The term mergers and acquisitions (M&A) describes a process where two companies combine. Usually, they may include two companies merging into a single entity. On the other hand, it may also involve one company purchasing shares in another. The acquired company may become a subsidiary or get dissolved. In the former case, the subsidiary company operates under the parent company.
Mergers and acquisitions define strategies that companies use to expand their operations. However, it does not fall under organic growth. Instead, companies use these strategies to enter new markets or obtain new products. They acquire other companies preexisting in those markets through these strategies. Similarly, they may have products with an existing customer base.
The process to achieve mergers and acquisitions may involve several steps. Within this process, companies can expand their operations and grow their business. However, it is not the only benefit that this process provides. Companies can also get other advantages from the process. One of these includes achieving synergies. Even outside that context, the term synergy in business can apply to several scenarios.
What is Synergy in Business?
Synergy relates to the concept that the combined value of resources is higher than their autonomous parts. In other words, when companies combine their execution, they can achieve better results. In contrast, independent operations can not accomplish the same performance. Synergy is a term that often relates to the diversification process. On top of that, it can apply to the mergers and acquisitions process.
Synergy usually involves the financial benefits that companies get from combining their operations. It may occur when companies join their operations or resources. By doing so, they can increase the effectiveness of those resources. While these operations can be independent, they may not produce the same results when used individually. It is often the driving factor that companies consider when considering a merger or acquisition.
The term synergistic also applies to the synergy concept. It refers to the benefit that results from the merger of two companies. By doing so, those parties can achieve results that neither of them would be able to independently. Therefore, they can enhance their combined performance as a result. This performance usually achieves a similar outcome and involves a similar process. Therefore, all involved parties can benefit from it.
Strategy is business can also refer to the same principles. In essence, it involves combining resources and capabilities to achieve better results. However, these situations don’t arise in the usual business environment. The term applies to specific scenarios where companies can work together and combine their operations. Consequently, companies can achieve better results than if they work individually.
Overall, synergy is a state of cooperative interaction between several participants. In this process, all parties contribute to common goals. By doing so, they can achieve significantly better results. In business, synergy refers to the teamwork generated from different companies merging their efforts. Through those efforts, they accomplish a better-combined effect. There are several areas in which companies can accomplish those synergies.
How can companies create Synergy in business?
Companies can create synergies by combining their resources and capabilities with other entities. This process usually involves identifying those entities that have similar goals. Once companies can determine that, they can join their resources to achieve a common goal. The existence of a common goal is crucial in creating synergies between companies.
Apart from combining resources, companies can also create synergies internally. Some of these synergies may come from financial gains or savings. On the other hand, others may generate through operations. Companies seek to promote synergistic behaviour in various departments. By doing so, they can enhance their processes and improve collective efforts.
External and internal synergies can be significantly crucial in achieving better results. Some companies may fail in their goals and objectives independently. However, when they combine their efforts with others, they can accomplish better results. They can do so with various techniques. Overall, companies can create synergies in business in the following ways.
Aligning goals
The first step to creating synergies is to align goals. Companies can achieve synergy by crafting and promoting an objective. Once they do so, they must communicate that objective to all departments. When all members and employees work to achieve that objective, they can increase their combined effort. By doing so, they can create synergy within the business. This step also applies to when companies use mergers and acquisitions.
Reduce inefficiencies
Synergy defines the combined effort that exceeds the total of individual inputs. When employees work toward inefficient goals, they can hinder synergies. In contrast, it can create adverse synergies, where the combined efforts are lower than the individual sum. By reducing or eliminating inefficiencies with the business, companies can prevent that. Similarly, it creates synergies, which can lead to better results.
Consider mergers and acquisitions
As mentioned, mergers and acquisitions are critical sources of synergy in business. When companies merge operations or acquire other companies, they combine their input. Usually, the companies involved in this process have similar goals or processes. When they combine their efforts in achieving those goals, they create synergies. In most cases, mergers and acquisitions are a critical source of synergies for companies.
What are the types of Synergy in business?
Companies can achieve synergy in various forms. These forms also represent the types of synergistic effects that come from the process. As mentioned, companies can create synergy in several ways. These synergies can then provide benefits through the areas they affect. Some of the primary types or forms of synergy in business include the following.
Financial synergy
Financial synergy is one of the primary areas where companies target. With this form of synergy, companies get access to better finance, like debt. On top of that, it makes managing and creating cash flows much easier. Financial synergy can also create a robust asset base for companies to acquire from others. Companies can also achieve savings from the synergies they form.
Cost-saving synergy
Synergy is one of the primary factors that impact costs. When companies use combined resources, they decrease their costs. If they use those resources individually, they can incur higher expenses. Therefore, cost-saving synergy relates to the amounts saved through the combined efforts. These savings can occur in various areas of the business. Nonetheless, it is a crucial part of the synergy process.
Marketing synergy
Companies can also create synergies by combining their marketing processes. Usually, it involves using similar sales and promotional activities as others. With this type of synergy, companies can use combined resources to promote various goods. On top of that, they can use marketing tools and research and development to benefit all participants.
Revenue synergy
Revenue synergy occurs when companies achieve higher sales as a unit. Usually, the combined resources of these companies enable them to make more revenues. Instead, if these companies were independent, they may not have generated the same earnings. It may come from the collective use of marketing resources. Similarly, companies can create a revenues strategy by combining their distribution channels.
Management synergy
Some companies can also achieve management synergy by combining their administrative tasks. Similarly, they can share their expertise and capacities in various areas. By doing so, they can achieve better results in the long run. The combined experience and capability of employees can benefit both companies. On top of that, it can also lead to lower costs than if they were separate.
Conclusion
Synergy is a term that relates to combining resources and capabilities. However, it doesn’t only represent that combination. Instead, it refers to the benefits that companies can achieve from that combination. On top of that, synergy occurs when those benefits are higher than companies can obtain independently. Companies can create synergies in many ways. On top of that, there are many types of it, as discussed above.
