FREE online courses on Corporate Strategies - Related Diversification

 

 

Companies' implements related diversification strategies in order to achieve and exploit economies of scope and build a competitive advantage by building on existing resources, capabilities, and core competencies. For companies that operate in multiple industries or product markets, economies of scope represent cost savings attributed to entering an additional business using capabilities and core competencies developed in another business that can be transferred to a new business without significant additional costs. In other words, companies that successfully transfer core competencies from one business to another without incurring significant additional costs will realize economies of scope.

 

The two primary operations-related economies through which companies can create value (from economies of scope) are by sharing activities or sharing core competencies. The difference between activity sharing and core competence sharing is based on how different resources are used jointly to create economies of scope. Tangible or physical resources, such as facilities and equipment, may be shared to achieve economies of scope. Intangible resources, such as manufacturing know-how, can be shared to achieve scope economies. A key to creating value through sharing that are essentially separate activities is to share know-how or skills rather than physical or tangible resources.

 

Table 5.6 Value-creating Strategies of Diversification

 

Companies seek to create value from economies of scope through two basic kinds of operational economies: sharing activities and transferring skills (corporate core competencies).  However, the levels of the two of these will lead to different corporate strategies with different advantages associated with each.