In: Categories » Business » Strategic planning » Concept of synergy
Before concluding the discussion of strengths and weaknesses, it will be desirable to briefly introduce the concept of synergy. Synergy, simply stated, is the concept that the combined effect of certain parts is greater than the sum of their individual effects. Let us say, for example, that product 1 contributes X and product 2 contributes Y. If they are produced together, they may contribute X+Y+Z. We can say that Z is the synergistic effect of X and Y being brought together and that Z represents positive synergy. There can be negative synergy as well. The study of synergy helps in analyzing new growth opportunities. A new product, for instance, may have such a high synergistic effect on a company’s existing product(s) that it may be an extremely desirable addition. Conceptually, business synergies take one of six forms:
1. Shared Know-How. Units often benefit from sharing knowledge or skills. They may, for example, improve their results by pooling their insights into a particular process, function, or geographic area.
2. Coordinated Strategies. It sometimes works to a company’s advantage to align the strategies of two or more of its businesses. Divvying up markets among units may, for instance, reduce interunit competition. And coordinating responses to shared competitors may be a powerful and effective way to counter competitive threats.
3. Shared Tangible Resources. Units can sometimes save a lot of money by sharing physical assets or resources. By using a common manufacturing facility or research laboratory, for example, they may gain economies of scale and avoid duplicated effort.
4. Vertical Integration. Coordinating the flow of products or services from one unit to another can reduce inventory costs, speed product development, increase capacity utilization, and improve market access.
5. Pooled Negotiating Power. By combining their purchases, different units can gain greater leverage over suppliers, reducing the cost or even improving the quality of the goods they buy. Companies can also gain similar benefits by negotiating jointly with other stakeholders, such as customers, governments, or universities.
6. Combined Business Creation. The creation of new businesses can be facilitated by combining know-how from different units, by extracting discrete activities from various units and combining them in a new unit, or by establishing internal joint ventures or alliances. A new product/market entry contribution could take place at three levels: contribution to the parent company (from the entry), contribution to the new entry (from the parent), and joint opportunities (benefits that accrue to both as a result of consolidation).
This article outlined a scheme for the objective measurement of strengths and weaknesses of a product/market, which then become the basis of identifying SBU strengths and weaknesses. Strengths and weaknesses are tangible and intangible resources that may be utilized for seeking growth of the product. Factors that need to be studied in order to designate strengths and weaknesses are competition, current strategic perspectives, past performance, marketing effectiveness, and marketing environment. Present strategy may be examined with reference to the markets being served and the means used to serve these markets. Past performance was considered in the form of financial analysis, ranging from simple measurements, such as market share and profitability, to developing product and market performance profiles. Marketing effectiveness was related to marketing orientation, which may be determined with reference to questions raised in the article. Finally, various aspects of the product/market marketing environment were analyzed. These five factors were brought together to delineate strengths and weaknesses. An operational framework was introduced to conduct opportunity analysis. Also discussed was the concept of synergy. The analysis of strengths and weaknesses sets the stage for developing marketing objectives and goals, which will be discussed in the next article.
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