COMPETITIVE STRATEGY (MGT425)

Week 4
(Lecture 19)

(Diversification Strategy)

Dr. Lucy Anning

Outline
• What Are Valuable Economies of Scope?

• Corporate Diversification and Sustained Competitive Advantage

Rarity for diversification
Imitability for diversification
Substitute for diversification
 What Are Valuable Economies of Scope? Cont’d
Diversification to exploit Operational economies of scope
• shared activities
• The Limits of activity sharing.
• core competencies.
• Limits of core competencies

Diversification to exploit Financial economies of scope

• Diversification and capital allocation.
• Diversification and risk reduction.
• Tax advantages of Diversification.
What Are Valuable Economies of Scope? Cont’d

Diversification to exploit anticompetitive economies of scope

• Multipoint competition.
• Diversification and Market power.

Firm size and employee incentives to Diversify

Corporate Diversification and Sustained Competitive Advantage

The Rarity of Diversification

• Most large firms have adopted some form of diversification if only the
limited diversification of a dominant-business firm. Even many small and
medium-sized firms have adopted different levels of diversification strategy.

• However, 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.
 The Imitability of Diversification
• Both forms of imitation—direct duplication and substitution—are relevant in evaluating
the ability of diversification strategies to generate sustained competitive advantages,
even if the economies of scope that they create are rare.
Direct Duplication of Diversification
• 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 research and development 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—issues
discussed in the next chapter. 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
The Imitability of Diversification Cont’d
Substitutes for 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.
• A second substitute for exploiting economies of scope in diversification can
be found in strategic alliances. 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.