A can help executives Desperately Seeking Synergy...Synergy Bias. Most corporate executives, whether or not they have any special insight into synergy opportunities or aptitude for

A healthy dose of skepticism can help executivesdistinguish real opportunities from mirages.

DesperatelySeeking SynergyBY MICHAEL GOOLD AND ANDREW CAMPBELL

THE PURSUIT OF SYNERGY pervades the management ofmost large companies. Meetings and retreats are held tobrainstorm about ways to collaborate more effectively.

Cross-business teams are set up to develop key accountplans, coordinate product development, and disseminate bestpractices. Incentives for sharing knowledge, leads, and cus-tomers are built into complex compensation schemes.Processes and procedures are standardized. Organizationalstructures are reshuffled to accommodate new, cross-unitmanagerial positions.

What emerges from all this activity? In our years of re-search into corporate synergy, we have found that synergyinitiatives often fall short of management's expectations.Some never get beyond a few perfunctory meetings. Others

Michael Goold and Andrew Campbell are directors of the Ashridge Stra-tegic Management Centre in London, England. They are the authors ofThe Collaborative Enterprise: Why Links Between Business Units Fail andHow to Make Them Work, which is forthcoming (Perseus Books, 1999).They also wrote, with Marcus Alexander. Corporate-Level Strategy: Creat-ing Value in the Multibusiness Company (John Wiley &) Sons, 1994).

ARTWORK BY DENNIS IRWIN

DESPERATELY SEEKING SYNERGY

generate a quick burst of activity and then slowlypeter out. Others become permanent corporate fix-tures without ever fulfilling their original goals. Ifthe only drawbacks to such efforts were frustrationand embarrassment, they might he viewed henignlyas "learning experiences." But the pursuit of synergyoften represents a major opportunity cost as well. Itdistracts managers' attention from the nuts andbolts of their businesses, and it crowds out otherinitiatives that might generate real benefits. Some-times, the synergy programs actually backfire,eroding customer relationships, damaging hrands,or undermining employee morale. Simply put,many synergy efforts end up destroying valuerather than creating it.

Avoiding such failures is possihle, but it requiresa whole new way of looking at and thinking aboutsynergy. Rather than assuming that synergy exists,can he achieved, and will be heneficial, corporateexecutives need to take a more balanced, even skep-tical view. They need to counter synergy's naturalallure by subjecting their instincts to rigorous eval-

The pursuit of synergy often distractsmanagers' attention from the nuts andbolts of their businesses.

uation. Such an approach will help executives avoidwasting precious resources on synergy programsthat are unlikely to succeed. Perhaps even more im-portant, it will enable them to hetter understandwhere the true synergy opportunities lie in their or-ganizations. (See the insert "Whatis Synergy?")

We helieve that synergy can provide a big hoost tothe bottom line of most large companies. The chal-lenge is to separate the real opportunities from theillusions. With a more disciplined approach, execu-tives can realize greater value from synergy-evenwhile pursuing fewer initiatives.

Four Managerial BiasesWhen a synergy program founders, it is usually thebusiness units that take the hlame. Corporate exec-utives chalk the failure up to line managers' recalci-trance or incompetence. We have found, however,that the blame is frequently misplaced. The truecause more often lies in the thinking of the corpo-rate executives themselves.

Because executives view the achievement of syn-ergy as central to their jobs, they are prone to four hi-

ases that distort their thinking. First comes the syn-ergy bias, which leads them to overestimate thehenefits and underestimate the costs of synergy.Then comes the parenting bias, a belief that syn-ergy will only be captured hy cajoling or compellingthe business units to cooperate. The parenting biasis usually accompanied hy the skills bias-the as-sumption that whatever know-how is required toachieve synergy will be available within the organi-zation. Finally, executives fall victim to the upsidebias, which causes them to concentrate so hard onthe potential benefits of synergy that they over-look the downsides. In combination, these four hi-ases make synergy seem more attractive and moreeasily achievahle than it truly is.

Synergy Bias. Most corporate executives,whether or not they have any special insight intosynergy opportunities or aptitude for nurturing col-laboration, feel they ought to he creating synergy.The achievement of synergy among their husinessesis inextricably linked to their sense of their workand their worth. In part, the synergy bias reflects

executives' need to justify the exis-tence of their corporation, particularlyto investors. "If we can't find opportu-nities for synergy, there's no point tothe group," one chief executive ex-plained to us. In part, it reflects theirdesire to make the different husi-nesses feel that they are part of a singlefamily. "My joh is to create a family-

a group of managers who see themselves as mem-hers of one team," commented another CEO. Per-haps most fundamentally, it reflects executives'real fear that they would be left without a role ifthey were not able to promote coordination, stan-dardization, and other links among the variousbusinesses they control.

The synergy hias hecomes an obsession for someexecutives. Desperately seeking synergy, theymake unwise decisions and investments. In one in-ternational food company that we studied-we'llcall it Worldwide Foods-a newly appointed chiefexecutive fell victim to such an ohsession. Seeingthat the company's various national units operatedautonomously, sharing few ideas across borders,he became convinced that the key to higher corpo-rate profits - and a higher stock price - lay in greaterinterunit cooperation. The creation of synergy he-came his top priority, and he quickly appointedglobal category managers to coordinate each ofWorldwide Foods' main product lines. Their briefwas to promote collaboration and standardizationacross countries in order to "leverage the company'shrands internationally."

132 HARVARD BUSINESS REVIEW September-October 1998


What Is Synergy?The word synergy is derived from the Greek word synergos, which means "work-ing together." In business usage, synergy refers to the ability of two or more unitsor companies to generate greater value working together than they could workingapart. We've found that most business synergies take one of six forms:

Shared Know-HowUnits often benefit from sharing knowledge orskills. They may, for example, improve theirresults by pooling their insights into a particu-lar process, function, or geographic area. Theknow-how they share may be written in man-uals or in policy-and-procedure statements,hut very often it exists tacitly, without formaldocumentation. Value can he created simplyhy exposing one set of people to another whohave a different way of getting things done.The emphasis that many companies place onleveraging core competencies and sharing bestpractices reflects the importance attributed toshared know-how.

Coordinated StrategiesIt sometimes works to a company's advantageto align the strategies of two or more of itshusinesses. Divvying up markets among unitsmay, for instance, reduce interunit competi-tion. And coordinating responses to sharedcompetitors may be a powerful and effectiveway to counter competitive threats. Althoughcoordinated strategies can in principle be animportant source of synergy, they're tough toachieve. Striking the right halance betweencorporate intervention and husiness-unit au-tonomy is not easy.

Shared Tangible ResourcesUnits can sometimes save a lot of money hysharing physical assets or resources. By usinga common manufacturing facility or researchlahoratory, for example, they may gain econo-mies of scale and avoid duplicated effort.Companies often justify acquisitions of relatedhusinesses by pointing to the synergies to hegained from sharing resources.

Pooled Negotiating PowerBy combining their purchases, different unitscan gain greater leverage over suppliers, reduc-ing the cost or even improving the quality ofthe goods they buy. Companies can also gainsimilar henefits by negotiating jointly withother stakeholders, such as customers, gov-ernments, or universities. The gains frompooled negotiating power can be dramatic.

Vertical IntegrationCoordinating the flow of products or servicesfrom one unit to another can reduce inventorycosts, speed product development, increase ca-pacity utilization, and improve market access.In process industries such as petrochemicalsand forest products, well-managed vertical in-tegration can yield particularly large benefits.

Combined Business CreationThe creation of new businesses can be facili-tated by combining know-how from differentunits, by extracting discrete activities fromvarious units and combining them in a newunit, or by establishing internal joint venturesor alliances. As a result of tbe business world'sincreased concern for corporate regenerationand growth, several companies have placedadded emphasis on this type of synergy.

HARVARD BUSINESS REVIEW Scptemher-October 1998 133


Pressured by the CEO, the category managerslaunched a succession of high-profile synergy ini-tiatives. The results were dismal. A leading U.K.cookie brand was launched with considerable ex-pense in the United States. It promptly flopped. Apasta promotion that had worked well in Germanywas rolled out in Italy and Spain. It backfired, erod-ing both margins and market shares. An attemptwas made to standardize ingredients across Europefor some confectionery products in order to achieveeconomies of scale in purchasing and manufactur-ing. Consumers balked at buying the reformulatedproducts.

Rather than encouraging interunit cooperation,the initiatives ended up discouraging it. As the fail-ures mounted, the management teams in eachcountry became more convinced than ever that

If business-unit managers choose notto cooperate in a synergy initiative,they usually have good reasons.

their local markets were unique, requiring differentproducts and marketing programs. After a year oflargely fruitless efforts, with few tangible benefitsand a significant deterioration in the relationshipbetween the corporate center and the units, thechief executive began to retreat, curtailing tbe syn-ergy initiatives.

A similar problem arose in a professional servicesfirm. Created through a series of acquisitions, thisfirm had three consulting practices-organizationdevelopment, employee benefits, and corporatestrategy-as well as an executive search business.The chief executive believed that in order to justifythe acquisitions, he needed to impose a "one-firm"policy on the four units. The centerpiece of this pol-icy was the adoption of a coordinated approach tokey accounts. A client-service manager was as-signed to each major client and given responsibilityfor managing the overall relationship and for cross-selling the firm's various services.

The approach proved disastrous. The chief execu-tive's enthusiasm for the one-flrm policy blindedhim to the realities of the marketplace. Most of thebig clients resented the imposition of a gatekeeperbetween themselves and the actual providers of thespecialist services they were buying. Indeed, manyof them began to turn to the firm's competitors. Farfrom creating value, the synergy effort damaged thefirm's profitability, not to mention some of its most

important client relationships. Faced with an up-roar from the consulting staff, the CEO was forcedto eliminate the client-manager positions.

For both these chief executives, synergy had be-come an emotional imperative rather than a ratio-nal one. Spurred by a desire to find and express thelogic that held their portfolio of businesses together,they simply assumed that synergies did exist andcould be achieved. Like wanderers in a desert whosee oases where there is only sand, they hecame soentranced by the idea of synergy that they led theircompanies to pursue mirages.

Parenting Bias. Corporate managers afflictedwith the synergy bias are prone to other biases aswell. If they believe that opportunities for synergyexist, they feel compelled to get involved them-selves. They assume that the unit managers, overly

focused on their own businesses andoverly protective of their own author-ity, disregard or undervalue opportu-nities to collaborate with one another.As one exasperated CEO told us,"There's the I'm-too-busy syndrome,the not-invented-here syndrome, andthe don't-interfere-you-don't-under-stand-my-business syndrome. If I

didn't continually bang their heads together, I he-licve they would never talk to one another."

Assuming that unit managers are naturally resis-tant to cooperation, executives conclude that syn-ergy can be achieved only through the interventionof the parent. (The parent, in our terminology, canbe a holding company, a corporate center, a divi-sion, or any other body that oversees more than onebusiness unit.) In most cases, however, both the as-sumption and the conclusion are wrong. Businessmanagers have every reason to forge links with otherunits when those links will make their own busi-ness more successful. After all, they regularly teamup with outside organizations-suppliers, cus-tomers, or joint venture partners-and they'll evencooperate with direct competitors if it's in their in-terest. In the music industry, to take just one exam-ple, the four leading companies will often share thesame CD-manufacturing plant in countries withinsufficient sales to support four separate plants.

If business-unit managers choose not to cooper-ate, they usually have good reasons. Either theydon't helieve there are any benefits to be gained orthey believe the costs, including the opportunitycosts, outweigh the benefits. The fact that unitmanagers do not always share their bosses' enthusi-asm for a proposed linkage is not evidence that theysuffer from the not-invented-here syndrome orsome other attitudinal ailment. It may simply be



they've concluded that no real gains will come ofthe effort.

At Worldwide Foods, for example, one of the cor-porate category managers attempted to create anadvertising campaign that could be used through-out Europe. The single campaign seemed logical:It would promote a unified hrand and would becheaper to produce than a series of country-specificcampaigns. And, because the campaign would befunded at the corporate level, the category managerpresumed it would be attractive to the local man-agers, who would not have to dip into their ownhudgets. But several local managers resoundinglyrejected the corporate advertisements, in manycases choosing to produce their own ads with theirown money. The category manager, regarding therejection as evidence of local-manager intransigence, asked thechief executive to impose the cor-porate advertising as a matter ofpolicy. "How parochial can youget?" he complained. "They'reeven willing to pay out goodmoney for their own ads ratherthan go along with the ones pro-duced by my department."

But discussions with the localmanagers revealed that their re-jection of the corporate campaignwas neither reactionary nor irra-tional. They believed that thecorporate campaign ignored realdifferences in local markets, cul-tures, and customs. The pan-European advertising campaignwould simply not have workedin countries such as Germany,Sweden, and Denmark. "I'd havebeen delighted to get my advertis-ing for free from corporate," stat-ed the German product manager."But I'd have paid much moreheavily in terms of lost marketshare if I'd used their campaign.We had to go our own way because the corporatecampaign wasn't appropriate for our distrihutionchannels or target customers."

Because the parenting bias encourages corporateexecutives to discount unit managers' objections, itoften leads them to interfere excessively, doingmore harm than good. If, for example, unit man-agers believe that the opportunity costs of a synergyprogram outweigh its benefits, forcing them to co-operate will make them even more skeptical of syn-ergy. If two unit managers have a bad working rela-

HARVARD BUSINESS REVIEW September-October 1998

tionship, pushing ahead with a coordination com-mittee will simply waste everyone's time. Al-though headquarters sometimes needs to pushunits to cooperate - when, for instance, some unitsare unaware of promising technical or operationalinnovations in another unit-it should consider in-tervention a last resort, not a first priority.

Skills Bias. Corporate executives who believethey should intervene arc also likely to assumethat they have the skills tointervene effectively. Alltoo often, however, theydon't. The membersof the managementteam may lackthe operating

Believing unit managers to be naturally resistant to cooperation, parentexecutives often feel compelled to intervene.

knowledge, personal relationships, or facilitativeskills required to achieve meaningful collabora-tion, or they may simply lack the patience and forceof character needed to follow through. In combina-tion with the parenting bias, the skills bias doomsmany synergy programs.

In one large retailing group, the chief executivewas convinced, rightly, that there were big benefitsto be had from improving and sharing logisticsskills across the company. Knowing that competi-tors were gaining advantages from faster, cheaper


distribution, he felt, again rightly, that his husi-nesses were not giving this function sufficient at-tention. He therefore set up a cross-husiness teamto develop, as he put it, "a core corporate compe-tence in logistics." As there was no obvious corpo-rate candidate to lead the team, the ehief executivedecided to appoint the supply chain manager fromthe company's biggest business unit, in the beliefthat he would grow into the role. As it turned out,the manager's lack of state-of-the-art logisticsknow-how, combined with his poor communica-tion skills, undermined the team's efforts. Thewhole initiative quickly fell apart.

The skills bias is a natural corollary to the parent-ing bias. If you are convinced that you need to inter-vene to make synergies happen, you are likely to

The downsides of synergy are everybit as real as the upsides; they arejust not seen as clearly.

overlook skills gaps-or at least assume that theycan be filled when necessary. Professional pride,moreover, can make it difficult for senior managersto recognize that they and their colleagues lack cer-tain capabilities. But a laek of the right skills can fa-tally undermine the implementation of any syn-ergy initiative, however big the opportunity. What'smore, learning new skills is not easy, especially forsenior managers with ingrained ways of doingthings. If new and unfamiliar skills are called for,it's a serious error to underestimate the difficulty ofhuilding them. It may be better to pass the opportu-nity by than to embark on an intervention thatcan't be successfully implemented.

Upside Bias. Whether or not the intended bene-fits of a synergy initiative materialize, the initiativecan have other, often unforeseen consequences-what we call knock-on effects. Knock-on effectscan be either beneficial or harmful, and they cantake many forms. A corporate-led synergy programmay, for example, help or harm an effort to instillemployees with greater personal accountability forbusiness performance. It may reinforce or impedean organizational change. It may increase or reduceemployee motivation and innovation. Or it may al-ter the way unit managers think about their busi-nesses and their roles, for better or for worse.

In evaluating the potential for synergy, corporateexecutives tend to focus too much on positiveknock-on effects while overlooking the downsides.

In large part, this upside hias is a natural accompa-niment to the synergy bias: if parent managers areinclined to think the best of synergy, they will lookfor evidence that backs up their position whileavoiding evidence to the contrary. The upside biasis also reinforced by the general belief that coopera-tion, sharing, and teamwork are intrinsically goodfor organizations.

In fact, collaboration is not always good for orga-nizations. Sometimes, it's downright bad. In oneconsulting company, for example, two businessunits decided to form a joint team to market and de-liver a new service for a client. One of the businessunits did information technology consulting, theother did strategy consulting. One evening, whenthe team was working late, the strategy consultants

suggested that they order in somepizza and charge it to the client. TheIT consultants were surprised, sincetheir terms of employment did notallow them to charge such items toclient accounts. The conversationthen turned to terms and conditionsmore generally, and soon the IT con-sultants discovered that the strategy

consultants were heing paid as much as 50% moreand had hetter fringe benefits. Yet here they wereworking together doing similar kinds of tasks.

The discovery of the different hilling and com-pensation practices-what hecame known in thefirm as the "pizza prohlem"-caused dissatisfac-tion among the IT consultants and friction betweenthe two businesses. An attempt to resolve the prob-lem by moving some IT consultants into the strat-egy business only made matters worse. Few ofthe IT consultants achieved high ratings under thestrategy unit's evaluation criteria; consequently,many of the firm's best IT consultants ended upquitting.

As the pizza problem shows, viewing cooperationas an unalloyed good often blinds corporate execu-tives to the negative knock-on effects that mayarise from synergy programs. They rush to promotecooperative efforts as examples to be emulatedthroughout the company. Rarely, though, do theykill an otherwise promising initiative for fear that itmight erode a unit's morale or distort its culture.Synergy's downsides are every bit as real as its up-sides; they're just not seen as clearly.

The best antidotes for these four biases, as for allbiases, are awareness and discipline. Simply by ac-knowledging the tendency to overstate the henefitsand feasihility of synergy, executives can betterspot distortions in their thinking. They can thenput their ideas to the test, posing hard questions to



themselves and to their colleagues: What exactlyare we trying to achieve, and how big is the benefit?Is there anything to be gained by intervening at thecorporate level? What are the possible downsides?The answers to these questions tell them whetherand how to act.

Sizing the PrizeThe goals of synergy programs tend to be expressedin broad, vague terms: "sharing best practices,""coordinating customer relationships," "cross-fertilizing ideas." In addition to cutting off debate -who, after all, wants to argue against sharing? -such fuzzy language obscures rather than clarifiesthe real costs and benefits of the programs. It alsotends to undermine implementation, leading toscattershot, unfocused efforts as different partiesimpose their own views about what needs to bedone to reach the imprecisely stated goals.

Clarifying the real objectives and henefits of a po-tential synergy initiative- "sizing the prize," as weterm it-is the first and most important disciplinein making sound decisions on synergy. Executivesshould strive to be as precise as possible about boththe type of synergy being sought and its ultimatepayoff for the company. Overarching goals shouldbe disaggregated into discrete, well-defined bene-fits, and then each benefit should be subjected tohard-nosed financial analysis.

At Worldwide Foods, for example, one of thenewly appointed category managers found that herinitial efforts were being frustrated by the impreci-sion of the CEO's goal. "Leveraging internationalbrands" covered such a wide range ofpossihle objectives, from standardiz-ing brand positioning, to sharing mar-keting programs, to coordinatingproduct rollouts, that she found it dif-ficult to reach agreement about tasksand priorities with the various localmanagers.

During a visit to the company's Ar-gentinean subsidiary, for example, shetried to persuade the local productmanager to use a marketing campaign that hadbeen successful in other countries. Dismissing theidea, he tried to shift the discussion. "That cam-paign wouldn't work in Argentina," he said. "WhatI would like is advice on new-product-developmentprocesses."

"I don't think you understand," the categorymanager countered. "I'm trying to create an inter-national hrand, and that means standardizing mar-keting across countries."


"No," said the local manager. "If we want toleverage our brands, we need to focus on productdevelopment."

Everywhere she went, the category managerfound herself mired in similarly fruitless debates.All the local managers defined "leveraging interna-tional brands" to mean what they wanted it tomean. There was no common ground on whichto build.

Finally, the category manager stepped back andtried to think more clearly about the synergy oppor-tunities. She saw that the broad goal-leveraginginternational brands-could be broken down intothree separate components: making the brand rec-ognizable across borders, reducing duplicated ef-fort, and increasing the flow of marketing know-how. Each of these components could, in turn, bedisaggregated further. Making the brand recogniz-able, for instance, might involve a number of differ-ent efforts affecting such areas as brand positioning,pricing, packaging, ingredients, and advertising.Each of these efforts could then be evaluated sepa-rately on its own merits. (See the exhibit "Disaggre-gating a Synergy Program.")

The exercise proved extremely useful. The cat-egory manager was able to go back to the localmanagers and systematically discuss each possihlesynergy effort, identifying in precise terms its ram-ifications for each local unit. In some cases, shefound she had to take the disaggregation even fur-ther. In examining the possibility of standardizingone product's packaging, for example, she foundthere were local issues about the type and color ofthe cap; the material used for the bottle; the size,

Clarifying the objectives and benefitsof a potential synergy initiative is thefirst and most important discipline in

making sound decisions on synergy.

shape, and color of the hottle; and the size of thelahel. Each item required a separate evaluation ofcosts and benefits. The type of cap, for example, hada big impact on manufacturing costs - and thus wasan attractive candidate for standardization-butsome local managers argued that changes in capdesign could hinder their marketing efforts. Cus-tomers in different countries preferred different capmechanisms. By carefully balancing the cost sav-ings from economies of scale in manufacturing

137


Disaggregating a Synergy Program

All too often, executives set overly broad goals for theirsynergy programs-goals that make good slogans butprovide little guidance to managers in the field. By dis-aggregating a broad goal into more precisely defined ob-jectives, managers will he hetter ahle to evaluate costs

and henefits and, when appropriate, create concreteimplementation plans. Here we see hov/ one hroad andill-defined goal-"leveraging international brands"-was systematically hroken down into meaningful com-ponents that could be addressed individually.

Leverageinternationalproducts

Make brandrecognizableacross borders

Reduce duplicationand bad practices

Increase flow ofknow-how

Positioning

Pricing

Packaging

Ingredients

Advertising

Advertising

Ingredients

Marketing

Product Development

Research

Product

Technical

Marketing

Research

Material

Shape

ColorCap

Logo

Positioning

Pricing

Promotion

Advertising

against the possible loss of sales, the category man-ager and the local managers were ahle to reach aconsensus on how much to reduce cap variety.

By disaggregating the objectives, the categorymanager was also ahle to gain a hetter understand-ing of how each effort should he implemented.Standardizing hottle shapes across countries, for

example, would require a corporate policy. Other-wise, many of the local managers would go theirown way, and economies of scale would he lost. In-creasing the flow of technical know-how, hy con-trast, would he hest achieved simply hy creatinghetter lines of communication among the techni-cians in each country. More heavy-handed, top-

138 HARVARD BUSINESS REVIEW Septembers-October 1998


down initiatives would risk making technical man-agers resentful and could end up dampening ratherthan promoting efforts to share expertise.

Once the overall synergy goal has heen brokendown into its main components, the next stepshould be to estimate the size of the net benefit ineach area. Uncertainties about both the costs andthe benefits, however, often lead executives toavoid this obvious task. But without some concretesense of the payoff, the decision maker will beforced to act on instinct rather than reason. Thatdoes not mean that an exhaustive financial analysishas to be performed before anything gets done. Inmost cases, order-of-magnitude estimates will do.Is the program likely to deliver $i million, Sio mil-lion, or $ioo million in added profits? Is the impacton return on sales likely to be half a percentagepoint, or one percentage point, or five? This is back-of-the-envelope stuff, hut we have found that evensuch rough estimates promote the kind of objectivethinking that counters the biases.

The estimated financial benefits don't always tellthe whole story, though. They rarely take into fuilaccount the opportunity costs of a synergy pro-gram, particularly the costs that result from not fo-cusing management's time and effort elsewhere.The difficulty lies in knowing when the opportu-nity costs are likely to he greater than the henefits.At one consumer-products company,for example, the corporate center wasspearheading an initiative to take aproduct that had heen successful inone country and roll it out in a num-ber of other countries. The local man-agers resisted the idea. They arguedthat the program would incur consid-erable opportunity costs, forcing themto divert marketing funds and management timefrom other local brands. The key to resolving thedispute lay in determining the strategic importanceof the planned rollout.

If the rollout was strategically important, eitherto the units involved or to the overall corporation,then the benefits would likely outweigh the oppor-tunity costs. But if some other more strategicallyimportant initiative was likely to be delayed in or-der to implement the rollout, then the opportunitycosts would be greater. After some soul-searchingby the units and hy corporate marketing, it wasagreed that the rollout had low strategic impor-tance, except in three units. Headquarters scaledhack the initiative. It would give advice and supportto those units that wanted to go ahead with theproduct launch, but it would not impose a rollouton the other units.

Sizing the prize provides a counterweight to thesynergy bias, forcing corporate managers to sub-stantiate their assumptions that the synergy initia-tives they propose will create big net benefits. Italso helps counter the parenting hias, as the carefulanalysis of opportunity costs can help corporatemanagers better understand the source of anyunit manager's resistance. And, by leading to thedisaggregation of broad initiatives into discrete,well-defined programs, sizing the prize can set thestage for a focused, successful implementation.

Pinpointing the Parenting OpportunityEven when a synergy prize is found to he sizable,corporate executives should not necessarily rushin. We would in general urge a cautious approachunless the need for corporate intervention is clearand compelling. Corporate executives should startwith the assumption that when it makes goodcommercial sense, the business-unit managers willusually cooperate without the need for corporateinvolvement.

When is intervention hy the corporate parent jus-tified? Only when corporate executives can, first,point to a specific problem that is preventing theunit managers from working together; second,show why their involvement would solve the proh-

Even when a synergy prize is foundto be sizable, corporate executives

should not necessarily rush in.

; and third, confirm that they have the skills re-quired to get the job done. In those circumstances,there is what we call a parenting opportunity. Wehave found that genuine parenting opportunitiestend to take four forms:

Perception opportunities arise when businessesare unaware of the potential benefits of synergy.The oversight may be caused by a lack of interest, alack of information, or a lack of personal contacts.The parent can help fill the perception gap by, forexample, disseminating important information orby introducing aggressive performance targets thatencourage units to look to other units for betterways to operate.

In general, the greater the number of businessunits in a company, the more likely it is that per-ception opportunities will arise. ABB, for example,has 5,000 profit centers organized into a numher of



business areas. In its power transformer area alone,there are more than 30 units. It is clearly impracti-cal for every unit head to know^ what is going on ineach of the other 29 units. The cost of scanning istoo high. The area head, therefore, plays an impor-tant role in facilitating the information flow, pass-ing on best-practice ideas and introducing man-agers to one another. In addition, the area headregularly publishes financial and operating infor-mation about eaeh business, enabling cross-unitcomparisons and helping each business identifyunits from which it can learn useful lessons.

Evaluation opportunities arise when the husi-nesses fail to assess correctly the costs and benefitsof a potential synergy. The businesses' judgments

Any decision for parental interventionshould also take account of the skillsof the managers involved.

may be biased by previous experiences with similarinitiatives, distorted by shortcomings in the pro-cesses or methods they use to assess cost-benefittrade-offs, or skewed by their own strategic priori-ties. In such cases, the parent should play a role incorrecting the units' thinking.

The German suhsidiary of one multinationalcompany, for example, was fiercely proteetive of anew product it had developed. It was not only reluc-tant to help other units develop similar products, iteven refused visits from unit and corporate-centertechnicians. The reason? The German managersdid not trust their French and Italian colleagues toprice the new product appropriately. They fearedthose units would not position it as a premiumproduct and, as a result, would undermine pricelevels throughout Europe, reducing the exceptionalprofits being generated in the German market. TheGermans' fear of the possible downsides cloudedtheir view of the very real upsides. The standoff wasresolved only when corporate executives walkedthe German managers through the cost-benefit cal-culations step hy step and guaranteed that priceswould be kept above a certain minimum in allcountries.

Motivation opportunities, which derive from asimple lack of enthusiasm by one or more units,can stop collaboration dead in its tracks. Disincen-tives come in a number of forms. Unit managersmay, for example, believe that the personal costs ofcooperating are too high-that their personal em-

pires or bonuses may be put at risk. Or transfer-pricing mechanisms may, in effect, penalize oneunit for cooperating with another. Or two unitmanagers may simply dislike each other, prevent-ing them from working together constructively.Identifying and removing motivational roadhlocks,whether they reside in measurement and rewardsystems or in interpersonal relations, can be one ofthe toughest, but most valuable, roles for the corpo-rate executive.

In one company, the CEO tried for five years toget the managers responsible for North Americanand European operations to cooperate. The NorthAmerican business was run by a beadstrong youngwoman with a strong belief in an open management

style. Europe was run by a reserved,traditional Englishman who preferredto operate through formal, hierarchi-cal structures. Both managers privatelyaspired to run the entire global busi-ness, but publicly they argued thatthere were few overlaps between theirbusinesses that would merit collabo-ration. After a series of failed attempts

to get the husinesses to work together, each ofwhich ended in bitter rows and recriminations, theCEO finally lost patience and fired both managers.In their places, he appointed more compatible man-agers who were able to work together with a greatdeal of success.

Implementation opportunities open up whenunit managers understand and commit to a synergyprogram but, through a lack of skills, people, or otherresources, can't make it happen. The businessheads of a European chemical company, for exam-ple, agreed that it would be valuable to pool theirresources when setting up an Asia-Pacific office inSingapore. Their aim was to improve the effective-ness of their sales efforts in markets that were unfa-miliar to all of them. The initiative failed hecausenone of the businesses had a suitable candidate tohead the office; the individual appointed was notwell connected in the region and lacked the skillsneeded to open new accounts. If the parent had in-tervened, by providing a suitahle manager from itscentral staff or training and by coaching the manappointed, the chances of success would have in-creased greatly.

Thinking through the nature of the parenting op-portunity, and hence the role that the parent needsto play, helps corporate executives pinpoint whichtype of intervention, if any, makes sense. But anydecision to intervene should also take account ofthe skills of the managers involved. Appointing apurchasing specialist to advise the husinesses on



gaining leverage by pooling their purchases may bean excellent idea, but if the parent does not have theright person to do the job, the new appointmentwill end up irritating and alienating the businesses.A lack of the right skills can thwart even the best ofintentions.

The discipline of pinpointing the parenting op-portunity is probably the most valuable contribu-tion that we have to offer to corporate executivesin search of synergy. Thinking clearly about whyparental intervention is needed can help managersavoid mirages and select suitable interventions.Unless a parenting opportunity can be pinpointed,our advice is not to intervene at all.

Bringing Downsides to LightThe synergy is attractive; the parenting opportu-nity is clear; the skills are in place. Is it time to act?Not necessarily. A final discipline is in order: look-ing carefully for any collateral damage that may oc-cur from the synergy program. Because the pursuitof synergy affects the relationship among businessunits and the relationship between the units andthe corporate center-two of the most sensitive re-lationships in any big company-it can have far-reaching consequences for a company's organiza-tion and strategy. If corporate executives overlookthe negative knock-on effects, they risk great harm.

Some synergy efforts send the wrong signals toline managers and employees, clouding their under-standing of corporate priorities and damaging thecredibility of headquarters. When one company setup a coordination committee to seek marketingsynergies among its businesses, the unit managersthought the CEO was abandoning his much-com-municated goal of promoting stronger accountabil-ity at the individual unit level. Theysaw the corporate committee as a signof a return to more centralized con-trol. In fact, the shift of accountabilityto the units remained a core strategicthrust-the synergy initiative wassimply a tactical effort intended tosave money. In another company, aninitiative to coordinate back-officefunctions distracted employees from the corpora-tion's fundamental strategic goal of becomingmore focused on the customer. They began lookinginward rather tban outward.

Top-down synergy efforts can also undermineemployee motivation and innovation. One con-sumer-goods company, for example, launched an ef-fort to coordinate research and development acrossits European units. Although the effort appeared to

be highly attractive, offering substantial productiv-ity gains, it backfired. A key source of innovation inthe company had been the internal competition he-tween the U.K. and the Continental businesses. Byestablishing a combined research unit, headquar-ters ended the competition - and the creativity. Theeffort succeeded in eliminating duplicated effortand achieving economies of scale, but these gainswere overshadowed by tbe unanticipated downsides.

In other cases, cooperation can distort the wayunit managers think about their business, leadingto wrongheaded decisions. Consider the experienceof a diversified retailing company that tried to en-courage greater cooperation between its two appli-ance-retailing businesses. One of the businesses,which focused on selling top-quality appliances atpremium prices, was highly profitable. The other,which pursued a pile-it-high, sell-it-cheap strategy,was barely breaking even. The group CEO recog-nized the differences between the businesses, buthe felt certain that synergy could be achieved, par-ticularly in purchasing. To encourage greater coop-eration, he put the head of the profitahie businessin charge of both operations.

The new leader of the two business units initiallylooked for areas where purchases could be pooled togain greater leverage over suppliers. But althoughsome small cost reductions were quickly realized,the program soon ran into difficulty: the two busi-nesses were buying different kinds of products,with different price points and different proportionsof store-branded items. It was clear that big savingscould only be achieved if the two businesses boughtidentical products. The managers of the strugglingunit initially resisted this course, but as theylearned more about the product and pricing strate-gies of their more successful partner, their thinking

When executives manage synergy well,it can be a boon, creating additional

value with existing resources.

began to change. Entranced by the wide marginsavailable from selling premium goods, they beganshifting their strategy. They bought better-qualityproducts, boosted service levels, and raised prices.

The result was calamitous. The unit's traditional,price-conscious customers went elsewhere for theirbargains, while upmarket purchasers stuck withtheir traditional suppliers. In emulating its sistercompany, the unit had undermined its business. It

HARVARD BUSINESS REVIEW September-October 1998 141


A Disciplined Approach to Synergy

By taking a more disciplined approach tii achievingsynergy, an executive can gain its rewards while avoid-ing its frustrations. The first step is to evaluate thecosts and benefits-to "size the prize." If the net hcne-fit is unclear, more exploration is needed. If it appearsto be small, the executive should not pursue the syn-ergy unless the risks oi corporate intervention are low.if it seems large, the executive should determine

whether an intervention hy the corporate parentmakes sense. If the parenting opportunity is unclear,the intervention should he restricted to facilitatingfurther exploration. If no parenting opportunity exists,the executive should resist any urge to intervene. Ifa clear parenting opportunity exists, the executiveshould tailor the intervention to fit the opportunitywhile minimizing any downside risks.

Size the prize

large andclear

small Don't interveneunless risks are low

Chooseexploratory

interventions

unclear Pinpoint theparenting

opportunity

clear

none exists Don't intervene

Perception OpportunityUnits are unable to

perceive the synergyor its benefits.

Evaluation OpportunityUnits do not accuratelyevaluate the benefit.

Motivation OpportunityDisincentives are preventing

the units frompursuing the synergy.

Implementation OpportunityUnits lack skills, resources,or processes to achieve

the synergy.

Select an interventionthat will fit the parenting

opportunity, will be easy toimplement, and wilt avoid

downside risks.



had tried to take its product mix upscale withouttaking account of its competitive positioning. Thenew strategy was soon reversed, but it took morethan a year to remove the inappropriate productsfrom the supply chain. The unit suffered hig lossesand major write-offs.

It is never possible to predict all the unintendedconsequences that can flow from a synergy initia-tive (or, for that matter, from any management ac-tion). But by simply being aware that husiness-unitcolkhoration can have big downsides, managerswill be able to take a more objective, rigorous viewof potential synergy efforts. In some cases, they willbe able to structure the effort to avoid many of thepotential downsides. In other cases, they will heahle to kill proposals that would have created moreproblems than they solved.

First, Do No HarmManagers have sometimes accused us of being tooskeptical about synergy. They argue that the disci-plined approach we recommend - clarifying the realhenefits to he gained, examining the potential forparental involvement, taking into account the pos-sible downsides - will mean that fewer initiativeswill be launched. And they are right. We believethat corporate managers should he more selectivein their synergy interventions. In all too many com-panies, synergy programs are considered no-brain-ers. Cooperation and sharing are viewed as idealsthat are beyond debate. As we've seen, such as-sumptions often lead to failed initiatives that wastetime and money and, sometimes, severely damagehusinesses. Real synergy opportunities exist inmost large companies, hut they are rarely as plenti-ful as executives assume. The challenge is to distin-guish the valid opportunities from the mirages. (Seethe exhibit "A Disciplined Approach to Synergy.")

In some cases, the analysis of synergy opportuni-ties will raise questions that will be hard to answer.The size of the prize may he uncertain: Will a jointInternet marketing group help or hinder our busi-nesses as they move into electronic commerce?The parenting opportunity may be unclear: Is theGerman product manager resisting the corporatemarketing campaign out of chauvinistic stubborn-ness, or is the German market really different? Theneeded skills may be unproven: Will our technicalmanager he able to lead a coordination committeeon production planning? The risks may be hard topin down: Will a cross-Asian product-developmentgroup undermine innovation?

When uncertainty is high, we recommend thatcorporate executives proceed cautiously. Rather

than intervene decisively, they should encouragefurther exploration. The mechanisms for explo-ration may be similar to those for implementation-pilot projects, fact-finding visits, temporary assign-ments and task forces, forums for sharing ideas-but they are very different in intent. An exploratorymechanism is designed simply to collect facts. Theend result is a better-informed decision maker. Inimplementation mode, by contrast, the intention isto change the way managers are working or thinking.

Sometimes, the best course will be to do nothing.The opportunity may he too small to justify the ex-penditure of management time, there may he noclear reason for the parent to intervene, or the risksmay be too high. The thought of doing nothing will,of course, make many executives distinctly uncom-fortable. After all, it goes against the grain of themost basic managerial instincts: to take action, toget things done, to create a whole greater than thesimi of the parts. Yet executives who are not pre-pared to countenance a do-nothing outcome shouldask themselves whether they are in the throes ofhiased thinking.

If convinced that the benefit is sizahle and theparenting opportunity real, executives can thensearch for the hest kind of corporate intervention.There are usually several possible choices, all withdifferent advantages and drawhacks. Synergies fromcombined purchasing power, for example, might beachieved by centralizing purchasing, hy setting upa purchasing coordination committee, hy establish-ing a corporate advisory center, by creating a cross-unit database on purchases, or by setting corporatestandards for terms and conditions. The decision onhow to intervene should depend on the nature ofthe benefit and the parenting opportunity. But itshould also take into account the available skills inthe organization and the ease with which imple-mentation is likely to take place. And it shouldseek to minimize the downside risks. Carefully se-lected interventions are the best way to releasetruly valuahle synergy.

When synergy is well managed, it can be a boon,creating additional value with existing resources.But when it's poorly managed, it can undermine anorganization's confidence and erode the trustamong business units as well as between the unitsand the corporate center. Synergy's upsides are real,hut so are its downsides. And the only way for man-agers to avoid the downsides is to rid themselves ofthe hiases that cloud their thinking. When it comesto synergy, executives would be wise to heed thephysicians' creed: First, do no harm. ^

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A can help executives Desperately Seeking Synergy...Synergy Bias. Most corporate executives, whether or not they have any special insight into synergy opportunities or aptitude for