Synergies in business refer to the phenomenon where two or more interdependent entities when working together to produce a desirable result have a greater total impact than the sum of the impacts of each entity when discretely considered. Quite simply, two individual businesses working together add value that is different from what either each one can do separately. Synergies refers to the value that businesses create when companies merge, cooperate or form strategic alliances.
Synergy in business occurs in a four fold manner. Firstly, it can create a larger pool of resources to better suit the specific needs of one or both companies. This could either mean a pooling of resources – merging two companies to build a larger production output, or a sharing of resources – with two companies splitting the work and taking up different roles to create a single unified product. Either way, by pooling resources more efficiently, the two partners can typically produce better quality products and services at a lower cost. Secondly, the merged companies stand to gain from economies of scale, whereby it can benefit from reduced costs, through a lower fixed cost base or improved ability to access raw materials at lower rates by leveraging off the larger production and purchasing footprints.
Thirdly, the combination of two businesses can create new market opportunities, such as by branching off into new sectors or by selling existing related products in existing markets. Utilising the resources, scale, people and channels of two companies, can help create new market entry opportunities and capabilities. Lastly, the combination of two businesses often leads to a greater ability to access capital. For example, if two companies combine their resources and operations, the larger entity can access markets that the two entities could not have accessed individually and often will be eligible for lower cost loan products due to the greater levels of capital deployed.
The combination of businesses can also result in a number of additional benefits. For example, two companies combining can lead to greater market access in foreign countries, better entry into other domestic markets, an improved supplier base, lower input costs and reduced transport costs. The combination of two businesses can often lead to greater product or service differentiation and can lead to increased customer loyalty and increased customer retention.
In a competitive environment, the ability to identify and exploit synergistic opportunities can be a major factor in business success. Synergy in business requires not just financial foundations, but also a culture of partnership and trust, open dialogue, and the sharing of ideas between the partners. It requires an understanding of the long-term vision of the partnership and a commitment to explore and develop opportunities to benefit both parties.
In conclusion, the ability to identify and leverage off of synergistic opportunities can often be key to business success. By combining resources, shared capabilities and access to new markets, two companies can often open up new business opportunities and create greater productivity, scale and profits than if they worked in isolation. Similarly, the synergy created between two businesses can often unlock the potential for new markets, access to capital and opportunities for product or service differentiation. Through the mutual trust and partnership between the two parties involved, companies can often progress and grow faster than either one could have achieved on their own. In todays competitive market, the ability to tap into synergies provides businesses with a competitive edge and the opportunity to strengthen their competitive position.
