Strategic Management Chpt 7 (Final)
Discuss when a firm is implementing a corporate diversification strategy and differentiate between a product diversification strategy, a geographic market diversification strategy and a product-market diversification strategy.
A firm is implementing a corporate diversification strategy when it operates in multiple industries or markets simultaneously. A firm is said to be implementing a product diversification strategy when it operates in multiple industries simultaneously. A firm is said to be pursuing a geographic market diversification strategy when it operates in multiple geographic markets simultaneously. When a firm implements both a product diversification strategy and a geographic market diversification strategy simultaneously, it is said to be implementing a product-market diversification strategy.
Limits of activity sharing include:
A substantial organizational issues that are often associated with a diversified firm's learning how to manage cross-business relationships and in which failure can lead to excess bureaucracy, inefficiency, and organizational gridlock.
If no other firm in the computer industry were using a diversification strategy similar to Peach Computers', this diversification strategy could be said to be A) rare and costly to duplicate. B) rare and less costly to duplicate. C) common but costly to duplicate. D) common and less costly to duplicate.
A) rare and costly to duplicate.
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. Which type of economies of scope is Peach Computers experiencing between its units? A) shared activities B) core competencies C) multipoint competition D) tax advantages
A) shared activities
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. One of the limits of the economies of scope that Peach Computers is leveraging in its diversification strategy is A) they may limit the ability of a particular business to meet specific customers' needs. B) they are significantly affected by the way a diversified firm is organized. C) they are not tangible and may be reflected only in the shared knowledge, experience and wisdom across businesses. D) the level and type of diversification that a firm pursues can affect the efficiency of this allocation process.
A) they may limit the ability of a particular business to meet specific customers' needs.
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. By 2003, Peach Computers' diversification strategy was best characterized as A) unrelated diversification. B) related-constrained diversification. C) related-linked diversification. D) dominant-business diversification.
B) related-constrained diversification.
Peach Computers' equity holders, its employees, suppliers and customers along with all of those groups and individuals who have an interest in how Peach Computers performs are referred to as A) focal groups. B) stakeholders. C) supporters. D) stockholders.
B) stakeholders.
Explain how strategic alliances are a substitute for exploiting economies of scope in diversification.
By using a strategic alliance, a firm may be able to gain the economies of scope it could have obtained if it had carefully exploited economies of scope across its businesses. For example, instead of a firm exploiting research and development economies between two businesses it owns, it could form a strategic alliance with a different firm and form a joint R&D lab.
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. If, when Peach Computers introduced its PeachPit in 2001, the company used its profits in the computer industry to subsidize its operations in the electronics industry and used this subsidy to sell the PeachPit for a price that was less than the cost of producing and selling the MP3 players, this would be an example of A) mutual forbearance. B) escalation of commitment. C) predatory pricing. D) multipoint competition.
C) predatory pricing.
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. In 2001, Peach Computers' diversification strategy was best characterized as A) related-linked diversification. B) dominant-business diversification. C) single-business diversification. D) related-constrained diversification.
C) single-business diversification.
In 2001, if Peach Computers did not want to employ a diversification strategy to enter the personal electronics industry, it could use which substitute for diversification? A) backward vertical integration B) product differentiation C) strategic alliances D) forward vertical integration
C) strategic alliances
Which of the following economies of scope is costly-to-duplicate?
Core competencies
_____are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial technical know-how, experience and wisdom.
Core competencies
A firm implements a _____ when it operates in multiple industries or markets simultaneously.
Corporate diversification strategy
At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues. If one of the reasons that Peach Computers entered into the electronics industry was to offset weakness in the computer industry because when the computer industry was weak, the electronics industry was strong, and vice versa, Peach Computers would be pursuing which economy of scope? A) core competencies B) multipoint competition C) tax advantages D) risk reduction
D) risk reduction
If Peach Computers were looking to getting into the business of making telephones, its diversification would be called A) related-linked. B) related-constrained. C) related-corporate. D) unrelated.
D) unrelated.
Which of the following economies of scope do not have the potential for generating positive returns for a firm;s equity holders since the economies of scope can be realized by outside equity holders at a low cost by investing in a diversified portfolio of stock?
Diversification to maximize the size of a firm
A common way of thinking about strategy across different businesses within a firm is known as the firm's
Dominant logic
Firms pursuing ____ have between 70-95% of their sales in a single product market
Dominant-business diversification
When the value of the products or services a firm sells increases as a function of the number of businesses that the firm operates in, ___ are said to exist
Economies of scope
Define the concept of economies of scope, discuss when they are valuable and identify and differentiate between four of the eight potential economies of scope a diversified firm might try to exploit.
Economies of scope exist in a firm when the value of the products or services it sells increases as a function of the number of businesses that firm operates in. The term "scope" in this definition refers to the range of businesses in which a diversified firm operates. For this reason, only diversified firms can, by definition, exploit economies of scope. Economies of scope are valuable to the extent that they increase a firm's revenues or decrease its costs, compared to what would be the case if these economies of scope were not exploited. There are eight different types of economies of scope: • Shared activities in which a firm's businesses share a variety of activities throughout their value chains can serve as the basis for operational economies of scope. • Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom. • Internal capital allocation. In a sense, diversification creates an internal capital market in which businesses in a diversified firm compete for corporate capital. An internal capital market creates value for a diversified firm when it offers some efficiency advantages over an external capital market. • Risk reduction. Diversified firms can achieve a lower level of risk if they build a business portfolio that has a low correlation between the cash flows of the businesses in the portfolio. • Tax advantages. A diversified firm can use losses in some of its businesses to offset profits in others, thereby reducing its overall tax liability. Second, because diversification can reduce the riskiness of a firm's cash flows, it can also reduce the probability that a firm will declare bankruptcy. This can increase a firm's debt capacity, which is particularly important in tax environments where interest payments on debt are tax deductible. • Multipoint competition is an anticompetitive economy of scope that exists when two or more diversified firms simultaneously compete in multiple markets. Multipoint competition can serve to facilitate a particular type of tacit collusion called mutual forbearance in which firms forgo acts of competitive strategies in one business because of the possibility of retaliation by a competitor in another business. • Exploiting market power. Internal allocations of capital among a diversified firm's businesses may enable it to exploit in some of its businesses the market power advantages it enjoys in other of its businesses through actions such as subsidizing the operations of another of its businesses. • Maximizing management compensation. Managers seeking to maximize their income should attempt to grow their firm. One of the easiest ways to grow a firm is through diversification, especially unrelated diversification through mergers and acquisitions that can allow a diversified firm to grow substantially in a short period of time, leading senior managers to earn higher incomes.
Which of the following economies of scope is less costly to duplicate?
Employee compensation
A dominant business firm is pursuing a related diversification strategy and has between 70-95% of firm revenues from a single business (T/F)
False
A firm that diversifies by exploiting its resources and capabilities advantages in its original business will have higher costs than firms that begin new businesses without these revenues and capability advantages or lower revenue than firms lacking these advantages or both. (T/F)
False
Currently, most scholars believe that when a firm implements a corporate diversification strategy it destroys about 25% of its market value (T/F)
False
Diversification per se (scale of economies?) is usually not a rare firm strategy regardless of how rare the particular economies of scope associated with that diversification are (T/F)
False
Employee compensation is an example of costly-to-duplicate economies of scope. (T/F)
False
Firms that may appear to be unrelated diversified firms, but that are, in fact, related diversified firms without any shared activities are referred to as seemingly related firms. (T/F)
False
In order for corporate diversification to be economically valuable there must either be some valuable economy of scope among the multiple businesses in which a firm is operating or it must be less costly for managers in a firm to realize these economies of scope than for an outside equity holder on his or her own (T/F)
False
Internal capital allocation is an example of less costly-to-duplicate economies of scope. (T/F)
False
Multipoint competition requires loose coordination between the different businesses in which a firm operates (T/F)
False
Over the last decade, more and more diversified firms have been abandoning efforts at manager each businesses' activities independently in favor of increased activity sharing (T/F)
False
Overall, related diversification is less likely to be consistent with the interests of a firm's equity holders than is unrelated diversification (T/F)
False
Predatory pricing is a type of cross-subsidization in which a firm uses revenues from other businesses to set its prices in a particular business so that the prices are substantially more than the subsidized business's costs (T/F)
False
Shared activities and risk reduction are usually difficult-to-duplicate bases for corporate diversification, but tax advantages and employee compensation are usually relatively easy to duplicate (T/F)
False
Shared activities can increase the expenses for a diversified firm's business (T/F)
False
Shared activities that can provide the basis for operational economies of scope are quite common among related-constrained and related-linked diversified firms, as well as firms following an unrelated diversification strategy (T/F)
False
Strategic alliances are generally viewed as a poor substitute for diversification since the economies of scope in diversification can be found in strategic alliances. (T/F)
False
The businesses within a diversified firm always gain cost-of-capital advantages by being part of a diversified firm's portfolio (T/F)
False
When a firm operates in multiple geographic markets simultaneously it is said to be implementing a product diversification strategy (T/F)
False
When a firm operates in multiple industries simultaneously it is said to be implementing a geographic market diversification strategy (T/F)
False
When less than 90% of a firm's revenue are generated in a single product market and when a firm's business share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification. (T/F)
False
When a firm operates in multiple geographic markets simultaneously it is said to be implementing a________
Geographic market diversification strategy
Substitutes for exploiting economies of scope in diversification include:
Growing and developing independent business within a diversified firm and strategic alliances.
Which of the following statements regarding the rarity of diversification is accurate?
If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare
Specify the two conditions that a corporate diversification strategy must meet in order to create economic value.
In order for corporate diversification to be economically valuable, two conditions must hold. First, there must be some valuable economy of scope among the multiple businesses in which a firm is operating. Second, it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own. If outside investors could realize the value of a particular economy of scope on their own, and at low cost, then they would have few incentives to "hire" managers to realize this economy of scope for them.
Currently, most scholars believe that exploiting economies of scope through corporate diversification on average:
Increased a firm's market values
Which of the following economies of scope is costly to duplicate?
Internal capital allocation
A firm has implemented a strategy of ____ when all or most of its activities fall within a single industry and geographic market
Limited corporate diversification
The analysis of firms pursuing a strategy of ___ is logically equivalent to the analysis of business-level strategies
Limited corporate diversification
Compared to two very risky businesses that have cash flow that are not highly correlated over time that are operating separately, the risk of a diversified firm operating in those same two businesses simultaneously is:
Lower
A firm that diversifies by exploiting its resources and capability advantages in its original business will have ___ costs than as firms that begin a new business without these resources and capability advantage, or _____ revenues than as firms lacking these advantages
Lower;Higher
In general, as a source of capital a diversified firm has ___ information about a business that it owns compared to external sources of capital
More and better
______ exists when two or more diversified firm simultaneously compete in multiple markets
Multipoint competition
Research over the years has demonstrated conclusively that the primary determinant of the compensation of top managers in a firm is:
Not the economic performance of the firm but the size of the firm, usually measured in sales
Which of the following statements regarding economies of scope is accurate?
Only diversified firms can exploit economies of scope.
Which type of economies of scope includes shared activities and core competencies?
Operational economies of scope
When diversified firms use the revenues from profitable businesses to subsidize the operation of another business and then set the prices of the subsidized firm's products at a level that is below the subsidized business's cost to produce these items, this is known as:
Predatory
When a firm simultaneously implements both a product diversification strategy and a geographic market diversification strategy it is said to be implementing a _____
Product-market diversification strategy
If all of a firm's business share the same core competencies, then the firm has implemented a strategy of ______diversification
Related-constrained
Firms such as PepsiCo that operate a number of business around the world that share a number of inputs, production technologies, or distribution channels but none of whose businesses account for more than 70% of a firm's revenues are said to be implementing a _____
Related-constrained diversification
Shared activities are quite common between both___and___ diversified firms.
Related-constrained; related-linked
Firms such as Disney that own and operate businesses that share a limited number of inputs, production technologies or distribution channels are said to be pursuing a ___ corporate diversification strategy.
Related-linked
The only economy of scope that an unrelated firm can try to realize is:
Risk reduction
Diversified firms that are exploiting core competencies as a economy of scope but are not doing so with any shared activities are sometimes called ____ diversified firms.
Seemingly unrelated
If a diversified firm has three businesses and these companies shared a common marketing and service operation, as well as common technology and development, this would be an example of which type of economy of scope?
Shared activities
In which type of limited corporate diversification do firms have a greater than 95% of their total sales in a single product market?
Single-business firms
________are substitutes for exploiting economies of scope in diversification
Strategic alliances
______is an examples of less costly-to-duplicate economies of scope.
Tax advantage
) Identify which economies of scope are more likely to be subject to low-cost imitation and which are less likely to be subject to low-cost imitation and discuss why each is either costly or less costly to duplicate.
The extent to which a valuable and rare corporate diversification strategy is immune from direct duplication depends on how costly it is for competing firms to realize this same economy of scope. Some economies of scope are, in general, more costly to duplicate than others. Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate. Because shared activities are based on tangible assets that a firm exploits across multiple businesses, such as common R&D labs, common sales forces, and common manufacturing, they are usually relatively easy to duplicate. The only duplication issues for shared activities concern developing the cooperative cross-business relationships that often facilitate the use of shared activities. Moreover, because risk reduction, tax advantages, and employee compensation motives for diversifying can be accomplished through both related and unrelated diversification, these motives for diversifying tend to be relatively easy to duplicate. On the other hand, other economies of scope are much more difficult to duplicate. These difficult-to-duplicate economies of scope include core competencies, internal capital allocation efficiencies, multipoint competition, and exploitation of market power. Because core competencies are more intangible, their direct duplication is often challenging. The realization of capital allocation economies of scope requires very substantial information-processing capabilities. These capabilities are often very difficult to develop. Multipoint competition requires very close coordination between the different businesses in which a firm operates. This kind of coordination is socially complex and thus may often be immune from direct duplication. Finally, exploitation of market power may be costly to duplicate because it requires that a firm must possess significant market power in one of its lines of business. A firm that does not have this market power advantage would have to obtain it. The cost of doing so, in most situations, would be prohibitive.
Identify and distinguish between the five different levels of diversification discussed in Chapter 7.
The five different levels of diversification that firms can pursue: Single-business firms - These firms operate in a single business and 95% or more of firm revenues come from this business. Dominant-business diversification - Firms using this type of limited diversification strategy operate in two or more businesses, one of which accounts for between 70% and 95% of firm revenues. Related-constrained diversification - A firm using this type of related diversification operates in multiple businesses, none of which accounts for more than 70% of firm revenues that share a significant number of dimensions including inputs, production technologies, distribution channels, similar customers, etc. This strategy is termed "constrained" because corporate managers pursue business opportunities in new markets or industries only if those markets or industries share numerous resource and capability requirements with the businesses the firm is currently pursuing. Related-linked diversification - Firms using this type of related diversification operate in multiple businesses, none of which accounts for more than 70% of a firm's revenues, and these businesses share only a couple of dimensions or have businesses that are linked along very different dimensions. Unrelated corporate diversification - When less than 70 percent of a firm's revenues is generated in a single product market and when a firm's businesses share few, if any, common attributes, then that firm is pursuing a strategy of unrelated corporate diversification.
Identify and discuss the two economies of scope that do not have the potential for generating positive returns for a firm's outside equity investors.
The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm and diversification to reduce risk. Diversification in order to maximize the size of a firm does not generate positive returns because firm size, per se, is not valuable. Diversification in order to reduce risk does not generate positive returns because equity holders can do this on their own at a very low cost by simply investing in a diversified portfolio of stocks.
Discuss the conditions under which a firm's diversification strategy will be rare.
The rarity of diversification depends not on diversification per se but on how rare the particular economies of scope associated with that diversification are. If only a few competing firms have exploited a particular economy of scope, that economy of scope can be rare. If numerous firms have done so, it will be common and not a source of competitive advantage.
For multipoint competition to lead to mutual forbearance:
The threat of retaliation must be substantial and the firms pursuing this strategy must have strong linkages among their diversified businesses.
In order for corporate diversification to be economically valuable:
There must be some valuable economy of scope among the multiple businesses in which a firm is operating and it must be less costly for managers in a firm to realize these economies of scope than for outside equity holders on their own
A firm has implemented a strategy of limited corporate diversification when all or most of its business activities fall within a single industry and geographic market (T/F)
True
A firm implements a corporate diversification strategy when it operates in multiple industries or markets simultaneously (T/F)
True
A firm's dominant logic is a common way of thinking about strategy across different businesses (T/F)
True
A firm's stakeholders include all those groups of individuals who have interest in how the firm performs (T/F)
True
Both shared activities and internal capital allocation are examples of economies of scope that have the potential for generating positive returns for a firm's equity holders (T/F)
True
Core competencies are an example of costly-to-duplicate economies of scope. (T/F)
True
Core competencies are complex sets of resources and capabilities that link different businesses in a diversified firm through managerial and technical know-how, experience, and wisdom (T/F)
True
Economies of scope exist in a firm when the value of the products or services it sells increases as a function of the number of businesses in which the firm operates (T/F)
True
Exploiting market power is an example of costly-to-duplicate economies scope. (T/F)
True
Firms that pursue a strategy of related corporate diversification have some type of linkages among most of the different businesses they pursue (T/F)
True
If all the businesses in which a firm operates share a significant number of inputs, production, technologies, distribution channels, similar customers, and so forth, this corporate diversification strategy is called related-constrained diversification
True
If the different businesses that a single firm pursues are linked only a couple of dimensions, or if different sets of businesses are linked along very different dimensions, that corporate diversification strategy is called related-linked diversification (T/F)
True
Most of the different types of economies of scope cannot be realized by equity holders on their own. (T/F)
True
Multipoint competition exists when two or more diversified firms simultaneously compete in multiple markets, and multipoint competition car serve to facilitate a particular type of tacit collusion called mutual forbearance. (T/F)
True
One of the limits of activity sharing is that sharing activities may limit the ability of a particular business to meet its specific customers' needs (T/F)
True
One substitute for diversification that exists is that instead of obtaining cost or revenue advantages from exploiting economies of scale across businesses in a diversified firm, a firm may decide to simply grow and develop each of its businesses separately. (T/F)
True
Shared activities can increase the revenues in diversified firms' businesses, and failure to exploit shared activities across businesses can lead to out-of-control costs. (T/F)
True
Shared activities, risk reduction, tax advantages, and employee compensation as bases for corporate diversification are usually relatively easy to duplicate (T/F)
True
The only two economies of scope that do not have the potential for generating positive returns for a firm's equity holders are diversification in order to maximize the size of a firm and diversification to reduce risk (T/F)
True
Identify two potential substitutes for corporate diversification and discuss how each can provide benefits similar to corporate diversification.
Two obvious substitutes for diversification exist. First, instead of obtaining cost or revenue advantages from exploiting economies of scope across businesses in a diversified firm, a firm may decide to simply grow and develop each of its businesses separately. In this sense, a firm that successfully implements a cost-leadership strategy or a product-differentiation strategy in a single business can obtain the same cost or revenue advantages it could have obtained by exploiting economies of scope, but without having to develop cross-business relations. Growing independent businesses within a diversified firm can be a substitute for exploiting economies of scope in a diversification strategy. A second substitute for exploiting economies of scope in diversification can be found in strategic alliances. By using a strategic alliance, firms may be able to gain the economies of scope they could have obtained if they had carefully exploited economies of scope across businesses they own. Thus, for example, instead of a firm exploiting research and development economies of scope between two businesses it owns, it could form a strategic alliance with a different firm and form a joint research and development lab. Instead of a firm exploiting sales economies of scope by linking its businesses through a common sales force, it might develop a sales agreement with another firm and obtain cost or revenue advantages in this way.
Firms such as General Electric that generates less than 70% of their revenues from a single product market and whose business share few, if any, common attributes are said to be pursuing ___ corporate diversification.
Unrelated
Discuss shared activities as a potential source of economies of scope for diversified firms and identify the potential benefits and limits of activity sharing.
When the companies in a diversified firm share a variety of activities throughout their value chains, these activities can serve as the basis for operational economies of scope. Potential shared activities can be found throughout a firm's value chain from input activities through dealer support and service. Activity sharing can have the effect of reducing a diversified firm's costs, and failure to exploit share activities across business can lead to out-of-control costs. Shared activities can also increase the revenues in a diversified firm's businesses through shared product development and sales activities as well as by enhancing business revenues by exploiting strong, positive reputations of some of a firm's businesses in other of its businesses. There are three important limits to activity sharing. First, substantial organizational issues can be associated with a diversified firm's learning how to manage cross-business relationships. Second, sharing activities may limit the ability of a particular business to meet its specific customer's needs. Finally, if one business in a diversified firm has a poor reputation, sharing activities with that business can reduce the quality of the reputation of other businesses in the firm.
When a firm operates in multiple industries simultaneously, it is said to be implementing a _______
product-diversification strategy
