20 Management Research News Volume 13 Number 1 1990 Why Are Synergies Non-universal? Consequent Tendencies in the Evolution of a Firm by Peng S. Chan and Ravi R. Chinta The Executive's Dilemma Regarding Related Growth Consider the case of Procter and Gamble (P&G), when it ships carloads combining diapers and other paper products. It saves transportation costs (about 10% of sales) relative to a firm that sells only diapers 1 . This is one example of synergies among divisions that seem to explain the superior performance of companies like P&G. Examples of other related companies are General Foods, General Mills, Pillsbury, Dupont, 3M, Westinghouse etc., each of which try to exploit some form of synergy or other. But at the same time, managers also find that there are several conglomerate firms comprised of unrelated business units which are also performing well. Examples of conglomerates in this category include ITT, Rockwell International, Dart Industries, Signal Companies, United Technologies, Gulf and Western Industries, Tenneco, Textron, USX etc. An erudite manager is thus faced with a dilemma 2 . Are synergies real? If they exist, why are they not ubiquitous? Why and when is unrelated growth pattern an attractive alternative? The purpose of this paper is three fold. First, it presents in a summary form the insights provided by ninety six divisional managers on the above questions. Second, it pulls together these managerial responses into a conceptual model. Third, it attempts to relate this model to explain some tendencies in the growth of a firm in terms of mergers and leveraged buyouts. Accordingly, the paper is divided into four sections. The first describes the questions, the second summarises the responses, the third provides the conceptual model, and the fourth discusses the consequent tendencies in the evolution of a firm. Two Open Ended Questions As part of a larger study 3 on synergies in companies, managers were asked to answer two open ended ques- tions. The first question relates to an enumeration of (i) barriers and (ii) limits to developing synergies within cor- porations. The second relates to possible reasons for un- related growth. Though 335 divisional managers answered the full questionnaire, only 96 of them answered the two open ended questions in some detail. The assertions made in this paper are based on an analysis of these 96 responses for consistently recurring themes. The Responses Broadly, there are two classes of barriers that inhibit development of synergies in corporations. These are structural barriers (74 managers specified these) and managerial barriers (52 managers indicated these). Examining the frequency of responses, it may be inferred that structural barriers are more awesome than managerial barriers. The total does not add to 96 because some managers indicated both sets of barriers. (a) Structural Barriers: Among the structural barriers, three distinct dimensions emerged. These are (i) differences in the nature of the business, i.e., zyxwvut product/market differences across divisions (40 managers indicated this), (ii) technological differences that do not allow technology transfer across divisions (58 managers indicated this), and (iii) geographic separation of divisions (28 managers indicated this). Again, judging by the relative frequencies, it may be inferred that technology transferability is the dominant factor. Here technology was treated as very broadly by some managers who treated it not only as a way of "doing" but also as a way of "thinking". The second most dominant barrier seems to be product/market dissimilarities. The third barrier is the geographic distances. Some managers indicated that geographic separation is less of a barrier now than before in view of the emerging new Information Systems Technologies (IST).ISTis now resulting in a wave of recentralisation in some sectors (for example, international banking). (b) Managerial Barriers: Three perceptual factors are mentioned here. These are (i) "Safeguarding One's Turf" or "Organisational Politics" that prevent interdependent relationships (43 managers indicated this), (ii) perception that synergies stifle entrepreneurial spirit and constrain flexibility (23 managers indicated this), and (iii) perception that synergies are more beneficial in stages of value addition far removed from the customer, for example in purchases or technology etc (18 managers indicated this). Organisational politics seems to be the most dominant managerial barrier. Further, a trade-off between synergies and flexibility in terms of innovations is strongly implied here. Synergistic interrelationships are viewed as one form of centralisation that reduces flexibility and takes away divisional autonomy. Several managers suggested that the delegation of actual conduct of business must be done to the level of "maximum knowledge." Pointing out that the extent of synergies may conceivably vary with the stage in the value chain of a business, 15 managers strongly indicated