at that point. If there is no parenting opportunity, no further action is needed. If the benefit is unclear or the parenting opportunity hard to pin down, an exploratory intervention is called for that will resolve some of the uncertainties. Once a substantial benefit has been defined and the parenting opportunity is understood, different options should be considered. The final step is to evaluate the options against three decision criteria: the degree to which the option addresses the parenting opportunity, the ease with which the option can be implemented, and the impact of knock-on effects.

It is important to realise that the difficulty that organisations have with synergy is not simply lack of managerial sophistication. It may not actually be essential, say Campbell and Goold. Some companies (Like Virgin and Granada) create value as a result of the direct influence of the corporate centre and have very few, if any, links between the business units. Well-managed synergy can be a 'golden prize' where additional value is created from the same resources. But badly managed, synergy can destroy value, undermine self-confidence and lead managers in the wrong direction. This book, with its four mental disciplines and its decision framework, will surely help managers to avoid synergy mirages and implementation disasters and help them find new sources of extra value. It is required reading for both parent managers and business managers.

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