Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

180 Part 2: Strategic Actions: Strategy Formulation

Economies of scope are cost savings a firm creates by successfully sharing resources and

capabilities or transferring one or more corporate-level core competencies that were devel-

oped in one of its businesses to another of its businesses.^32

As illustrated in Figure 6.2, firms seek to create value from economies of scope

through two basic kinds of operational economies: sharing activities (operational relat-

edness) and transferring corporate-level core competencies (corporate relatedness). The

difference between sharing activities and transferring competencies is based on how

separate resources are jointly used to create economies of scope. To create economies

of scope, tangible resources such as plant and equipment or other business-unit phys-

ical assets often must be shared. Less tangible resources such as manufacturing know-

how and technological capabilities can also be shared.^33 However, know-how transferred

between separate activities with no physical or tangible resource involved is a transfer of

a corporate-level core competence, not an operational sharing of activities.^34

6-3a Operational Relatedness: Sharing Activities

Firms can create operational relatedness by sharing either a primary activity (e.g., inven-

tory delivery systems) or a support activity (e.g., purchasing practices)—see Chapter 3’s

discussion of the value chain. Firms using the related constrained diversification strategy

share activities in order to create value. Procter & Gamble uses this corporate-level strat-

egy. Sany, described in an example above, also shares activities. For example, Sany’s var-

ious businesses share marketing activities because all of their equipment is sold to firms

in the construction industry. This is evidenced by the sponsorship of a NASCAR racecar

in an attempt to reach executives in the construction industry. (see more on Sany in the

Mini-case at the end of the Chapter)

Economies of scope are
cost savings a firm creates
by successfully sharing
resources and capabilities
or transferring one or
more corporate-level core
competencies that were
developed in one of its
businesses to another of its
businesses.

Figure 6.2 Value-Creating Diversification Strategies: Operational and Corporate Relatedness

Related Constrained

Diversification

Both Operational and

Corporate Relatedness

Unrelated

Low Diversification

High

High

Low

Operational

Relatedness:

Sharing

Activities

between

Businesses

Related Linked

Diversification

Corporate Relatedness:

Transferring Core Competencies into Businesses