Management Buzzwords Explained: System and Synergy

The word "synergy" has found an odd home in the management lexicon. When most people use it, they do so ill-informed and at their own peril. If I explain this well, new and/or young managers may avoid looking like rookies who are trying a little too hard.

The word synergy has its origin in systems theory, i.e., in basic science, not management science. But since systems are all around us, this and associated terms like synergy have become widely diffused, diluted and almost destroyed in the process.

There are many definitions of the word system, but I'll pick one that suits present purposes. A system is a group of interdependent parts (or subsystems) all working together towards the accomplishment of a common goal (or set of goals.) Many things common to our experience fit: sewer system, management information system, digestive system, air conditioning system, public school system, dewey decimal system, penal system ... I think you get the point. Let's break the definition down and also look at a few of the other features of a system before we get to the synergy thing. I'll apply systems theory to organizational dynamics, since that is the context of this essay.

First, systems have parts, which sometimes are themselves subsystems. Conversely, often a system is a part of a larger system. A penal system is part of the judicial system, and so on. It's all a matter of one's beginning point of view.

Second, the parts are interdependent. The output of one part is an input to another. A change in any particular subsystem has the potential to change them all, to include the entire system. A change to a school system can affect the entire community it serves.

Third, systems exhibit "equifinality." This simply means that "there is more than one way to skin a cat." A system can accomplish its overall purpose through more than one manner of subsystem interactions. A marketing strategy could increase overall profits if prices were raised or lowered, depending on the overall organizational strategy.

Fourth, each system has a boundary. At least theoretically, what is part of the system cannot be part of the system's external environment, and vice versa. The people you work with are part of the system. If they quit, they would cease that, but they still may be customers, suppliers, or just innocent bystanders breathing your toxic waste.

Fifth, a system cannot exist completely self-contained, or not for long anyway. A system must consume resources taken from its external environment, in order to function and produce its outputs. Somebody external to the firm has to invest money in order to sustain it, or consumers must pay prices that more than cover the costs of running the system. Note that money is only a "proxy" for the resources that are really consumed.

Sixth, or perhaps corollary to the fifth, no system is perfectly efficient. No system can transform every bit of resource and turn it into useful output. In every system, resources are wasted. Surely, some of your organization's product is scrap and can't be sold.

Finally, every system is potentially "synergistic." Synergy occurs when the overall output of a system is greater than the sum of the outputs of the individual parts/subsystems. It has been captured by the simplistic expression 2+2=5, but the first breakdown is that people believe this literally, not metaphorically. Ostensibly, when one subsystem that has the capacity to produce 2 units of output, is combined with another, and the overall system output is 5 and not 4, the extra 1 is said to be a synergistic effect.

Now, does your organization actually produce an excess of final inventory that can only be explained by such magic? Of course not. So why do managers use the term? It's because they don't understand some simple economics, and resort to what I'll call "industrial mysticism" instead.

Now, systems theory has become one of the most popular frameworks for describing and understanding organizations. One can easily discern systems thinking in other business terms such as value-added, the stakeholder concept, financial theory, and operations management in its vast entirety. The problem is that managers have developed a mis-informed love affair with the word synergy that does more harm than good. Synergy says that there is such thing as a free lunch, and we all know better than that.

There is such a thing as synergy, but in business, the term is usually just used incorrectly and unwittingly as an abstract synonym for any of several terms for improvements to system efficiency (defined above.) Efficiency means improved capacity utilization, elimination of redundancies (especially redundant overhead,) creating economies of scale, combining economies of scope, and well-understood business improvements like that. Efficiency doesn't mean 2+2=5, it means saving the waste in that equation so that 1.9 + 1.9 = 4, if we insist on using mathematical metaphors. But I'm suggesting that you don't use metaphors. Learn the economics of what you're doing, and develop the communication skills to explain them to people without resorting to using words like synergy. It will mean a great difference in your credibility.

What aggravates me the most is how managers at executive levels are the most guilty of sounding like total dopes. It especially happens when they try to explain the logic behind mergers, acquisitions, joint ventures, and alliances. The record in these strategic moves is generally awful. In the assumption that synergies will be found as easily as saying 2+2=5, enormous amounts of shareholder wealth have been squandered in what is little more than a renewed search for the Holy Grail of synergy. And I'm alluding to Monty Python, not Steven Spielberg. All that's missing are the cocoanuts.