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Shared Activities Core Competencies Internal Capital Allocation Risk Reduction Tax Advantages Multiple Competition Exploiting Market Power Maximizing Management Compensation
FINANCIAL :
ANTI COMPETITIVE :
Technology Development
A, B, C
Product Design Product Design
A, B
Manufacturing
C
Manufacturing
A, B
Marketing
A, B, C
Distribution Distribution
A
Service
B, C A, B, C
c)
CORE COMPETENCIES
RESOURCES AND CAPABILITIES ENABLING TO OPERATE SUCCESSFULLY IN SEVERAL BUSINESSES.
CAPITAL ALLOCATION
EXTERNAL MARKET : INDEPENDENT ENTITIES HIGH RETURN, HIGH CASH FLOW INTERNAL MARKET : DIVERSIFIED FIRM COMPETE FOR CORPORATE CAPITAL
INTERNAL MARKET MUST OFFER EFFICIENCY ADVANTAGES OVER EXTERNAL MARKET DUE TO INFORMATION ACCESS
QA :
Why do you think, a diversified firm do not always gain cost of capital advantage being part of a diversified firms portfolio ? (Lower overall risk vs performance and prospects)
RISK REDUCTION
Diversified Businesses Stable Returns / Cash Flow overtime ?
TAX ADVANTAGES
Use losses in some of the businesses to offset profits in others (reduce overall tax liability) Reduce the capacity) risk of bankruptcy (debt
MARKET POWER
MARKET POWER IN ONE BUSINESS CAN SUBSIDIZE OPERATIONS OF ANOTHER OF ITS BUSINESSES PREDATORY PRICING / DEEP POCKETS MODEL FIRM SIZE INCENTIVE TO DIVERSIFY SALES BUT COMPENSATION IS NOW MORE AND MORE TIED TO ECONOMIC PERFORMANCE ( USE STOCKS AND OTHER FORMS OF DEFERRED COMPENSATION )
TYPE OF ECONOMIES OF SCOPE 1. OPERATIONAL ECONOMIES OF SCOPE - Shared Activities - Core Competencies 2. FINANCIAL ECONOMIES OF SCOPE
POSSIBLE POSSIBLE
NO NO
POSSIBLE POSSIBLE
NO YES NO
POSSIBLE POSSIBLE
NO NO
POSSIBLE POSSIBLE
NO
NO
NO
RARITY
CORPORATE DIVERSIFICATION IS NOT A RARE STRATEGY
IMITABILITY
LESS COSTLY TO DUPLICATE ECONOMIES OF SCOPE COSTLY TO DUPLICATE ECONOMIES OF SCOPE
SHARED ACTIVITIES
RISK REDUCTION TAX ADVANTAGES EMPLOYEE COMPENSATION
CORE COMPETENCE
INTERNAL CAPITAL ALLOCATION MULTIPOINT COMPETITION EXPLOITING MARKET POWER