The Thucydides Trap describes the high risk of war when a rising power threatens to displace a dominant ruling power. This concept is  named after the Greek historian Thucydides who noted the dynamics between Athens and Sparta leading to the Peloponnesian War.

Thucydides war was further popularized by political scientist Graham T. Allison, suggesting the fear of the rising power by the established nation, coupled with the challenger’s growing confidence, often leads to conflict, though Allison aims to help manage this dynamic (currently U.S.-China) to avoid war through understanding and diplomacy.

The origin of the Thucydides’ trap started in situation where rising power Athens challenged the status of an established, ruling power  Sparta. The war was called Peloponnesian War, The Peloponnesian War was fought in the Eastern Mediterranean between the Athenian-led Delian League and the Spartan-led Peloponnesian League from 431 to 404 BC for domination over Ancient Greece. Thucydides approached ethics with scepticism, viewing morality as shaped by one’s environment rather than universal truths. Thucydides’ observations during the Peloponnesian War led him to develop political realism, the theory that political behaviour is fundamentally driven by fear of war and self-interest.

In the world wars happen due to complex, overlying reasons like disputes over resources such as land, oil, power struggles, political control, influence, and identity clashes  due to religion, nationalism, ideology, often fuelled by economic inequality, historical grievances, resource scarcity exacerbated by climate change, or a breakdown in diplomacy, leading groups to use organized violence when peaceful resolution fails. For example, Pakistan’s frequent conflicts with India stem mainly from the unresolved Kashmir dispute since 1947, leading to wars and ongoing border clashes, fuelled by religious/communal tensions and strategic interests, alongside internal instability and support for militant groups impacting regional security, especially with neighbours like Afghanistan, creating a cycle of conflict. The violent 1947 split by British created a deep-seated hostility between India and Pakistan leading to religious divide between  Hindu-Muslim, and a legacy of distrust.

Wars, often arising from economic, territorial, religious, or political reasons, can leave countries war-torn, requiring decades for rebuilding infrastructure and economic reconstruction. Rebuilding nations after war is indeed a daunting task, involving immense challenges across social, economic, political, and infrastructural domains. It requires comprehensive, long-term strategies and often international cooperation to establish lasting peace and stability.

The Russia-Ukraine conflict, beginning in 2022, it exemplifies the complexities of modern warfare, including unexpected resistance, strategic and logistic challenges, and significant civilian impact. On February 24, 2022, the Russian Federation began a military invasion of Ukraine, escalating a conflict that had been simmering since Russia’s 2014 annexation of Ukraine’s Crimean Peninsula.

Global war statistics reveal a diversity of conflicts, from Myanmar’s long-standing civil war to the ongoing drug war in Mexico, each with unique causes and consequences.

Myanmar’s civil war stems from the military’s 2021 coup, overthrowing a democratically elected government and triggering widespread armed resistance by pro-democracy forces and ethnic groups against the ruling junta, building on decades of ethnic conflict and military dominance over civilian rule. The core reasons are the military’s desire to retain power, suppression of democratic movements, and long-standing ethnic grievances, all exacerbated by the military’s violent crackdown on peaceful protests after the coup.

The Mexican drug war is an ongoing lopsided armed conflict between the Mexican government and various drug trafficking syndicates. When the Mexican military intervened in 2006, the government’s main objective was to reduce drug-related violence. This conflict has resulted in widespread violence, including mass killings and brutal tactics employed by the cartels, such as execution-style murders and the use of mass graves. The conflict known as the Mexican Drug War is still very much ongoing as an intense armed struggle between the Mexican government and powerful drug cartels, despite various government initiatives and claims of ending the “war,” with cartels like the Sinaloa Cartel remaining dominant players in the multi-billion-dollar drug trade, driving violence and instability.

The conflict between Israel and Palestine is a long-running, complex dispute over land and self-determination with historical roots stretching back over a century. It encompasses a series of wars, numerous military operations, and ongoing political conflict, most notably the current Israel-Hamas war in Gaza. The Palestinians seek to establish their own independent state in at least one part of historic Palestine. Israeli defence of its own borders, control over the West Bank, the Egyptian-Israeli blockade of the Gaza Strip, and Palestinian internal politics currently make the Palestinians’ goal out of reach. The Israeli–Palestinian conflict is an ongoing military and political conflict about land and self-determination within the territory of the former Mandatory Palestine.

Civilization Identity will be increasingly important in the future, and the world will be shaped in large measure by the interactions among seven or eight major civilizations. These include Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African civilization.

The Soviet-Afghan war and the First Gulf War as the emergence of civilization wars. Huntington interprets the Afghan War as a civilization war because it was the first successful resistance to a foreign power, which boosted the self-confidence, and power of many fighters in the Islamic world says American political scientist Samuel Huntington.

Cold Wars are increasingly appearing at these civilizational divisions. Wars such as those following the breakup of Yugoslavia, in Chechnya, and between India and Pakistan were cited as evidence of inter-civilizational conflict.

Impact of clash of civilization on business

According to a study by the Harvard Business Review, a staggering 70% of international ventures fail due to cultural differences. This alarming statistic underscores the critical need for mastering cross-cultural communication. Because human societies are complex systems, some common factors that may contribute to their decline are economic, environmental, demographic, social and cultural. These factors may cascade into another and build up to the point that could overwhelm any mechanisms that would otherwise maintain stability.

Culture clash in the workplace refers to the conflict that arises when different employee backgrounds, beliefs, and behaviours collide. This can manifest in various ways, including: miscommunication, diverse communication styles can lead to misunderstandings and frustration. Also, cultural clashes disrupt businesses.

Increased Trade Costs and Reduced Flows

Cultural differences act as a significant, and in the post-Cold War era, potentially increasing barrier to international trade. Countries belonging to different civilizations tend to trade less with each other. This is due to higher transaction costs, a lack of trust, and differing business norms which complicate negotiations and collaboration.

Foreign Direct Investment (FDI) Risks

Businesses investing overseas face “cultural risks” in regions with vastly different languages, religious beliefs, legal origins, and values. These risks can lead to potential operational challenges, social tensions, and the need for significant adaptation to local cultural norms, which can be costly and difficult to manage.

Geopolitical Conflict and Instability

The theory posits that conflicts will primarily occur along “fault lines” between civilizations. This increases the risk of regional instability, proxy conflicts, and “tit-for-tat” sanctions (e.g., in trade and finance) which can disrupt global supply chains, catch businesses in the middle of political disputes, and increase compliance costs.

Challenges in Mergers and International Operations

Within organizations, a clash of corporate cultures, often exacerbated by different national or regional operating styles, can lead to communication breakdowns, demotivation, resistance to change, and a lack of cohesion in teams. This makes successfully integrating acquired companies or managing diverse global operations a major challenge.

Reinforced Economic Regionalism

The theory suggests that successful economic regionalism often succeeds only when it is rooted in a common civilization. This trend toward stronger intra-regional trade blocs (e.g., in Europe, East Asia, North America) could lead to the marginalization of businesses from outside those blocs, making cross-regional expansion more difficult.

Weaponization of Trade and Finance

The intensification of civilizational competition can lead to the “weaponization” of economic tools, such as trade tariffs, sanctions, and restrictions on technology transfers, in “nationally sensitive” domains for example,  semiconductors, clean energy. This environment of economic warfare forces businesses to navigate a complex, fragmented international system.

Some negative facts about synergy are that many of the attempts to synergise never get beyond a few obligatory meetings. Others generate a quick burst of activities and then slowly fade out. Others become permanent corporate fixtures without ever fulfilling their original goals. In short, the attempts are termed as ‘learning experience’ to coax the failures.  The quest of synergy often represents a major opportunity cost as well. It distracts managers’ attention from the nuts and bolts of their businesses, and it gushes out other initiatives that might or might not generate real benefits. At times, the synergy programs actually backfire, eroding good relations with customers and marketing channels damaging brands, or damaging employee morale. A simple fact is, many synergy efforts end up destroying value rather than creating it. Synergy is sought in all functional areas by businesses.

What does Operating Synergy mean?

When the combined value of two firms is greater than the sum of the separate firms apart and, when the combined firm allows for the firms to increase their operating income and achieve higher growth it is termed as ‘’Operating synergy’.’ Operating synergies arise from the following:

Economies of scale, greater pricing power and higher margins resulting from greater market share and lower competition, combination of different functional strengths such as marketing skills and good product line, or higher levels of growth from new and expanded markets.

Operating synergies are achieved through merger, acquisition or takeovers of firms which have competencies in different areas such as production, research and development or marketing and finance can also help achieve operating efficiencies. Tata Steel which is one of the biggest Indian steel companies; it took over Corus which was Europe’s second largest steel company in 2007. Tata Steel’s takeover of the European steel major Corus for the price of $12.02 billion made the Indian company, the world’s fifth-largest steel producer. The acquisition was intended to give Tata steel access to the European markets and to achieve potential synergies in the areas of manufacturing, procurement, R&D, logistics, and back office operations.

What does Financial Synergy mean?

Financial synergies are most often appraised in the context of mergers and acquisitions, but latest strategic alliances include strategic partnerships. These types of synergies relate to improvement in the financial metric of a combined business such as revenue, debt capacity, cost of capital, profitability, etc. Examples of positive financial synergies include: Increased revenues through a larger customer base, lower costs through streamlined operations, talent and technology harmonies.

In addition to above, financial synergies can result in the following benefits post acquisition: Increased debt capacity, greater cash flows, lower cost of capital, tax benefits etc. The Renault-Nissan (Franco – Japanese) strategic partnership or car making alliance expects to generate 5.5 billion euros ($6 billion) of synergies in 2018 by integrating more divisions and sharing resources better within the partnership. Increased union between the French carmaker and its 43.4 percent-owned Japanese partner generated more than 4 billion euros in synergies in 2015.

The two companies go together to benefit from cost cutting.  As of December 2016, the Alliance is the world’s leading plug-in-electric vehicle manufacturer, with global sales since 2010 of almost 425,000 pure electric vehicles, including those manufactured by Mitsubishi Motors which is also now part of the Alliance. The strategic alliance partnership between Renault and Nissan is not a merger or an acquisition. The two companies are joined together through a cross-sharing agreement. The structure was unique in the auto industry during the 1990s consolidation trend and later served as a model for General Motors and PSA Peugeot Citroen.

What is Marketing synergy

Marketing synergy implies that the marketing-mix makes for overall effectiveness. For example, by grabbing an opportunity which makes it possible to gain increased utilisation of existing marketing and distribution facilities, it may be possible to enhance sales revenues without causing a proportionate increase in costs. Hero Honda Ltd was a joint venture between Hero Cycles of India and Honda Motor of Japan. Hero Cycle’s long experience about Indian road conditions including Indian rural and urban customers was wholly combined with Honda Motor’s superior technological capability to create the expected  synergy effect for producing a highly fuel efficient and sturdy motor cycle to suit the exact requirements of the Indian customers and meet the rough road conditions as early as 1985. The partnership lasted for 26 years.

What is Synergy Bias

The quest of synergy often distracts managers’ attention from the nuts and bolts of their businesses. It has been observed that most corporate executives, whether they have any special insight into synergy opportunities or not, feel they ought to be creating synergy. The achievement of synergy among their businesses is vividly linked to their sense of their work and worth. In large business groups, the synergy bias reflects executives’ need to justify the existence of their corporation, particularly to investors. Perhaps primarily, it reflects executives’ real fear that they would be left without a role if they are not able to promote coordination, standardization, and other links among the various businesses they control.

The synergy bias becomes an obsession for some executives. Desperately seeking synergy, they make unwise decisions and investments. It’s been observed that when companies with surplus human resources in terms of skilled managers and staff can best be utilized only if they have problems to solve. When organizations start utilising their senior managers and skilled staff for focusing on synergy, they tend to lose focus due to failure to devise a concrete plan with suitable involvement and control, and lack of establishing necessary integration processes. Ebay purchased Skype for USD 2.6 billion, later to be sold at just USD 1.9 billion after four years, was a failure due to challenges in technical integration and over-expectations from customers. Ebay expected synergy coming from Skype being established as the communication medium between buyers and sellers on its marketplace platform, which unfortunately did not become popular among its market participants. Avoiding such failures is possible which requires a whole new way of looking at and thinking about synergy.

]]> https://drvidyahattangadi.com/what-is-the-meaning-of-synergy-in-business/feed/ 0 https://drvidyahattangadi.com/trouble-free-brand-integration-is-a-must-in-ma/ https://drvidyahattangadi.com/trouble-free-brand-integration-is-a-must-in-ma/#respond Mon, 10 Aug 2015 00:29:12 +0000 http://drvidyahattangadi.com/?p=2635 Trouble-free Brand Integration Is a Must in M&A

Mergers and acquisitions is common practice in the business world. It allows corporate ambitions to soar. M & A makes its effects in the areas of corporate finances, management and strategy dealing, human resources, marketing, sales, R&D and infrastructure of the firm. In short everything changes in the corporate entity when it gets purchased by another corporate or it joins with another corporate.

Though the two are often mentioned together, a merger is very different from an acquisition. A merger involves two corporate entities joining forces and becoming a new business entity, with a new name. It usually involves two companies of same size and stature joining hands. An acquisition, on the other hand, involves one bigger business taking over a smaller company which may be absorbed into the parent company or run as a subsidiary. The company being taken over is referred to as the ‘target company’ in the corporate world.

In India the huge and most talked about takeover or acquisition last year was seen of the seven year old Bangalore based domestic e-retailer Flipkart acquiring the online portal Myntra for an undisclosed amount which industry analysts and insiders believe it was a $300 million or Rs 2,000 crore deal.

Another one was Sun Pharmaceutical Industries Limited, a multinational pharmaceutical company bought the Ranbaxy Laboratories. Ranbaxy shareholders will get 4 shares of Sun Pharma for every 5 Ranbaxy shares held by them. The deal is worth $4 billion.

Globally, the pharmaceutical industry saw a flurry of mergers and acquisitions this year, but the biggest one was of Novartis AG (NVS) and GlaxoSmithKline (GSK) which agreed to swap $20 billion in assets in what amounted to major restructurings for both firms. Novartis bought GlaxoSmithKline’s cancer drug business, GSK took Novartis’s vaccine business, and the companies agreed to combine their respective over-the-counter and consumer drug businesses.

Facebook Inc purchased WhatsApp which saw the largest-ever purchase of a venture FB purchased whatsApp for $22 billion; $16 billion-price given at the announcement of the deal. So why did FB take this expensive plunge? As it touted at the time, WhatsApp — a free text message service — is about twice as large by user base as Twitter Inc. The M&As can happen for various reasons. Goldman Sachs was the top M&A adviser worldwide, with $623 billion worth of deals last year.

What’s considered most important in M&A is the post-M&A result which can be very exhaustive than imagination. Organisations must control effective and efficient management of merging corporate brands and their respective portfolios. Particularly for those that have an international standing. The management and building of each brand in the combined portfolio needs to be consistent around the world and needs to match its acknowledged role, the consistency needs to be maintained in every market. Still, since consumer behaviour may vary from market to market, the strategic position established for each brand in the mixed portfolio can only offer some general guidelines as no sure short solutions are available or can be offered for a successful venture raised out of the M&A.

Brand integration is priority after an M&A
The global positioning of a merged brand is quite complicated and exhaustive. Each market requires unique strategies. For sensible brand integration organizing human resources is very important. The efficacy of the merging brands and its success depends on how in fact the human resources are organised. Ford established a “Premier Automotive Group” (PAG) to be in charge of its premium brands right after the acquisition of Jaguar. Furthermore, when the company acquired Land Rover and Volvo (also premium brands), the PAG took the responsibility of brand integration.

Being equally fair to people is most important
Treating the employees with respect and fair financial benefits serves half of the problem. Given the fact that M&As often take place at corporate level, the issues regarding human resource including the necessary laying offs should be addressed first right after the announcement of the deal. These issues should be tackled rightly by taking assistance of the mature consultants or firms. The incorporation of human resources becomes an essential issue, one common response from the managers in the case studies being that groups of people embedded within particular cultures are difficult to integrate. In relation to brand integration, three important rules could be outlined from many case studies: the best people must be selected equally from both sides; people must be integrated rapidly and with sensitively; and in that order, respect and fair financial benefits must be ensured to all.

Training is crucial at this juncture
A brand acquisition comes along with its brand people, its marketing, its brand building methods, its brand ‘languages’ or terminologies and others. An essential part of brand integration consists in homogenizing all of the above – making people do brand building in a common way and speak a similar marketing or brand ‘language.’ This is a process which training can be an extremely useful tool. It’s easy for people in an organization to get caught up in the glamour of integrating two organizations. For the moment, that’s where the action is. The future shape of the company, including jobs and careers, appears to be in the hands of the integration taskforces. But if management allows itself and the organization to get distracted, the base business of both companies will suffer. If everybody’s trying to manage both the ongoing business and the integration, nobody will do either job well. This is where assigning responsibilities come in picture.

Marketing Management
Putting the customer at the centre of planning and analysis is most crucial. This begins by understanding customer profitability by segment and targeting identified markets. It requires a comprehensive evaluation of how well each brand in the portfolio compares to its key competitors in meeting the needs and preferences of these customers. A merger poses a unique opportunity to think about customers in a broader and more integrated fashion. Combining and analyzing both companies’ knowledge of their respective customer bases will provide a broader view of customer behaviour. This information can be amplified by new qualitative and quantitative research to understand category drivers and competitive positioning. Marketing research plays a very vital role here.  By developing a more comprehensive and integrated understanding of such issues as current and emerging marketplace dynamics, customer preference drivers and perceptions of brand equity, marketers can more effectively make decisions on how to structure and manage the merged brand portfolio. Optimize the brand portfolio.

The post-M&A organisation needs to conduct new market research in order to identify opportunities for the newly acquired brands and, moreover, to absorb and use the brand and market knowledge possessed by the acquired company.

In 1998, Mercedes-Benz manufacturer Daimler Benz merged with US auto maker Chrysler to create Daimler Chrysler for $ 37 billion. The merging was done for capturing the globe and to dominate the market. Things dint work out very smoothly after the merger. In 2007, Daimler Benz sold Chrysler to Cerberus Capital Management firm (a specialized financial restructuring firm) for mere $ 7 billion. Chrysler was nowhere near Daimler Benz. What did Daimler Benz try to tell world? What lessons are to be learnt for this merger and later corporate divorce?

Many research studies have proved that rate of failures is 50 percent in M&As. One recent survey has also proved that the percentage of companies that failed to achieve the goals of the merger is 83%.  Once you have achieved integration, take the time to review the process. Evaluate how well it works and what you would do next to integrate each brand.