Chapter 6: Corporate-Level Strategy 181
Activity sharing is also risky because
ties among a firm’s businesses create links
between outcomes. For instance, if demand
for one business’s product is reduced, it may
not generate sufficient revenues to cover the
fixed costs required to operate the shared
facilities. These types of organizational dif-
ficulties can reduce activity-sharing suc-
cess. Additionally, activity sharing requires
careful coordination between the businesses
involved. The coordination challenges must
be managed effectively for the appropri-
ate sharing of activities (see Chapter 11 for
further discussion).^35
Although activity sharing across busi-
nesses is not risk-free, research shows that
it can create value. For example, studies of
acquisitions of firms in the same industry
(horizontal acquisitions), such as the banking
and software industries, found that sharing
resources and activities and thereby creat-
ing economies of scope contributed to post-
acquisition increases in performance and higher returns to shareholders.^36 Additionally,
firms that sold off related units in which resource sharing was a possible source of econ-
omies of scope have been found to produce lower returns than those that sold off busi-
nesses unrelated to the firm’s core business.^37 Still other research discovered that firms
with closely related businesses have lower risk.^38 These results suggest that gaining econo-
mies of scope by sharing activities across a firm’s businesses may be important in reducing
risk and in creating value. More attractive results are obtained through activity sharing
when a strong corporate headquarters office facilitates it.^39
6-3b Corporate Relatedness: Transferring of Core Competencies
Over time, the firm’s intangible resources, such as its know-how, become the foundation
of core competencies. Corporate-level core competencies are complex sets of resources
and capabilities that link different businesses, primarily through managerial and techno-
logical knowledge, experience, and expertise.^40 Firms seeking to create value through
corporate relatedness use the related linked diversification strategy as exemplified by GE.
In at least two ways, the related linked diversification strategy helps firms to cre-
ate value. First, because the expense of developing a core competence has already been
incurred in one of the firm’s businesses, transferring this competence to a second business
eliminates the need for that business to allocate resources to develop it. Resource intan-
gibility is a second source of value creation through corporate relatedness. Intangible
resources are difficult for competitors to understand and imitate. Because of this diffi-
culty, the unit receiving a transferred corporate-level competence often gains an immedi-
ate competitive advantage over its rivals.^41
A number of firms have successfully transferred one or more corporate-level core
competencies across their businesses. Virgin Group Ltd. transfers its marketing core com-
petence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a num-
ber of other businesses.^42 Honda has developed and transferred its competence in engine
design and manufacturing among its businesses making products such as motorcycles,
Corporate-level core
competencies are complex
sets of resources and
capabilities that link different
businesses, primarily through
managerial and technological
knowledge, experience, and
expertise.Charles Pertwee/Corbis News/Corbis
Procter & Gamble (P&G) is a consumer products firm that shares a lot of
activities among its divisions; for example, most of its products are sold
through retail outlets and those sales activities can be shared among
its divisions.