Synergy – What is it and how does it work?

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A number of people have asked me about synergy (which is described in most business strategy books as making 2 + 2 = 5) and what it means from a corporate perspective.

This subject was brought back into focus in a recent article in the Sydney Morning Herald (see SMH Article) which suggests that Australia Post should set up a bank because some similar organisations overseas have them. This idea is also further supported because the CEO of Australia Post, Ahmed Fahour, used to be a senior executive at both Citibank and NAB.

However, if you examine what Australia Post might bring to banking, it is access to it’s retail outlets (post offices) which could relatively easily be extended to handle more banking transactions – it already handles similar transaction such as bill payments etc for a range of third parties. I know that this can be done without too much difficulty having done a similar exercise myself when, as CEO of GIO Building Society, we extended it’s operations into the GIO branch network (which at the time handled only insurance transactions).

However, there is much more to banking than being able to handle bank teller transactions (where there are some synergies) and the many other banking functions i.e. product design, FX, credit management, securitisation etc  (where there are no synergies). In these cases, which form the major functions of a banking organisation, they would have to be set up from scratch which would be expensive, take a long time and would be risky.

In fact, the ideal banking strategy for Australia Post would be to partner with an existing (preferably Australian) banking organisation and offer their rebranded products similar to the Virgin Money strategy, which relies on brand synergies. This way they would make use of the areas where they can provide synergistic benefits (retail branches) and use the strengths of their banking partners (for the other banking functions) where their banking partner can provide the synergistic benefits.

This is synergy in it’s true form.  It is interesting that it is reported in the SMH article that David Murray, Chairman of the Future Fund will be talking to the Federal Government about Australia Post offering “banking services” not necessarily setting up their own bank although that distinction is not highlighted out in the SMH article.

Do you understand what synergies are and their upside and downside?  Would you like to discuss how you might make use of corporate synergies to grow your business? Please call on +61 2 9258 1972 or go to our Contact page.

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