FREE online courses on Corporate Strategies - Related Diversification - Operational Relatedness

 

Because all of its businesses share product, technological, and distribution linkages, activity sharing is common among related-constrained diversified companies, such as Proctor & Gamble. P&G's paper towel, napkin, and disposable diaper businesses can share a number of activities because of their common characteristics. Each business uses paper products as a key input, so they are likely to share key facets of procurement and inbound logistics, as well as primary manufacturing activities. Because all three businesses produce consumer products that are sold in similar (if not the same) outlets, they will likely share outbound logistics, distribution channels, and possibly sales forces.

 

Recall from our discussion of the primary and support activities in a company's value chain in Chapter 3 that primary activities (such as inbound logistics, outbound logistics, and operations) might have several shared activities. Companies that are able to develop core competencies through effective (and efficient) sharing of primary activities will achieve a competitive advantage.  Examples of activity sharing may include:

Inbound logistics: inventory delivery systems, warehouse facilities, quality assurance practices

Operations: assembly facilities, quality control systems, maintenance operations

Outbound logistics: sales force and service management

Support activities: procurement, technology development

 

Companies also must recognize that, while activity sharing is intended to reduce costs through achieving economies of scope, there are incremental costs related to sharing activities (costs that are created by sharing).  These costs must be recognized and taken into account when planning activity sharing or economies of scope may not be realized.

 

When activities are shared across business units, the business units must carefully coordinate their activities to achieve effective and efficient sharing.  Thus, any costs that are specifically related to coordination must be balanced by economies of scope.

 

Business unit managers may be forced to compromise individual business-unit strategies to accommodate activity sharing, which implies that managers may have to share business-unit strategic control.  Compromising business-unit strategic control may be problematic.  For example, if one business-unit manager feels that another business unit receives an unequal advantage from sharing (such as higher quality inputs or more efficient production compared to what was available before activity sharing), conflict might result.

 

Activity sharing also can result in new risks if the closer linkages between business units create tighter interrelationships and/or interdependencies. For example, if two business units share production facilities and sales in one unit's products decline to the point that revenues no longer cover the costs of shared production, then each business unit's ability to achieve strategic competitiveness may be adversely affected.

 

Regardless of the risks that accompany activity sharing, research indicates that activity sharing--or the potential for activity sharing--can increase the value of the company.  It also indicates that acquiring companies in the same industry--a horizontal acquisition--where sharing of activities and resources is implemented results in improved performance and higher returns to shareholders. Selling off units where resource sharing is a possible source of economies of scope results in lower returns to shareholders than does selling off business units that are unrelated to the company's core business. Companies with more related units have less risk.