On Management

Dec. 21, 2004
The opposite of synergy is 'nonergy.'

In reading the history of the Old West, I came across a story about a ranch in northern Oklahoma not far from a place where I once lived. The 101 Ranch was one of the largest and historically most significant land masses of the 1800s and early 1900s. A huge expanse of more than 100,000 acres, it was assembled by combining numerous smaller spreads. Unfortunately, the 101 Ranch eventually failed because size alone, achieved simply by combining other ranches, was not enough to ensure success. Does this remind you of any recent mergers? Studies have shown that megamergers involving large companies seldom increase the value of the combined companies -- and often decrease the value. The oft-cited rationale for many giant mergers is that they will somehow achieve "synergy." That's a nice-sounding word that means the whole is greater than the sum of the parts. However, in many cases, the future earnings never justify the price paid by the acquiring company and negative synergy actually results, at least in a financial sense. Unfortunately, no one seems to have coined a word for the opposite of synergy. So I will boldly suggest that this negative synergy ought to be called "nonergy." Nonergy occurs when mergers, like the 101 Ranch, combine spreads but fail to increase the true productivity of the new larger entity. Naturally, there are the obligatory personnel reductions that prop up financial results for a few quarters. And often reserves are created that can slowly be filtered back into earnings to avoid fiscal nonergy for a year or more. But, before long, the truth becomes evident. Bigger is not necessarily better. Blending different competitors' cultures is not just hard, it is excruciatingly difficult. (Does DaimlerChrysler come to mind?) Another problem in combining large entities is that the bigger they get, the more rigid, bureaucratic, and inflexible they become. Great size inhibits the diffusion of information. It also breeds arrogance and/or complacency. Remember the Titanic? Combining large companies into megacompanies requires a careful pairing of partners and deft attention to avoiding the pitfalls associated with size. General Electric Co. seems to be one of the few companies to have mastered this balancing act -- using the power of size without being paralyzed by the bulk. Jack Welch, GE's widely admired and quoted CEO, constantly reminds us of the problems of being big, yet thinking small and staying flexible. Big usually means powerful, but history has proven time and again that big powerful companies can be knocked off by small, nimble, customer-sensitive competitors. The easy interchange of ideas in small companies becomes a bureaucratic exercise in big ones. When ranches grew larger and larger, information took longer to reach the outlying areas -- and was often distorted by the time it got there. Certainly, advances in telecommunications can solve this, but someone has to take the time to communicate frequently -- and honestly -- in order for the technology to do its job. In addition, people far removed from the seats of power have to read or listen and, hardest of all, accept what is being said. With trust between workers and company leaders at a low point, no matter how often or how well communication occurs, the question is whether the troops will believe the messages and act on them. Nonetheless, executives working for merged companies need not despair. Unlike the Titanic, most do not sink entirely. Many are broken up into smaller, more focused, and manageable pieces -- which is exactly what happened with the 101 Ranch. The pieces, managed properly, can survive and thrive. The keys to survival are still the same: talented, committed people marshaling their energies to create and deliver value, based on a sensitivity to the needs and wants of customers. Whether it is ranching or manufacturing, bigger is not necessarily better. Better is better. John Mariotti, a former manufacturing CEO, is the author of Smart Things to Know About Brands (1999, Capstone Ltd.). His e-mail address is [email protected].

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