Synergy Concept: Types of Synergies, Reasons, and Examples

In marketing, Synergy Concept implies that the marketing-mix will make for overall effectiveness. Below is a screenshot bookkeeping spreadsheet of CFI’s Mergers and Acquisitions Modeling Course. Company A sells cheap new laptops, and company B sells used laptops.

  • By having these people working together, it allows them all to expand each other’s ideas.
  • For example, a retail business that sells clothes may decide to cross-sell products by offering accessories, such as jewelry or belts, to increase revenue.
  • Synergy is a term that is most commonly used in the context of mergers and acquisitions (M&A).
  • Similarly, companies can create a revenues strategy by combining their distribution channels.
  • However, when two mid-sized companies unite into one big company, the loan borrowing conditions improve.

Therefore, cost-saving synergy relates to the amounts saved through the combined efforts. Apart from combining resources, companies can also create synergies internally. Some of these synergies may come from financial gains or savings. Companies seek to promote synergistic behaviour in various departments. By doing so, they can enhance their processes and improve collective efforts.

What Areas Is Synergy Realized?

Jennifer said that synergy, like any buzzword, can turn people off. But there are those who might not have heard about synergy and others who are simply curious about how it could help them manage projects. That’s where business initiatives like Diversity and Inclusion programs (D&I) come into play. Committing to a diverse team means doing the work to build a more equitable and inclusive environment.

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. When companies use combined resources, they decrease their costs. If they use those resources individually, they can incur higher expenses.

Through those efforts, they accomplish a better-combined effect. There are several areas in which companies can accomplish those synergies. Synergy usually involves the financial benefits that companies get from combining their operations. 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.

A synergy is any effect that increases the value of a merged firm above the combined value of the two separate firms. Synergies may arise in M&A transactions for several reasons, such as cost savings due to operational efficiencies or revenue upside due to more productive use of assets. Below is a non-exhaustive list of potential types of synergies that a company may face. In practice, corporate synergy—and especially financial synergy, which is when two companies merge finances—is hard to achieve. Integrating two businesses and the entirety of what those businesses represent—including finances, employees, products, culture, and practices—takes a lot of time and effort. Without the right change management process, the M&A process can fall short of its intended benefits.

  • Some of the primary types or forms of synergy in business include the following.
  • But by proactively setting group norms, you make it easier for your team to collaborate.
  • Instead, if these companies were independent, they may not have generated the same earnings.
  • Let’s explain cost synergies with the help of the before-mentioned example.
  • More specifics about the synergy definition in business further.

A merger can also reduce job duplication and multiple levels of management. The company will also benefit from a larger number of sales representatives to sell more products than they previously owned before the merger. Also, the merged company will incur fewer costs of marketing and distribution due to the corporate synergies. Marketing synergy refers to the marketing benefits that two parties in an M&A transaction may enjoy when promoting their products and services. These synergies include information campaigns, marketing tools, research and development, as well as marketing personnel. The potential synergy is considered when two companies are planning to merge or a large company is planning to acquire its smaller competitor and thereby increase the efficiency of its operations.

What Are the Benefits of Synergy?

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.

Foster trust and collaboration

For us, synergy began at Synergy Services with the first youth shelter in Western Missouri back in 1970, serving children ages12-18. Revenue synergies most commonly occur between companies that sell in the same industry. Corporate synergy signifies that the whole of an organization is worth more than the sum of each of its individual parts. Together, more can be accomplished than each working individually. Companies that operate established distribution networks in specific geographical locations may enter into an M&A transaction with companies with distribution networks in other geographical markets. For example, assume that Company A has established strong distribution networks in North America, while Company B has established distribution networks in Europe.

Meaning of synergy in English

Consequently, companies can achieve better results than if they work individually. 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.

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Synergies in M&A are often easy to imagine and plan but harder to implement. It always takes time to gain awaited results, and all the parties involved in synergy analysis should realize that. Part of the reason for over-optimism may be the desire to “sell a deal” to the market or investors and ensure that it looks attractive enough.

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. When two companies merge, they often become synergistic by virtue of generating more revenues than the two independent companies could produce on their own. The merged company may gain access to more products and services to sell through an extensive distribution network.

For example, a retail business that sells clothes may decide to cross-sell products by offering accessories, such as jewelry or belts, to increase revenue. In other words, if company A, worth $200 million, acquires company B, worth $50 million, and if their combined value grows to $290 million, the merger results in a synergy of $40 million. The value of the combined firm is obviously more valuable and profitable than when two firms operate separately.

Overall, companies can create synergies in business in the following ways. At its core, synergy describes a way to work together to produce great results. Though this term was co-opted by corporate executives, it doesn’t refer to mergers and acquisitions as a rule. After all, the term comes from ancient Greek and was used in practice as early as the 1600s. Negative synergy is derived when the value of the combined entities is less than the value of each entity if it operated alone. This could result if the merged firms experience problems caused by vastly different leadership styles and corporate cultures.