They say that all of us are connected by up to six degrees of separation from anyone else on earth. Yesterday I did a search on a popular social network, and in three easy steps, I was able to make contact with someone who is very much in vogue lately: the founder of PayPal and Tesla, Elon Musk. I've been toying with the idea of calling him to talk shop over coffee. Sounds mad, doesn't it?
Just as that idea seems to be a bit off the wall, there are executives who believe that their business can easily make the jump to new businesses thanks to some kind of synergy - what a great concept! Synergy! It is also used to justify the imposition of a politically motivated fusion, or even as a way of dressing up a discourse on diversification strategy of which, perhaps, we are not entirely convinced.
Make no mistake, personally I have nothing against the concept of synergy; but there's something about its repeated use which unnerves me. Whenever the word 'synergies' enters the conversation while studying the potential for a new line of business, there are often five warning signs that set off alarm bells for me:
Sign Nº 1. All the opportunities debated within the company are based around the synergies with our technological capacities. Companies who are enamoured with their product and their technologies, consistently overestimate the prospects of applying them to new markets, whereas they underestimate the prospects of capitalising on the commercial vantage.
Sign Nº 2. Although the promoter of the new business points out repeatedly, almost like a mantra I might add, the numerous synergies between the new and current business, they are unable to quantify its impact on the bottom line. Instead they assert that the synergies will 'materialise over the long-term', or that 'it's all based on intangibles'. To truly put an argument of this sort to the test, one must ask ‘why?’ not once, but twice. If, for example, we talk about sharing a sales network, are we sure that the same sales team is able to sell both products?
Sign Nº 3. None of the key people in the current business is going to get involved in the new business. Aside from other ways of sharing resources which could well justify diversification, in general, synergies materialise by means of people or teams who are put to work in the new business, either by giving shape to a shared activity, or transferring knowledge.
Sign Nº 4. The discourse focuses on size rather than profitability. In short, synergy comes about when the sum profitability of business A and business B is greater when both A and B co-exist within the same company. However, many operations of diversification are defended by arguing that the size of A+B is much greater than that of A. If size contributes to generating economies of scale, then someone prove it to me.
Sign Nº 5. Precious few opportunities emerge from within our current business, whereas a multitude of opportunities appear when we merely look out the window. Well, isn't that unfortunate? In reality, more than a few companies already have at their disposal sufficient area for development and diversification within their existing business (new clients, broadening the product range, sophistication of the offer, etc.), and still they seem to spot more opportunities in new businesses. I am reminded of what an uncle of mine quipped when I had just told him about my idea of travelling abroad one summer: "What do you want to go there for? You've been to the village down the road, haven't you?".
With all the above, I wish to make it clear that my intention is not to shoot down the various ideas for generating new businesses within our companies, but rather to draw attention to the danger of taking decisions which are hard to justify. Finally, however, while Elon might agree to meet me for coffee to talk over his plans to colonise other planets, I do believe it would be more realistic, and more useful, to seek out another kind of conversation with my workmates at the office.
Read the original article at Estrategia Empresarial (Spanish)