4.
Improved linkages with other stages of production can also result from large size. Better
links with suppliers may be attained through large orders, which may produce lower
costs (quantity discounts), improved delivery, or custom-made products that would be
unaffordable for smaller operations. Links with distribution channels may lower costs by
better location of warehouses, more efficient advertising, and shipping efficiencies. The
size of the organization relative to its customers or suppliers influences its bargaining
power and its ability to influence price and services provided.
5.
Sharing of information between units of a large firm allows knowledge gained in one
business unit to be applied to problems being experienced in another unit. Especially for
companies relying heavily on technology, the reduction of R&D costs and the time
needed to develop new technology may give larger firms an advantage over smaller,
more specialized firms. The more similar the activities are among units, the easier the
transfer of information becomes.
6.
Taking advantage of geographic differences is possible for large firms. Especially for
multinational firms, differences in wage rates, taxes, energy costs, shipping and freight
charges, and trade restrictions influence the costs of business. A large firm can
sometimes lower its cost of business by placing multiple plants in locations providing the
lowest cost. Smaller firms with only one location must operate within the strengths and
weaknesses of its single location.
CONCENTRIC DIVERSIFICATION
Concentric diversification occurs when a firm adds related products or markets. The
goal of such diversification is to achieve strategic fit. Strategic fit allows an organization
to achieve
synergy
. In essence, synergy is the ability of two or more parts of an
organization to achieve greater total effectiveness together than would be experienced if
the efforts of the independent parts were summed. Synergy may be achieved by
combining firms with complementary marketing, financial, operating, or management
efforts. Breweries have been able to achieve marketing synergy through national
advertising and distribution. By combining a number of
regional breweries
into a national
network, beer producers have been able to produce and sell more beer than had
independent regional breweries.
Financial synergy may be obtained by combining a firm with strong financial resources
but limited growth opportunities with a company having great market potential but weak
financial resources. For example, debt-ridden companies may seek to acquire firms that
are relatively debt-free to increase the lever-aged firm's borrowing capacity. Similarly,
firms sometimes attempt to stabilize earnings by diversifying into businesses with
different seasonal or cyclical sales patterns.
