Anticompetitive economies of scope (Market Power) • multipoint competition • exploiting market power Employee Incentives (Growth Motive) • diversifying employees’ risk and improving promotion chances • maximizing management compensation • Avoid declining industries
Diversification 9 (1) Sharing Linkages Between Businesses (2) Sharing Core Competence Bus. A Bus. B Bus. C Bus. D Bus. A Bus. B Bus. C Bus. D Core Competence Corporate Advantages from Diversification Corporate Advantages from Diversification
Diversification 10 Corporate Advantages from Diversification Corporate Advantages from Diversification • Market Power • Umbrella branding • Bundling • Cross promotion • Willingness to Pay • Economies of Scope • Shared costs across businesses • Shared activities • Shared resources • Economies of Internalizing Transactions • Internal Market System • Information Advantages • Superior internal resources/transfer mechanisms • Cross business learning/knowledge • Size based political influence
Diversification 11 Economies of scope -- cost reduction from achieving minimum scale in an input factor, derived from producing multiple products * tangible assets, e.g., distribution and service networks, R&D * intangible assets, e.g., brand names, corporate reputations, technology Scope Advantages from Diversification Scope Advantages from Diversification * organizational capabilities, e.g., management capabilities, marketing skills
Diversification 12 Scale Advantages from Diversification Scale Advantages from Diversification Economies of Scale in Administration, Financing and Control = cost advantages from reaching minimum efficient scale in administrative and control activities by centralizing similar activities at the corporate HQ, and by operating an internal capital market * Administration, e.g. centralized strategic planning, centralized legal functions, etc.
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- internal capital market