Strategic synergy in mergers and acquisitions: creating competitive advantages

Strategic Management - Strategic Synergy

The ultimate goal of any company is to increase its profits and consolidate its market positions and in doing so, they develop wide series of strategies. A most commonly used such strategy is given by the joining of forces in numerous alliances as to best benefit from the comparative advantages of each entity. These unions often take the form of mergers and acquisitions and they are beneficial as they create a strategic synergy. The strategic synergy encompasses the benefits derived from the joining of forces by two or more companies and has often been assimilated with the simple equation of 2 + 2 = 5. This basically means that when put together, two companies add up to more value, more core competencies and a stronger and better consolidated position on the market than any one of them could have achieved on its own. The strategic synergy can be used to generate three main effects:

the creation of economies of scale the joining together of complementary skills, and the dissemination of core competencies

Economies of scale

Economies of scale occur when a single entity or group of entities possesses the necessary skills, resources and capabilities to control an entire industry on its own. This company or group has increased access to all types of resources and is able to manufacture and sell products at extremely low and uncompetitive prices. The competition is basically crushed and the situation is often compared to monopolistic practices and it is being accordingly criticized.

However there are various causes at the basis of scale economies, one of these causes could easily be the strategic synergy. In this situation, two or more companies activating in the same industry can chose to work together and detain monopoly on the market. Even if the situation could occur in the case of complementary products and services, it is most commonly met in the case of similar if not competitive products. The manufacturers often possess complementary skills which they then combine to retrieve the most favorable result. By engaging in supporting activities, the two companies are better able to reduce manufacturing and operational costs, increase as such the number of customers, reduce the position held by the competitors and strengthen their own market position - all to lead to the creation of economies of scale.

To best understand how strategic synergies could lead to the formation of scale economies, take the example of two major it competitors on the Japanese market. These two hardware manufacturers possess together 80% of the entire market, with 50% the first and 30% the second manufacturer. They both represent a forceful competitor for the other, but if they join forces, they will be able to control the market. They will be better able to satisfy the needs of their combined customers, improve the quality of their products and services and reduce the manufacturing time and the retail price to the end consumer. The remaining companies, with a 20% market share, are likely to be put out of business due to the newly created economy of scale.

Core competencies

Another aspect of strategic synergies is given by the possibility to spread and share the useful information in such a manner that is extremely beneficial. To understand how this mechanism works, take the example of two companies activating in the automobile industry. Say two American manufacturers decide to go into a joint venture mostly to benefit from shared complementary skills and support each other in reaching the ultimate goals. Aside from combining the already existent resources, possibilities and data, the two will also share the future earnings and benefits. The core competencies are similar to the complementary skills, but different in the meaning that both partners have them, but at varying degrees. For instance, both manufacturers have a highly skilled marketing department that allows them to constantly communicate with the customers in order to identify needs and demands and retrieve feedback. But if the first company possesses better trained marketing specialists with access to more resources, the new business will most likely use this team.

All in all, strategic synergies are more and more commonly used by companies who desire to increase profits and consolidate their positions. Three main effects of strategic synergies can take the form of economies of scale, sharing of complementary skills and the dissemination of core competencies.