What it is:
Synergy is the benefit that results when two or more agents work together to achieve something either one couldn't have achieved on its own. It's the concept of the whole being greater than the sum of its parts.
How it works/Example:
Synergy is often one of the goals of a merger or acquisition. The two firms combined may be able to achieve higher profitability than either firm could achieve on its own. Synergy can be reflected in increased revenues and/or lower expenses.
For example, a company may acquire a similar firm, allowing it to expand its product offering and, as a result, increase its sales and revenues. This could not have been accomplished had the two firms remained independant.
In management, synergies may be created between management teams, resulting in increased capacity and workflow that was not possible when the teams were working independently.
As for costs, synergies allow for the creation of economies of scale. For example, a merger can reduce multiple levels of management and duplication and spread fixed cost technologies over larger operations.
Why it matters:
Synergies may be elusive, but they are one of the most important objectives in business. To acquire synergy will result in more efficiency, more efficacy and higher profitability.