Business strategy

Synergy

The synergy is to exert a synergistic effect between management resources by combining different management resources. The effect of combining the management resources of two different businesses makes 1 + 1 more than 2 . Specifically, when a company launches a new product, the existing sales channel or This refers to cases where the initial investment cost can be reduced by utilizing production equipment. As a result, the new profits will be greater than building production equipment or building sales channels from scratch. In addition, there are cost reduction effects by sharing equipment and improving purchasing negotiation capabilities, and mutual complementation effects of management resources and know-how.

 

Importance of synergistic effect

By forming M & A and business alliances aimed at synergistic effects, we can expect improvement of technical capabilities and business expansion by acquiring customer information . Considering the direction of the company and engaging in business, it is highly evaluated by shareholders, so the rise in the stock price index will increase the corporate value.

In addition, due to the diversification of market needs and the introduction of IT in a wide range of industries, a company loses competition with other companies with only one business.
In order for a company to survive in a fiercely competitive environment, it is also necessary to aim for synergistic effects and aim for corporate growth.

 

 

Benefits of synergistic effect

Cost reduction

Cost reduction is one of the expected synergies in business alliances and M & A. Maximize profits by consolidating operations related to purchasing, sales, logistics, manufacturing, overhead costs, research and development, and reducing duplicate equipment to improve efficiency.

Specifically, it means reducing sales costs by consolidating and abolishing overlapping resources, and reducing indirect department costs by consolidating management departments such as accounting. ..

In addition, by sharing suppliers through business alliances, etc., it becomes possible to obtain a large amount of products at a lower price, and by purchasing a large amount, the price becomes cheaper, and price negotiations with the supplier are also small. You will be able to proceed more favorably than when you purchase.

 

Expansion of distribution channels

The distribution channel is the route from the company to the customer, and the expansion of the distribution channel can be expected by using the synergistic effect.

For example, suppose company A, which operates in North, and company B, which operates in South, form a sales alliance to sell each other’s products. Company A will be able to acquire customers in South, which could not be sold until now, while Company B will be able to acquire customers in North
By forming business alliances between companies with different geographical conditions and target customers, it is possible to increase new markets and target customers .

 

Time saving

Gathering human resources and establishing know-how with just one company is a laborious and time-consuming task. Through diversification, business alliances, and M & amp; A, if we can mutually obtain management resources such as human resources, know-how, and brands, we will be able to efficiently generate double or triple profits.

Doing so will save you time and create great synergies.

 

Sharing know-how and knowledge

In addition, one of the merits is that we can share know-how and knowledge by sharing the necessary resources with each other.
 

 

About synergistic effects in M ​​& A in the same industry and different industries

The synergistic effect of M & amp; A is that multiple companies can collaborate and jointly operate their businesses, allowing them to utilize functions such as sales, equipment, and technology in multiple layers, resulting in greater results and growth than acting alone. Refers to bringing.
M & amp; A has various methods such as stock transfer, business transfer, and capital tie-up, but most of them expect synergistic effects through cooperation and fusion between companies with different corporate cultures and history. When selecting a partner, the point of “what kind of synergies will be created” is very important.
In addition, the synergistic effect differs depending on whether it is an M & amp; A with the same industry or an M & amp; A with a different industry.
 

M & A in the same industry

M & amp; A between the same industries has the advantage of strengthening existing businesses, such as strengthening production capacity and acquiring new sales channels. In addition, if you take over a company or business that already has a track record, you can incorporate existing technologies, know-how, business partners, brands, etc. as they are, which will save you time and money to grow your business. This can be expected to have the same effect not only for new businesses but also for strengthening existing businesses.

 

M & A in different industries

On the other hand, if you take over a company in a different industry, it may be difficult to generate synergies at first glance. However, in some cases, there may be greater synergies than M & amp; A between the same industries.
In this way, new sources of revenue can be expected after taking over companies from different industries and strengthening existing businesses. This is a good example of creating synergies between different industries.

In general, the synergistic effects that can be expected from M & A in the same industry are sales synergies and production / investment synergies . On the other hand, synergies that can be expected by conducting M & A with different industries are production / investment synergies and management synergies . This is because when a newcomer enters the industry through M & A with a different industry, management synergies can be expected by sharing management know-how.

 

 

Classification of synergies

Static synergies

Static synergies are one-time synergies that do not change over time. It would be nice if both could be achieved, but if there were two choices, the conclusion would be that dynamic synergies would be more preferable for long-term corporate growth.

 

Dynamic synergy

Dynamic synergies are time-varying synergies of creating one information resource at one point in time and using it at another point in the future. A typical example is to draw a scenario in which the accumulation of technology built by an existing business becomes the foundation for the development of a new business, and from that foundation, a competitive strategy for the new business is developed in an advantageous manner. Moreover, in the future, both of these businesses will be
In this example, there are two synergies, a static synergy at a future point and a synergy from the present to the future, which can utilize the accumulated technology.
Following the process of successful corporate growth, dynamic synergies are often at the core, and it is said that this dynamic synergy should be aimed at by diversification strategies .
Also, in Product Portfolio Management (PPM), showing a positive direction is basically the overall strategy of the business structure, especially the way of major development centered on the domain and dynamic synergies.

 

 

Types of synergies

Sales synergies

Sales synergies are synergistic effects due to the use of giant leap distribution channels and sales management organizations for various products.
It is a synergy created by using existing sales organizations, sales channels, warehouses, sales promotion methods, etc., and cross-selling / up-selling and reduction of distribution costs can be expected.

 

Cross-selling / up-selling

Cross-selling means selling additional products or services that the customer purchases or is already using. Upselling refers to selling products and services whose unit price is higher than what the customer is considering.

At M & A, it will be possible to sell each product and service to the transferee company and the transferee company’s customers, so sales can be expanded and indirect costs can be reduced.

 

Expansion of sales channels

4P analysis is one of the marketing strategy planning and execution processes. 4P analysis is the combination of controllable elements that a company can use to achieve its goals in the market.

4P refers to “Product”, “Price”, “Place”, and “Promotion”. In expanding sales channels, we will work to expand Place (distribution).
Place (distribution) is a term that refers to the route to provide products to customers, and since M & amp; A makes it possible to utilize both sales channels, it is expected that sales will increase as the sales channels expand.

 

Brand effect

By performing M & A, you may be able to utilize the brand of the partner company. In that case, you can reduce the time it takes to develop your brand and deploy it.

 

 

Production synergies

Production synergies are synergistic effects due to the use of common equipment and personnel and bulk purchasing. It is a synergy created by utilizing existing production equipment, raw materials (purchasing), technology, production know-how, etc., and is expected to strengthen price bargaining power and reduce production costs.

 

Strengthening price bargaining power

In some cases, multiple companies can come together and negotiate with the seller to lower the price, such as by increasing the purchase volume.

 

Reduction of logistics costs

By integrating the logistics operations of the transferring company and the transferring company, it is possible to reduce the cost of managing inventory.

 

 

Investment synergies

Investment synergies are synergies from shared use of plants and joint inventory of raw materials . It is a synergy created by using information such as existing R & D and know-how, and it is expected to strengthen R & D costs and combine technologies and know-how.
Strengthening R & D costs

Efficient provision of R & D costs by two companies can sometimes reduce R & D costs compared to doing it on their own.

 

Combined technology and know-how

We can expect to improve by sharing and combining the technologies and know-how that we have acquired over time and funds.

 

Management Synergies

Management synergies are synergies that bring experience to problems in new industries. It is a synergy created by utilizing the existing business management ability, and it will be possible to carry out more strategic management.
By gathering the management teams of each business and integrating each strategy, it will be possible to formulate and implement better management strategies.

 

Strategic management is possible

Since the managers, officers, and managers of the transfer company and the transfer company gather, it is expected that a better management strategy will be formulated and implemented by combining the strong points of both strategies.
For example, if management gets on track and the business performance of the company improves after conducting M & A, it can be judged that both management strategies are working more effectively, so the management synergistic effect is demonstrated. It can be said that there is.

 

 

Revenue Synergy

Revenue synergies are synergies that increase sales by linking the businesses of buyers and sellers .
For example, if there is a company with poor sales force, if the company acquired by M & A invests sales personnel or accommodates advertising expenses, the sales force may increase and sales may increase. .. In addition, we can expect the realization of cross-selling as a profit synergy.

 

Cross-selling

Cross-selling is a sales promotion method that encourages customers who plan to purchase products to purchase related products.
It is also considered to be a profit synergy that companies integrated by M & A have the opportunity to have each other’s customers purchase their products.

 

 

Cost synergy

Cost synergies are synergies that can save costs by scaling up .
It is a synergistic effect using “economy of scale”, and economies of scale is the effect of increasing the production volume and production scale of a certain production facility and reducing the cost per unit. In addition, if the offices are integrated, property costs can be expected to be saved.
Other examples of cost synergies are known to have effects such as strengthening price bargaining power and reducing distribution costs.

 

Common cost synergy (economy of scope)

The synergistic effect that is very common in SME M & A is that the headquarters function of the M & A target company is greatly reduced, and the buyer company undertakes what is needed. The headquarters cost of the target company can be significantly reduced, and it will be possible to make a profit by itself.
It should be noted that while reducing labor costs by dismissing headquarters personnel is the most effective, restructuring is not so easy.

 

Business cost synergies

The effect is to reduce costs relative to sales by linking businesses.
If you do M & A, the sales scale will be added, so it will be easier to make economies of scale.
There is also a method of matching the purchase / purchase unit price between the buyer and the target company and negotiating the price to lower the unit price to the lower one.

 

Operation sharing synergies

It is a one-sided synergistic effect that realizes cost reduction by transferring the cost reduction know-how of one company to the other company.
In addition, companies that are good at acquisitions have achieved results by acquiring companies that have fallen into the red and striking a thorough cost consciousness to improve profits.
It often leads to cost reductions, but on the other hand, be careful about the risk of sales decrease due to deterioration of service quality and retirement due to employee stress.

 

Vertical integration cost synergy

Vertical integration cost synergies are synergistic effects that reduce costs by acquiring upstream and downstream businesses such as suppliers and customers.
From the perspective of the acquirer, future costs will be paid in a lump sum as M & A consideration, so it would be a meaningless synergy unless the parents and children work together to reduce costs and increase value after the acquisition.

 

 

Tax synergy (tax synergy)

Tax synergies are synergies that focus on the tax-saving effects generated by M & A, such as the tax-saving effect of goodwill, utilization of loss carryforwards, and reduction of per capita rate due to mergers.

 

 

R & D synergies

R & D synergies are synergies that enable the execution of previously impossible projects by merging different companies .
To generate R & D synergies, we must reallocate resources.
Specifically, it is the sharing of R & D resources and the reorganization of joint teams.
It is also necessary to understand, digest, and utilize the knowledge that the merged companies have with each other.
Therefore, it is necessary to stimulate communication between companies and reform the organization.

 

Financial synergies

Financial synergies are synergies created by the participation of well-funded companies .
Due to the synergistic effect created by the participation of companies with abundant funds by companies with unstable financial bases, some listed companies may have surplus funds whose use has not been decided.
If the surplus funds can be utilized by M & A, it may lead to the improvement of the surplus funds.
It is also a synergistic effect expected from M & amp; A of small and medium-sized enterprises, and if M & A takes over the debt carried forward, it may be possible to obtain a tax-saving effect as a financial synergy. Loss carried forward is a tax deficit that can be carried forward from the next fiscal year onward, and has the effect of offsetting future taxable income.

 

 

How to create synergies

Generally, there are the following methods.

 

Diversification strategy

Diversification is a management strategy that aims to gain and expand market share by expanding into fields other than the main business in order to improve the overall sales and profits of the company. Diversification can be classified into four categories: “horizontal diversification strategy”, “centralized diversification strategy”, “vertical diversification strategy”, and “collective molding diversification strategy”, and build a strategy that suits your company. can. Above all, the horizontal diversification strategy is an effective means of developing new markets based on our own technology, and we can expect synergistic effects from the effective use of management resources.
Diversification strategies include related diversification that utilizes existing products and markets and unrelated diversification that introduces new products into new markets.
The risk of unrelated diversification is higher than that of related diversification.
By diversifying, we aim for synergistic effects in terms of cost, sales, research and development, etc., and aim to diversify risks.
Ansoff’s growth matrix is ​​used to consider the diversification approach, and the product market portfolio is used to consider the resource allocation of the business.
 

Horizontal diversification strategy

The horizontal diversification strategy is a diversification strategy for expanding into new product and service areas in the same market as the existing market . Since the horizontal diversification strategy can utilize existing production technology and distribution channels, it can be expected to obtain the “synergy effect” that will be described in detail later.

 

Vertical diversification strategy

The vertical diversification strategy is a diversification strategy that covers the upstream and downstream fields of the current business . Diversification to the downstream is called “forward diversification” and diversification to the upstream is called “backward diversification”, and it is an advantage to make use of the experience of business relationships and sales staff that have already been accumulated.
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Centralized diversification strategy

A centralized diversification strategy is a diversification that makes technology and / or marketing relevant between existing products (services) and new products (services). increase. Examples include the advance from televisions to car navigation systems, the conversion of lenses used in digital cameras to medical equipment, and the manufacture of Wine by industrial alcohol manufacturers. One of the benefits of a centralized diversification strategy is the ability to leverage the technical resources and capabilities accumulated within the enterprise.

 

Conglomerate type diversification (intensive diversification)

Conglomerate-type diversification (intensive diversification) is a diversification strategy to develop new products and services and enter new markets in fields completely different from conventional business areas . .. High risk and high return are characteristic because we will expand our business into a completely new field.

 

 

M & A

M & A stands for Mergers and Acquisitions and is a merger and acquisition of a company.
M & A is a management term that means acquisition and merger of companies. The benefits of M & A are mainly market power, market efficiency, and tax deductions, and synergistic effects are achieved based on these factors . Specifically, market power reduces purchasing costs, market efficiency creates new value by improving productivity, and tax deductions include consumption tax deductions for business transfers and special cases of loss carryforwards (both conditions). Exists).

M & A has many advantages in terms of time and cost, and is used as a realization method to create high synergistic effects. M & A includes vertical M & A, which aims to unify upstream and downstream to solve producer surplus and consumer surplus, and conglomerate type M & amp, which acquires companies engaged in fields not related to existing businesses. There is A.
The following types of M & A can be mentioned.

Merger

A merger is a legal integration of a company’s capital and organization with another company.
There is an absorption-type merger that keeps one company alive and a new merger that eliminates both and establishes a new company.

 

Acquisition

This is a method of acquiring the shares issued by a company and making it a subsidiary, or receiving a capital increase by issuing new shares to take control of the company.

 

Business transfer

A method of transferring assets related to a business.
Business transfer targets include equipment, buildings, patents, brands, etc.

 

 

Business alliance

Business alliances between companies with different products, services, and technologies can achieve high synergistic effects by increasing each other’s corporate value and sharing know-how. By partnering with each other’s businesses, mutual complementation becomes possible, and each management issue can be resolved. In particular, sharing management know-how can be highly synergistic for entering overseas markets and improving productivity .

 

 

Ansoff’s Growth Matrix-Framework for Synergistic Effects-

Ansoff’s growth matrix is ​​a typical framework for predicting synergistic effects. A framework for analyzing growth strategies proposed by Professor Igor Ansoff, a well-known American business scholar.

Create a 4-quadrant matrix by dividing the vertical axis into “market” and the horizontal axis into “existing” and “new” respectively. Each mass is positioned as “market penetration strategy”, “new market development strategy”, “new product development strategy”, and “diversification strategy” , and analyzes and decides which strategy to take. It can also be used to derive synergies with the M & A strategy of choice.

When implementing a market penetration strategy, it is effective to use M & A to expand the scale to increase sales and reduce costs through economies of scale. Immediately after M & A, cost synergies can be demonstrated and business performance can improve.
In the new market development strategy, we will carry out M & amp; A with companies that have sales channels, regions, and businesses that we do not have, aim to expand into new markets, and sell existing products. This is expected to improve profitability due to economies of scale.
In addition, when taking a new product development strategy, we can expect effects such as improvement of product development capabilities by conducting M & A with a company that handles a product group different from our own. By sharing management resources while developing multiple businesses, it may be possible to obtain an “economy of scope” that indicates that overall management efficiency will be improved.

In addition, since the diversification strategy develops new products in new businesses, there is high uncertainty, so there is a possibility of success by executing M & A with highly relevant companies that can utilize their know-how. Can be enhanced .
By utilizing M & A in this way, we can expect efficient business diversification and entry into new businesses through alliances and transfers with other companies that have strengths such as technologies and know-how that our company does not have. In this way, “ Ansoff’s Growth Matrix ” can be used not only to analyze a company’s growth strategy, but also to derive synergistic effects of M & A.

 

 

Synergy Trap

Pursuing synergies is one of the important management strategies that should be considered from the perspective of group management, but while encouraging the independent activities of individual businesses, it is not easy to secure overall optimization, and synergies have always been achieved. Large-scale M & A aimed at is stuck in the so-called “synergy” trap and has failed many times.
The synergy trap is that companies pursue synergies to preserve unprofitable businesses that cannot survive on their own, or to reduce the strategic freedom of individual businesses and become a bureaucratic organizational management . is. Talking about synergies often leads to the illusion of talking about management, but it is necessary to make management decisions after fully understanding and quantifying the synergistic effects.
 

 

4 ways to increase synergies through M & A

Here are four ways to increase synergies through M & A.

M & A timing

Sales synergies and investment synergies do not have immediate effects after M & A, and even if we proceed with the development of products and services, the trends will change over time, and the expected synergistic effects will be achieved. You may not get it.
Therefore, if the timing is wrong, there is a risk of a deficit.
Therefore, the timing of M & A is important to enhance the synergistic effect of M & A. In order to properly enjoy the synergistic effects, it is necessary to plan the schedule in anticipation of the timing when the product or service can be sold.

 

 

Asset compatibility

Even if M & A is carried out, if the assets held by both parties are incompatible, the synergistic effect may decrease.
For example, the compatibility of employees, which can be called human assets, is mentioned, and if the corporate culture and culture are extremely different, there is a risk that friction will occur between employees after the integration and morale will decline.
In addition, M & A also involves financial and legal risks, such as off-balance sheet debt that is not recorded on the balance sheet and guarantee debt that is liable for the default of the debtor.
In addition, you must be aware of unpaid salaries, unpaid leave, and non-compliance.
Preliminary research is also required to minimize the risk of negative assets for synergies.

 

 

Name of partner company

Suppose you merge with a lesser-known company. For example, no matter how good the company has the know-how, it may be difficult for users to purchase it until the products and services offered are widespread. ..
In that respect, if you can acquire a well-known brand through M & A, you can reduce the time and cost required for distribution and market development.
In order to increase sales synergies, M & amp; A that is aware of the name of the partner company is important .

 

 

Definition and planning, monitoring

Synergies do not occur just by performing M & A.
One of the reasons why the synergistic effect cannot be obtained is that the synergistic effect is not clearly defined.
Therefore, it is important to clarify in advance what kind of synergies you want to obtain with M & A, such as investment synergies and sales synergies . The definition of synergies is not enough, and at the due diligence stage, it is necessary to understand the gap between the desired synergies and the current situation of the company and plan to close the gap. Along with that, we also have to secure the resources to be invested.
It is also necessary to monitor synergistic effects. We will quantify the results of the measures implemented to achieve synergistic effects and run the PDCA cycle.

 

 

What is the anergy effect?

Anergy effects are negative effects between businesses . The anergy effect is an antonym of the synergy effect and means a negative effect. When the value of two companies is set to 50, the synergistic effect is when the value is 100 or more by integrating, and the anergy effect is when the value is 100 or less.
In recent years, the anergy effect has also attracted attention, and the reason is that there is widespread recognition that integrating companies from different industries has a negative effect.
It is also called “negative synergy”, “dissynergy”, “minus synergy” .

The causes of the anergy effect include different directions for each business and different ideas between managers.
First of all, if the direction is too different from the existing business, there is a high possibility that an anergy effect will occur, there is no overlap in the customer, supply chain, business model, and the added value is more than the sum of the profits of each. The possibility of not being able to produce it increases.
In addition, differences in opinions between management may produce an anergy effect, and when carrying out M & A, the management of the acquired company is often eventually expelled or leaves the site by itself. , It is common to commit to management for several years.

Unexpected costs are another example of the anergy effect. In business integration, system investment and M & A advisor costs are often high, so even if some synergistic effects are obtained, it may take a long time to recover those investments.

 

 

Anergy example

Examples of anergies that are likely to occur in M ​​& A are increased costs and withdrawal of human resources / customers / business partners .
The outflow of human resources is a typical example of the anergy effect, and when performing M & A, the environment for employees may change completely, and it is necessary to eliminate anxiety.
Therefore, it is important to establish a system to communicate with employees in a short time after executing M & A.
It is also important to communicate appropriate information to executives so that false information does not spread and increase employee anxiety.

 

Pure company

Realizing synergies is often not easy and successful, and sometimes acquisitions and consolidations in different industries can have an anergy effect. For example, integration slows down business decisions.
There is pure company as a method to eliminate the anergy effect. Making a pure company is a policy to return a company that has expanded and become complicated to the original specialized company.
In other words, as opposed to pursuing synergistic effects through integration, we will narrow down to core businesses and eliminate the anergy effects.
 

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