International synergy management: A strategic approach for raising efficiencies in the cross-border interaction process

Table of Contents

Index of Figures

Index of Tables

Abbreviations

1 Introduction
1.1 Research Background
1.2 German small and medium-sized businesses as research object
1.3 Research Problem and Objectives
1.4 Research Scope
1.5 Research Pertinence
1.6 Research Structure
1.7 Definitions

2 Literature Review
2.1 Overview
2.2 The concept of synergetic interaction in the business context
2.2.1 Definition
2.2.2 Types of synergetic interaction
2.2.3 Positive effects of synergetic interaction
2.2.4 Negative effects of synergetic interaction
2.2.5 Synergetic interaction and the competitive advantage
2.2.6 Barriers blocking synergetic interaction
2.3 Synergy Management
2.3.1 Synergy Management as Corporate Strategy
2.3.2 The Synergy Management Process
2.3.2.1 Identifying potential synergetic interaction (Definition Phase)
2.3.2.2 Quantifying potential synergetic interaction (Definition Phase)
2.3.2.3 Coordinating ways to achieve synergetic inter. (Planning Phase)
2.3.2.4 Management Tools & Techniques (Implementation Phase)
2.3.2.5 Monitoring of Synergetic Interaction (Control Phase)
2.4 Practical implementation of synergetic interaction

3 Methodology
3.1 Primary Research
3.1.1 Research Approach and Procedure
3.2 Research Design
3.2.1 Research Strategies
3.2.1.1 Case Study Research
3.2.1.2 Survey Research
3.2.2 Research Choice
3.2.3 Research Time Horizont
3.2.4 Research Techniques (Data Analysis)
3.3 Evaluating primary research design
3.4 Secondary Research

4 Hypotheses Derivation
4.1 Case Study
4.2 Research Hypotheses

5 Research Analysis and Discussion

6 Recommendations and Conclusion
6.1 Recommendations
6.1.1 Synergy Management – Strategic Perspective
6.1.1.1 Provide Orientation
6.1.1.2 Define Management Power and Authority
6.1.1.3 Provide Chance & Incentives
6.1.1.4 Cost-Benefit Analysis
6.1.1.5 Summary – Strategic Perspective
6.1.2 Synergy Management – Operational Perspective
6.2 Conclusion
6.3 Study limitations and supplementary research

References

Appendix

Index of Figures

Figure 1: Manufacturing SMBs - Relocation of business activities to foreign countries

Figure 2: Manufacturing SMBs - Campaigns to improve competitiveness

Figure 3: Directions of synergetic interaction

Figure 4: Positive effects of synergetic interaction

Figure 5: Mobilization and Synergy Management as corporate strategies

Figure 6: Synergy Management Process

Figure 7: Approaching Synergetic Interaction

Figure 8: Interrelationship Typology Matrix

Figure 9: Interrelationship Typology Matrix – Research Stream

Figure 10: Interrelationship Typology Matrix – Research Stream

Figure 11: Interrelationship Typology Matrix – Research Stream

Figure 12: Interrelationship Typology Matrix – Research Stream

Figure 13: Interrelationship Typology Matrix – Research Stream

Figure 14: Subsidiary roles in multinational firms

Figure 15: The research onion

Figure 16: De Groot's empirical cycle

Figure 17: Business contact databases

Figure 18: Survey distribution via the online provider www.onlineumfragen.com

Figure 19: Individual case analysis vs. sample analysis

Figure 20: Survey analysis via the online provider www.onlineumfragen.com

Figure 21: IFM Sports – global presence

Figure 22: IFM Sports cross-border interaction

Figure 23: Distribution of German SMBs by state

Figure 24: Level of cross border interaction

Figure 25: Level of cross border interaction (production unit only)

Figure 26: Unutilized synergetic potential

Figure 27: Unutilized synergetic potential - T-Test test statistic

Figure 28: Barriers blocking synergetic interaction

Figure 29: Synergy management applied within the corporate strategy

Figure 30: Responsible entity for managing cross border interaction I

Figure 31: Responsible entity for managing cross border interaction II

Figure 32: Reasons confronting the implementation of a corporate synergy management

Figure 33: Cross-border synergy management concept

Figure 34: Cross-border Synergy Management – Strategic Perspective

Figure 35: Wiki - Knowledge Management Platform

Figure 36: Cross-border Synergy Management – Operational Perspective

Index of Tables

Table 1: Definition of small and medium-sized businesses

Table 2: Synergy Typology

Table 3: Synergy on target performance monitoring template

Table 4: High and low synergy society – basic comparison

Table 5: Research techniques applied

Table 6: Data collection methods applied in the case study context

Table 7: Synergy profile

Table 8: Unutilized synergetic potential between the IFM headquarter and the US subsidiary

Table 9: IFM Germany – IFM USA cross-border employee exchange and transfer

Table 10: Type of barriers blocking synergetic interaction

Table 11: Management tools applied to coordinate cross-border interaction

Abbreviations

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1 Introduction

1.1 Research Background

Every four years the global sports community follows 32 teams fighting for the World Championship in the most popular global sport, football. The best eleven players from each country are brought together to compete for the world’s most prestigious trophy. The following phenomenon occurs regularly, catching the attention of both attendees as well as media outlets: Although on an individual basis position players from one team may not physically or mentally match up with or be able to compete well against their counterpart, the inferior team may be able to outperform the favourite as such happened in the 2010 World Cup. The French team, consisting of highly skilled athletes, lost the group matches against the less competitive teams from Mexico and South Africa. Media afterwards critically asked: “When will the French players realize that there is more to football then having the foot with the ball?” (Johns, 2010) “Football is hard when you can't play together” - with his reaction the French player Yoann Gourcuff has underlined the discrepancies within his team regarding the approach how to perform successfully (Soufi, 2010). In contrast, the winning teams from Mexico and South Africa took advantage of their ability to interact in a synergetic way, leading to the fact that the overall team performance was greater than the sum of the individual player performances.

Interaction within businesses can be compared to the characteristics in team sports. Skilled individuals are requested to interact within a system and perform together in order to accomplish a common objective. However, efforts of individuals and entire units might lack alignment and coordination or in the worst case scenario there is not interference at all. In team sports the coach plays a central role in managing interaction between the individual players, providing the overall team direction and creating a team spirit which should prevent or reduce any form of personal exploitation, mistrust and jealousy and get everyone in the system going in the same direction. Kaplan and Norton (2006) dedicated this role within a corporation to the corporate management: “Synergies will not occur unless the corporate level plays an active role to identify and coordinate opportunities for integrating the behaviour of its decentralized business units”. According to Goold and Campbell (1998) executives can obtain additional value with excising capabilities and resources if they understand how to manage synergies.

Corporations expect from synergetic interaction, for example economics of scale, a better level of capacity utilization, learning effects, the elimination of double and multiple activities and advantages through higher order quantities or knowledge sharing (Johnson et al., 2008). In this context Freeman (in Moran and Harris, 1982) outlines the challenges for organizations operating across borders: “Multinational organizations have a special role not only in building cross-cultural bridges. But in innovating synergies through their practical knowledge of putting together human and natural resources with the knowhow of managing both in the most effective ways”.

1.2 German small and medium-sized businesses as research object

International business opportunities are relevant for numerous companies throughout the German economic landscape. 72% of all small and medium-sized businesses (SMBs) are heavily involved in international business activities (KPMG, 2007). From an economical perspective this business segment is characterized as the backbone of the German economy as it counts for 99.7% of all German businesses, 39.7% of the total turnover generated by German corporations and 60.8% of all jobholders officially registered (IFM, 2009). Export is still the dominating internationalization mode applied within this businesses sector; however, the local presence in foreign markets becomes even more important (KPMG, 2007). Small and medium-sized businesses establishing and running foreign subsidiaries are consequently facing the opportunity as well as the challenge to benefit from synergetic headquarter-subsidiary interrelationships. Exploiting this potential effectively can add additional value to the corporate network and provide or enlarge a competitive advantage. “In addition to identifying a company’s potential sources of cross-border value, executives must identify the organizational barriers to achieving it” (Ghislanzoni et al., 2008). The McKinsey consultants Ghislanzoni, Penttinen and Turnbull emphasize the challenges in regards to synergetic cross-border interrelationships and underline the level of strategic management efforts required, in order to design an effective and efficient international corporate network.

This research project aims to investigate to which extent German small and medium-sized manufacturing businesses could benefit from the implementation of a strategic cross-border synergy management.

In order to discuss this research question a basic understanding of the specific characteristics of small and medium-sized businesses is required. Resources available to corporations of this business segment can have a restricting effect. First, the application of strategic management tools is limited due to the unity of ownership and management which is quite common within small and medium-sized businesses. The decision making process is consequently heavily based on intuition (Amschlinger, 2011). Second, this business segment is facing insufficient financial reserves in comparison to large corporations whereby their creditworthiness might be limited. Third, small and medium-sized businesses do not have such a broad and diversified staff as large businesses, whereby specific skills might not be available within the corporation. In regards to internationalization and cross-border interaction of small and medium-sized businesses these specifics are in particular relevant and will be addressed throughout the paper.

1.3 Research Problem and Objectives

According to Johnson et al (2008) corporations can select between two major alternatives in achieving a sustainable competitive advantage. Businesses can either seek external market opportunities by positioning itself advantageously in relation to the competitors operating in the same field (market-based view) or base their competitive advantage on the application of company specific valuable resources and capabilities (resources-based view). According to Porter (1985), the competitive advantage obtained via the second option can be strengthened and developed by sharing activities / resources and / or transfer skills / competences along individual business units. Business synergies are a key aspect in the field of strategic management and strongly influence corporate decisions. Synergetic interrelationships can be established between different types of business units and implemented within different business scenarios. Interaction is obviously not limited to specific markets, in fact, multinational corporations have the chance to utilize and profit from synergetic potential provided by their international network. However, potential benefits provided by the international environment are accompanied by even more demanding challenges. In this context the strategic design and management of cross-border interaction between the corporate parent and foreign subsidiaries is specifically relevant for both parties to achieve positive effects. In order to elaborate the main research question presented above it is necessary to delineate between individual sub problems. This research project specifically aims to examine the following subordinated research objectives:

- First, the analysis shall provide an understanding to which extend German small and medium-sized manufacturing businesses have implemented synergetic headquarter-subsidiary interrelationships or whether this field provides further potential. For this purpose it is required to identify the degree of synergetic cross-border interaction along the respective company value chains.
- Second, the project seeks to identify if and what kind of barriers are negatively influencing cross-border interaction.
- Insights gathered via both sub problems presented above shall provide an understanding for the need for a strategic cross border synergy management. How this demand for management efforts is currently meet in a comprehensive way shall be investigated in a third step.

1.4 Research Scope

The majority of published books or research articles in the field of synergetic interaction are focused on specific problem areas. Insights generated via this research shall provide the basis for discussing a holistic synergy management approach specifically focusing on cross-border interaction of small and medium-sized manufacturing businesses. Factors characterizing this business segment as listed in chapter 1.2 shall specifically be considered. This integrated framework is composed of a number of interdependent modules. The underlying research focuses on the manufacturing industry which covers all elements of the standard value chain as proposed by Porter. The consideration of trading, consulting or for example logistic businesses would have limited the explanatory power of the insights gathered as those sectors function differently. This integrated system shall provide strategists of SMBs, operating in the international environment, with the most relevant information and guidance to make the best possible decision in regards to synergetic interaction between the headquarter and the foreign subsidiaries. The study discusses cross-border interaction and synergy management from a corporate strategy standpoint. In this context the paper touches other disciplines such as human resources; however it cannot be classified as an interdisciplinary paper as these fields are rather mentioned in the overall context than analyzed in detail.

1.5 Research Pertinence

The relevance of this research project can be underlined as follows: First, a variety of research has investigated modes applied in the internationalizing process of small and medium-sized businesses. However, research addressing the strategic design and management of synergetic interaction between the corporate headquarter and the foreign subsidiaries within this business segment is rather limited. As, according to the German institute for research in the field of medium-sized businesses (IFM), SMBs will increase the relocation of business activities to foreign countries (Kayser et al, 2005) this aspect becomes even more relevant. Figure 1 illustrates that 33% of medium-sized businesses with 250-499 employees have already established business locations abroad, 22% are planning to go abroad over the next two years. According to the institute for research in the field of small and medium-sized businesses every fifth business carries a product portfolio which is competitive on an international level. This underlines the potential for further internationalization within this business segment, especially driven by high tech industries, such as environmental-, medical- and biotechnology, information and communication technologies. According to Ensign (1998) “coordination tends to become increasingly more important as the business environment becomes more competitive.”

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Figure 1: Manufacturing SMBs - Relocation of business activities to foreign countries (Kayser et al, 2005)

Second, as a result of globalized markets SMBs are more intensively confronted with competitive pressure. As a consequence, cost efficiency improvement campaigns, aiming for cost reduction or performance enhancement for the same price level, are even more in focus and listed by executives as the major factor in increasing competitiveness (see figure 2). Efficiency of global activities has to be combined with the sensitivity for expectations of local customers. International corporate networks are often driven by heterogeneous process structures and the unequal application of business management methods on operational level. These businesses deliver a significant level of unutilized potential for performance enhancement. The coordination of those challenges with traditional hierarchical organization forms is critical. Network-, team-and process-oriented structures characterize the shape of the future business system.

Johnson et al (2008) are listing four major cost drivers – economics of scale, supply costs, experience and product & process design. Cross-border interaction can have a positive impact on all factors listed above. For example, multiple studies have underlined the important relationship between the cumulative experience achieve by a corporation and its unit costs. Porter outlines that “sharing an activity or skills and competences can increase efficiency and lead to a sustainable competitive advantage” (Porter, 1985). On cross-border level this symbiotic effect can be even stronger as positive insights from a variety of markets can benefit the corporate network. Lacks in the field of managing synergies across borders were observed by the author while implementing a new department in a foreign subsidiary of a German medium-sized organization over the time period of one year.

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Figure 2: Manufacturing SMBs - Campaigns to improve competitiveness (Kayser et al, 2005)

1.6 Research Structure

The research problem and the related sub problems are defined in the introduction chapter, which in addition delivers the scope and the pertinence of this research project. The second chapter reviews critically the relevant literature, published in German and English language. The methodology chapter introduces the overall strategy and techniques applied in order to answer the underlying research problem. The research hypotheses are derived in the following chapter based on a single case study. In order to test these tentative hypotheses, results gathered via a survey are presented and analyzed in chapter 5. The final chapter proposes a comprehensive approach for small and medium-sized manufacturing businesses to manage cross-border interaction and increase corporate efficiency and performance.

1.7 Definitions

Small and medium-sized businesses are defined differently by individual institutions. The German institute for research in the field of medium-sized businesses, as well as the European Union are both using two indicators in order to characterized this business sector from a quantitative perspective – the annual turnover volume and the number of employees (see table 1).

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Table 1: Definition of small and medium-sized businesses (Günterberg and Wolter, 2002)

This research paper applies the definition as proposed by the German institute for research in the field of medium-sized businesses. According to this guidline SMBs do not exceed 500 staff members and the turnover volume is limited to 50 Mio. Euros per year (Günterberg and Wolter, 2002).

In the following the terms ‘’synergetic interrelationship’’ or “synergetic interaction” will refer to shared activities / resources and / or transferred skills / competences between business units located in the corporate headquarter on the one hand and foreign subsidiaries on the other hand. “Synergetic potential” can be characterized as a theoretically condition attainable under ideal conditions, whereas “synergetic effects” arise in reality as a result of interaction. For example, cost advantages (economies of scope / economies of scale) or increased differentiation, leading to a stronger competitive advantage can be classified as synergetic effect.

The abbreviation “IFM” is used twice within this study as it is the official abbreviation for two relevant organizations. On the one, hand it stands for the “German institute for research in the field of medium-sized businesses”, on the other hand it applies to the ”Institut für Medienanalyse” (“Institute for media analysis”). The latter is the business investigated via a case study approach in chapter 4, whereas the first is mentioned as a source throughout the entire text.

2 Literature Review

This chapter critically reviews the academic literature related to the research problem examined within this research and delivers the initial foundation for this research project. The text first outlines the concept of synergetic interaction by contrasting the key contributions before structuring a variety of practical implementation scenarios. In order to receive a comprehensive overview selected titles written in German and English language are considered.

2.1 Overview

The topic of identifying and strategically managing business synergies is discussed throughout a variety of literature. Consequently, contributions are highly fragmented and partially limited in providing a comprehensive overview across all relevant aspects. From a chronological perspective Ansoff (1965) and Porter (1985) provided the two fundamental contributions in the relevant area. Both authorities have delivered the foundation for discussing the topic of business synergies in the scientific community. Numerous authors have repeated their thoughts and enhanced first concepts by contributing their individual findings. For example, Rodermann (1997) and Steidl (1999) argue that the heuristic contributions of Ansoff and Porter both leave “white spots” as a definition of the term “synergy” is missing and the non-distinctive delineation to related concepts is not provided. Campbell and Gold (1998) point out that “in the 1990s, scholars have continued to explore the concept of synergy, further refining its theoretical basis and practical applications”.

2.2 The concept of synergetic interaction in the business context

2.2.1 Definition

The principal idea of business synergies was first introduced by Igor Ansoff (1965) within his book “Corporate Strategy” published in 1965. “2+2=5” is still the most common analogy used in order to describe synergetic effects. The term “synergy” is originally derived from Greek language (syn – together and érgo – achievement) and illustrates the collaboration of individual factors which mutually boost each other in combination. Aristoteles summarized synergetic effects with the following quote: “The whole is greater than the sum of its parts” (Ansoff, 1965). In the business context this equation is based on the concept of “economies of scale”, which states that it’s possible to decrease costs across two interacting businesses for example by purchasing larger volumes. In addition, this effect occurs while transferring managerial skills, leading to improved executive decisions. Ansoff (1965) does not examine the phenomenon separately as it merely functions in his concept as a key performance indicator to select between potential markets. The authoritative influence of Ansoff’s product-market strategy on his understanding about synergies limits his consideration of synergies achieved between business units operating in the same markets.

Porter (1985) contributed essential insights by introducing the concept of strategic interrelationships based on his value chain framework. Although replacing the term “synergy” by the expression “interrelationship”, he continues to discuss the actual idea introduced by Ansoff (1965). He highlights the fact that interrelationships are a main driver in the process of achieving and sustaining a competitive advantage, either by reducing costs or supporting diversification. In contrast to Ansoff (1965), Porter (1985) discusses synergies as a key aspect in the context of corporate strategic management and does not limit the discussion to business expansion only. Cockerill (1995) enhances the discussion by relating the term synergy to “systems thinking”, which is the process of understanding how individual components influence one another within a whole: “One of the earliest references to systems ideas that I am aware of is in Aristotle’s ancient Greece when the notion that some wholes exhibit properties not present in any of the parts was noted. Today’s systemic equivalent is called synergy.” Itamic and Roehl (in Juga, 1996) add an additional aspect by characterizing synergy as a “free ride” because intangible assets created in certain units could be capitalized in other parts of the company. Castell, Gregory, Hindle, James and Ragsdall (in Harwood, 2000) define synergy with its demands: “Synergy comes from the Greek word “synergos” which means working together. This demands a platform for participation through the development of dialogues, between disciplines and people, the very stuff of systems thinking.” The concept of synergetic interaction can be summarized by isolating the key aspects identified throughout the individual contributions:

- synergy comes from the Greek word “synergos” which means working together
- synergy is a collaboration of individual factors which mutually boost each other in combination
- synergetic interaction can be characterized as interrelationships between individual business units
- synergetic interaction is a main driver in the process of achieving a competitive advantage and requires systems thinking
- synergetic interaction demands a platform for supporting the development of dialogues between disciplines and people
- synergetic interaction is a key aspect in the context of corporate strategic management

2.2.2 Types of synergetic interaction

In regards to the direction of synergetic interaction Rodermann (1997) distinguishes between three cases (see figure 3). First, the coordination between related business units at the same production stage out of different value chains is summarized as “horizontal integration”. This is the case when for example the corporate headquarter and the foreign subsidiaries are sharing one research laboratory. The analysis of 160 scientific synergy definitions has shown that most explanations interpret the idea of synergetic interaction as an interrelationship between value adding activities of two or more individual value chains (Rodermann, 1997). Johnson et al (2011) follows this approach as he argues that “the realization of synergies involves bringing together different value networks”. This strategic approach is specifically relevant for designing the relationships between the corporate parent and the foreign subsidiary which is producing the same product or group of products. Consequently, this direction of synergetic interaction is in focus of this paper and delivers the foundation for designing specific areas of the case study and survey research (see chapter 4 & 5). Second, interrelationships can be established between upstream and downstream activities of one single value chain. For example, sales activities are coordinated with the physical delivery of goods in order to reduce deliver times. Finally, collaboration can take place within one value adding activity. For instance, marketing-mix elements within the value adding activity “marketing” can be coordinated in order to reinforce each other.

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Figure 3: Directions of synergetic interaction (Rodermann, 1997)

Furthermore, Rodermann (1997) introduced a systematic approach of classifying different types of synergetic interaction by reviewing them from five different dimensions in a first step and several sub dimensions in a second step (see table 2). First aspects introduced by Porter (1985, “I will discuss all forms of interrelationships […] tangible […] and intangible.”) or Ansoff (1965, “Start-up Synergy and operating synergy”) are considered and enriched by additional dimensions.

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Table 2: Synergy Typology (Rodermann, 1997)

All dimensions listed above are relevant for this research project. However, the key delineation, valuable in this context, is not considered. This approach separates between synergies achieved between business units both located within one country and units operating in different markets. The specifics, importance and relevance of this dimension shall be underlined with this research project.

2.2.3 Positive effects of synergetic interaction

Ansoff (1965) is using simple mathematical terms to illustrate positive synergetic effects. According to his theory they occur if integrated business activities across two markets (A & B) decrease costs, increase revenues or require less investments and consequently influence the return on investment positively as stated via the following formula.

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Rodermann (1997) delivers an overview across the different effects of synergetic interaction based on an empirical analysis. 494 experts in the relevant field were asked to provide their insights, resulting in the following chart which displays the top 6 positive effects^[1].

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Figure 4: Positive effects of synergetic interaction (Rodermann, 1997)

Steidl (1999) is differentiating between three types of synergetic effects. First, universal synergetic effects can be generated through every kind of interaction. This type of effect is not depending on the interacting units producing the same products or operating in the same industry. Usually it occurs in supporting activities such as finance and human resources. Interaction in the best case leads to a decrease of fix costs on both sides. Second, endemic synergy effects occur in similar industries or between businesses which are linked to each other (Rodermann, 1997). It arises for example due to a concentration of production capacity and marketing capacities. For example, paper mills often use steam while producing and drying paper. In the case of a company located in Germany the required steam is supplied from the power plant operating next door. There the steam was previously used to drive a turbine in order to generate electricity. The waste product can be sold profitably by the power plant, and the paper mill does not have to make high investment for producing the steam. This synergetic effect was already considered in the process of setting up the paper mill. Third, specific synergy effects occur only in certain interaction scenarios. The combination of special assets such as patents hold by one party and an appropriate distribution channel hold by the second party can be mentioned exemplary.

Porter (1985) is discussing effects of synergetic interaction in regards to the competitive environment a business is operating in. According to his theory individual positive effects (e.g. decrease costs, reduce process durations) finally result in a competitive advantage. As this is a major argumentation for seeking synergies chapter 2.2.5 “Synergetic interaction and competitive advantage” will review this linkage in detail and outline arguments provided by different authorities.

2.2.4 Negative effects of synergetic interaction

In contrast to a variety of contributions only a limited number of authors have mentioned the negative effects of synergetic interaction, also referenced to as “dysergy” or “dysynergy”. The term “dys” is originally derived from the Greek language (dys – poor) and illustrates a poor collaboration between business units (Hofmann, 2004). Following the approach Ansoff (1965) applied to illustrate the effect of synergetic interaction, dysynergies can be explained with the following metaphor „2 + 2 = 3“.

Campbell and Goold (1998) emphasize that the attempt to achieve synergetic interaction leads to problems within a majority of corporations. Shaver (2006) and Furrer (2010) underline that synergetic interaction between individual units can limit the company’s ability to react on favorable or changing conditions in the business environment as the level of interdependences increases, limiting flexibility and decision making autonomy. Rodermann (1997) points out that synergies do not necessarily have to have a positive impact. He rather underlines the existence of “negative synergies” as unavoidable effects in the process of realizing positive synergies. Consequently, he characterizes synergetic interaction as the net total of numerous positive and negative effects. Even before, Cockerill (1995) argued in the same direction. “A football team may comprise 11 individual stars but may not necessarily perform as a team. Synergy can be positive […] or negative, that is to say we gain less opportunities and more “interference” with regard to our plan.” In contrast, Klemm (in Rodermann, 1997) characterizes negative synergies as avoidable and classifies them as mismanagement. Campbell and Goold (1998a) agree with this argumentation: “Avoiding such failures is possible, but it requires a whole new way of looking at and thinking about synergy”. Ansoff (1965) and Porter (1985) emphasize that benefits of synergetic effects have to outweigh costs, produced in the process of seeking, establishing and keeping them. Rodermann (1997) adds two additional aspects, delivering the following classification of negative synergetic effects.

Synergetic interaction - Negative effects on costs

Porter (1985) delineates three types of costs which might occur while sharing activities or resources.

a) Costs of Coordination (Caused by the increased need for coordination required in the sharing process.)
b) Costs of Compromise (Caused by the fact that activities cannot be performed as optimal as under isolated circumstances.)
c) Costs of Inflexibility (Caused by the fact that corporate strategic flexibility is reduced as dependencies have to be considered.)

Synergetic interaction - Negative effects on revenues

Synergetic interaction might have a negative effect on revenues. Rodermann (1997) specifically links this implication to Mergers & Acquisition, which is not in focus of this research paper whereas a detailed outline shall not be undertaken at this point.

Synergetic interaction - Negative effects on risk levels

According to Rodermann (1997) synergetic interaction can increase the unsystematic as well as the systematic risk level organizations are facing. The latter rises if profits of the interacting units correlate, which can be assumed in the case of operative synergies. On the other hand, synergetic interaction may increase the level of unsystematic risk. This could be the case if for example a natural disaster destroys physical resources which are for synergetic reasons centrally stored.

2.2.5 Synergetic interaction and the competitive advantage

According to Johnson et al (2008) corporations can select between two main alternatives in achieving a sustainable competitive advantage. Businesses can either seek for external market opportunities by positioning itself advantageously in relation to the competitors operating in the same field (market based-view) or base their competitive advantage on the application of company specific valuable resources and capabilities (resources based-view). According to Porter (1985), the latter can be strengthened and developed by sharing activities/resources and/or transferring skills/competences among individual business units: “Sharing leads to a competitive advantage if it reduces costs or enhances differentiation”. Ensign (1998) specifies this statement, stating that the process of sharing activities can results in a competitive advantage under the following preconditions: First, interaction must take place between (units) activities which produce a significant part of the overall operating costs. Second, cooperation has to decrease costs of running shared activities. Third, sharing has to support differentiation either by reducing differentiation costs or by supporting the uniqueness of an activity. Sharing skills can result in a competitive advantage under the following preconditions: First, interaction has to take place in key value adding activities. Second, skills exchanged must be unknown or lead to an improvement in the receiving department. Rowley (2002) follows Porter, stating that a corporation has to outperform its competitors in one or several value chain functions in order to achieve a competitive advantage. This can be achieved by implementing interrelationships between individual units and the synergetic effect resulting out of these linkages. On the other hand, dysynergies could weaken a company’s competitive position (Hofmann, 2005). If dysynergies outperform positive effects obtained via interaction processes the overall synergy balance and the effect on the corporation will be negative.

2.2.6 Barriers blocking synergetic interaction

Synergetic interaction between individual business units can be blocked by certain barriers. Campbell & Goold (2002) underline the relevance of “synergy killers”. They list rivalry between unit heads and mistrust of senior managers as the major barriers and call for “corporate managers to clear away these synergy killers” and establish a “family feeling” within the corporation to support synergetic interaction. Johnson et al (2011) point out the self-interest of managers which are supposed to interact. For example, performance related compensation systems limit the willingness of unit managers to follow and invest in the overall objective and follow the overall corporate direction.

Cross-border interrelationships are facing additional barriers in contrast to collaborations taking place purely on a domestic level. “In addition to identifying a company’s potential sources of cross-border value, executives must identify the organizational barriers to achieving it” (Ghislanzoni et al, 2008). The McKinsey consultants Ghislanzoni, Penttinen and Turnbull emphasize the challenges in regards to the management of synergetic cross-border interrelationships and underline the level of management efforts required in order to limit negative effects.

2.3 Synergy Management

2.3.1 Synergy Management as Corporate Strategy

In general business literature (Rodermann, 1997) separates between two forms of coordination – central vs. peripheral. A management approach can be classified as “peripheral” if individuals involved have equal rights and can decide autonomously. In contrast, coordination can be associated as “central” if the decision is made by a higher authority and is consequently binding for all individuals involved. In the latter case the decision maker could be an individual person or a group of people. Businesses have the opportunity to manage synergetic interaction on corporate level via the corporate management or on unit level via the individual managers directly affected. Expert interviews conducted by Rodermann (1997) delivered an understanding about how heads of individual units consider this issue. According to this study unit managers refuse being dictated and underline that their detailed expertise is required in order to successfully evaluate and utilize synergetic potential.

On the other hand, Rodermann (1997) states that literature provides the overall direction that only the top management is obligated to decide about the implementation of synergetic interactions. This assumes that the corporate management has a broader overview across all fields of potential synergetic interaction and is less influenced by the respective interests of the individual units. Ensign (1998) agrees by stating that synergy management should be part of the corporate level strategy. Top management should be concerned with the overall direction for making the corporation worth more than the sum of its individual parts. He clearly separates its purpose from other strategy levels by underlining that “corporate strategy must center on creating value that is independent of business unit value” and points out that corporate strategy “must organize and manage business units so that each can benefit from its link with the rest of the corporation”. Kaplan and Norton (2006) even sharpen this direction by stating that “synergies will not occur unless the corporate level plays an active role to identify and coordinate opportunities for integrating the behaviour of its decentralized business units”. Steidl (1999) is discussing the topic of synergetic interaction in the context of corporate strategy by outlining two value adding strategies, namely “mobilization” and ”synergy management” (see figure 5). The first is based on “the process of making latent energy available via more effective and efficient usage of resources within individual business units” (Steidl, 1999). The second approach is characterized by the sharing of valueable activities and skills between independent business units, actively managed by the corporate management.

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Figure 5: Mobilization and Synergy Management as corporate strategies (Steidl, 1999)

Clark (in Ensign, 1998) agrees with the direction provided by the authorities listed above, however, points out that many corporations failed in developing an effective synergy management on corporate level. The major challenge for corporate strategists is to find the optimal balance between realizing synergies and keeping business unit responsiveness. Responsiveness in this context is defined as the ability to respond to the competitive requirement of external or internal stakeholders in a timely and adequate manner. The contradictoriness of both directions is outlined by De Wit and Meyer (2004) as the “paradox of responsiveness and synergy”. The authors are presenting the example of Philips. During the 1990s different CEOs struggled to find the right balance on corporate level between synergetic interaction and unit responsiveness and drifted from one extreme to the other side.

2.3.2 The Synergy Management Process

The following paragraphs gather various aspects contributed by different authors in regards to the process of managing synergetic interaction. In order to structure the individual insights this paper links the different insights to the four phases of the general management process (see figure 6).

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Figure 6: Synergy Management Process (Own figure based on Felden, 2006)

2.3.2.1 Identifying potential synergetic interaction (Definition Phase)

The first step in the process of managing each kind of synergetic interaction is the identification of synergetic potential which could provide additional value to the corporation. In this context Cockerill (1995) promotes the process of systems thinking which can be summarized as the understanding of how individual components influence one another within a whole. “Systems thinkers take holistic views of the system and try to determine the emergent (the resulting synergy) purpose of the system” (Cockerill, 1995). The author outlines that that the smallest non dividable parts of each corporation are micro systems such as staff members or material expenses (natural resources or machines). A value creating business system is created out of interacting sub-systems that are based on a variety of micro systems. While initiating the interaction of sub-systems synergies can be utilized in those areas in which the purpose of the individual subsystems is equal.

According to Rodermann (1997) the existence of synergetic potential can be based on two different reasons. First, the surplus of a material production factor which, due to its physical indivisibility, can only be obtained in larger quantities as currently required. Second, every immaterial factor is dedicated to obtain synergies due to the fact that this type of asset will not be burned up and will not lose value in the production process. In order to identify material and immaterial factors which could be used in a synergetic way scientific literature provides object related search strategies. The most common systems are provided by Ehrensberger (1993) and Ropella (1989), whereas the latter shall be outlined exemplarily below.

Ropella (1989) delivers an approach which categorizes production factors based on their potential to be used across several production processes. According to his strategy only “potential factors” fulfill the precondition to be used in a synergetic way as “consumption factors” disappear after being used once. Potential factors are categorized by Ropella into homogenous vs. heterogenous on the one hand and simultaneous vs. successive factors on the other hand. Homogeneous factors can only be applied for certain exercises, whereas heterogeneous factors can be used on a universal level. Simultaneous factors can be applied in several production processes simultaneously, whereas successive factors can only be assembled in a certain point in time within one single production process.

In response to Porter, who states that “a business unit can potentially share any value activity with another business unit in the firm”, Rodermann (1997) introduces an approach which increases efficiency in seeking for synergetic potential. He advises to concentrate the analysis on important value activities which are responsible for high cost levels.

2.3.2.2 Quantifying potential synergetic interaction (Definition Phase)

Scientific literature delivers quantitative and qualitative concepts of measuring synergetic potential. As the application of quantitative methods (e.g. net present value method) is rather limited in practice (Rodermann, 1997) this paper focuses on the qualitative systems such as scoring models. In order to outline the synergetic potential between an existing system and a potential investment Wissema (1985) introduced the “synergy profile analysis”. As this concept is applied within this paper please consider the methodology chapter 3.2.4 for a detailed explanation. More recently Bachmann (2001) and Ebert (1998) approached this field by introducing synergy / dysynergy calculation models which shall be listed in this context, however, will not be outlined in detail.

2.3.2.3 Coordinating ways to achieve synergetic inter. (Planning Phase)

Campbell and Goold (1998) outline that the destruction of value, as a result of uncoordinated attempts to achieve synergies, is widely spread. According to their research a strategic consideration of pros and cons is rather increasingly replaced by management snapshots driven by four mental biases. The two authorities developed a framework which provides a strategic approach for planning the course of action in regards to synergetic interaction (see figure 7). The following paragraphs will deliver an overall outline of the concept rather than discussing individual steps in detail.

In order to identify strategic options in achieving objectives in the field of synergetic interaction managers are in a first step asked to challenge potential opportunities. According to Campbell and Goold (1998) corporate managers frequently see “valuable” synergetic potential which in reality does not exist. Decision makers are asked to evaluate benefits and costs before tackling a potential opportunity and apply “a healty does of skepticism […] to distingguish real opportunities from mirages” (see figure 7 step a). Kaplan and Norton (2006) agree and underline that the corporate parent has to be clear about the synergies it seeks to create. Johnson et al (2011) point out the danger of “illusory synergies” at this level as expected value often cannot be obtained when putting synergetic interaction into practice. Following an illusion might distract managers from their core business and result in a decrease of the overall value. Second, Campbell and Goold (1998) cite that corporate level managers presume that individual units’ heads will not cooperate without being pushed by the corporate hand. They suggest that “corporate executives should start with the assumption that when it makes good commercial sense, the individual unit managers will usually cooperate without the need for corporate involvement”. Decision makers are asked to intervene on operational level only if a specific problem is preventing unit heads from interaction (see figure 7 step b) Third, research undertaken by Campbell and Goold has delivered the insight that corporate managers presume to have the required skills to utilize synergetic potential. After the synergetic effect is classified as beneficial, the parenting role is defined and the required skills are identified in house and available, corporate managers should consider a fourth point while planning the synergy action map: Corporate managers tend to ignore the side effects which occur while linking individual units (see figure 7 step c).

Figure 7: Approaching Synergetic Interaction (Campbell and Goold, 1998)

2.3.2.4 Management Tools & Techniques (Implementation Phase)

Gentles (1984) underlines the challenge “to get everyone in the system going in the same direction at the same time to accomplish a common and well defined goal”. According to Ensign (1998) it is no longer satisfactory that only top management understands and lives the corporate direction: “If all people at all levels understand horizontal strategy […] it will help to sustain a competitive advantage”. Alexander (2002) strengthens this argument, outlining that “once you get your entire team seeking synergy the entire organization will have reinvented itself”. The corporate parent has the opportunity to take advantage of several management tools and techniques to stimulate synergetic interaction. The following paragraph does not have the intention to provide a complete picture of all options available; it rather summarizes groups of management tools and techniques in order to outline potential directions supporting the implementation of the theoretical synergy concept.

Human resources (HR) provide a variety of tools in order to activate and support synergetic interaction. According to Moss Kanter (1998, “cooperation flourishes on a foundation of shared experiences”) and Thompson (2001) synergetic effects can be generated by initiating employee exchange programs and transfering staff memebers between different units of an organisation. Corporate strategists can initiate this type of internal networking in order to link individuals within the company. Meetings and networking events provide the opportunity to connect people, whereby expatriation is an excellent option in order to create cross-border relationships.

On the compensation side HR has the opportunity to stimulate synergetic interaction via the promotion of incentives. In the context of achieving synergetic interaction this tool can be applied on executive level as well as on employee level in order to reward the achievement of synergy goals. “Joint incentives, which give everyone something if anyone reaches high levels of performance, make cooperation even more likely” (Moss Kanter, 1998).

According to Moss Kanter (1998) “communications is key to achieving synergies”. Computer networks and information systems can enhance communication which is required in order to obtain positive synergetic effects and accompany face to face interaction. Business information and communication technology (ICT) provider offer a variety of systems which support internal collaboration. For example, “iThink is a powerful tool for communicating interdependencies between processes and problems. Your entire business team will understand the variables that impact your business. Shared insight enables teams to work together, further ensuring that decisions are fully implemented and mitigating risk” (isee systems, 2011). Video and telephone conference software systems become relevant especially in the context of cross-border interaction and provide the potential to keep interrelationships between individuals and units located in different areas. This type of organization is called “virtual team“ and is joint by members which collaborate temporary or permanent, but not face-to-face basis.

Kaplan and Norton (2006) outline that most businesses are seeking for synergies, however, rather in a fragmented and unstructured way without any corporate alignment. In line with Ensign (1998), Steidl (1999) and Johnson et al (2008) they point out the importance of an overall corporate approach in regards to synergetic interaction, however underline that the implementation phase is key in achieving beneficial synergetic interaction: “The alignment strategy must be completed with an alignment process” (Kaplan and Norton, 2006). As Porter (1985) is using his value chain framework in order to structure potential synergetic areas Kaplan & Norton are structuring their approach based on their four dimensional management concept – the balanced scorecard.

1. Financial Synergies
2. Customer Synergies
3. Internal Process Synergies
4. Learning and Growth Synergies

The strategy map and the balanced scorecard concept are positioned as management tools to generate value through synergies as they support the clarification of corporate objectives and can be used to communicate them to the individual business units (Jones, 2011). Kaplan and Norton (2001) call for employees which understand corporate strategy and design their daily business in accordance to the success of the overall direction. Consequently, the scorecard tool can support the corporate management in designing interrelationships between induvidual units and ensuring that they occure (Kaplan and Norton, 2001).

2.3.2.5 Monitoring of Synergetic Interaction (Control Phase)

As important as the implementation of management tools in order to coordinate cross-border interaction is a regular progress and on target performance monitoring process. It points out if synergies achieved match with the target value set as objective. Often positive synergetic effects do not occur as predicted as they are overshadowed by unanticipated integration costs or dysynergies. The following matrix sets the basis for a continuous controlling process of key performance indicators in the context of achieving synergies. It defines the relevant KPIs per department, delivers the actual and target values, outlines the monetary value generated and points out risks and responsibilities. While synergy controlling is focused on maximizing value via cost degression and revenue progression dysynergy controlling on the other hand is simultaneously aiming to minimizing the decline in value via cost progression and revenue degression (Hofmann, 2004). The introduction and the optimal design of a synergy on target performance monitoring allows the reduction of errors while assessing and realizing cross-border synergies. In conjunction with the corresponding reporting obligations this type of synergy controlling supports corporate strategists in the process of designing interrelationships (see table 3).

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Table 3: Synergy on target performance monitoring template (Lechner and Meyer, 2005)

2.4 Practical implementation of synergetic interaction

In order to structure the variety of literature discussing the synergy concept and to identify the relevant contributions for the purpose of this research project, it is beneficial to introduce an overview across the different scenarios in which the implementation of synergetic interaction is relevant. According to Rodermann (1997) most contributions are discussing interrelationships either with a focus on a specific type of relationship between the interacting units (e.g. M & A, Alliances), a specific business type (e.g. corporate group) or business area (e.g. gastronomy). In order to structure the individual directions in the context of this paper figure 8 provides a matrix, illustrating different interaction scenarios between independent business units based on the dimensions “Type of relationships between interacting units” and “Location of interacting units”. The second dimension is specifically relevant for the purpose of this research project as interrelationships across borders are even more challenging than purely domestic ones. Based on the matrix below different research streams can be identified discussing different aspects of implementing synergetic interaction. Individual research streams will be outlined in the following, whereas the level of detail is based on the scenario relevance for this research paper.

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Figure 8: Interrelationship Typology Matrix (Own Figure)

Literature discussing synergetic interrelationships is predominantly base on scientific research on the one hand, on the other hand practitioners as Holt (2001) and Alexander (2010) are providing their perspective via contributions which are predominantly based on individual management experience. Moreover, the field of literature in the context of business synergies can be enhanced by sources which do not discuss synergetic interrelationships directly as outlined above. However, from a content perspective these contributions cover topics which are directly linked to synergetic aspects such as corporate branding or corporate financial management. This type of literature shall be mentioned, however, it is not discussed in detail at this point as this would go beyond the scope of this research project which focuses on the strategic identification, implementation and management of synergetic cross-border interrelationships.

Research Stream 1 – Synergy Management universally valid

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Figure 9: Interrelationship Typology Matrix – Research Stream 1 (Own Figure)

Essential contributions of Ansoff (1965) and Porter (1985) have introduced the discussion about business synergies in a comprehensive way, whereby insights can be applied to all dimensions listed in figure 9 (see area marked in orange). More recently Rodermann (1997) has pointed out and criticized limitations of additional contributions in the relevant field and follows the main direction established by the two business authorities listed above (“The research in hand presents a synergy concept, which can be applied independently from its context of practical implementation.”). With the identification and discussion of several areas Ansoff and Porter have left untouched Rodermann (1997) made a relatively systematic and comprehensive effort to contribute further insights in developing the general idea of managing business synergies. In contrast to previous heuristic contributions, as described above, his work is based on empirical analysis via expert interviews and company surveys. This research stream provides essential insights which are relevant for the context of this research paper.

Research Stream 2- Synergy Management in the context of M &A

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Figure 10: Interrelationship Typology Matrix – Research Stream 2 (Own Figure)

Analyzing the application of the term “synergy” in regards to business relations often leads to large acquisitions and mergers - for instance, the merger of Daimler-Benz and Chrysler as the new Daimler Chrysler Group. A dedicated research stream is focusing on synergetic effects within this context (see figure 10, area marked in orange). Bocker (2011 “Synergieeffekte und Integration bei Mergers and Acquisitions”) or Haspeslagh and Jemison (1998, “Creating value in symbiotic acquisitions”) refer to the basic concepts introduced by Ansoff and Porter, however, discuss synergetic interrelationships specifically in the context of joining businesses. “Synergy is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms” (Sirower, 1997). Haspeslagh and Jemison (1998) state that synergetic interaction processes between joining business units might be even harder to implement and manage in comparison to relationships between business units which grew from the beginning with the same or a similar corporate concept and control. This type of research stream benefits the current research project as mergers & acquisition are frequently taking place on a cross-border level, leading to circumstances whereby joining business units are entering the corporate network in the position of a “foreign subsidiary”. Theoretical concepts created in this context can to some extend be applied within the field this paper is approaching.

Research Stream 3 - Synergy Manag. in the context of ongoing-processes

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Figure 11: Interrelationship Typology Matrix – Research Stream 3 (Own Figure)

Additional research is dedicated to synergetic interrelationships between business units already legally belonging to the same corporation for a prolonged time period (see figure 11). Steidl (1999) characterizes this direction by its common ground to examine synergies generated in the context of “ongoing-processes” and is contrasting it to literature focused on on mergers & acquisition. For example, Steidls contribution examines synergy management applied in the context of corporate groups. He positions the management of synergetic interaction as a major top management challenge. In contrast to previous examinations he does not only focus on the classification of synergy types or the identification of potential interrelationships, moreover he outlines various organizational structures which are key in realizing synergies in “ongoing-processes”.

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^[1] Answers are based on the following question: “Which positive effects do you think companies expect by realizing synergies?” Results presented consider the following answers: “yes” / “rather yes”.