One of the most important competitive advantages that a related diversification strategy can produce is lower costs than competitors. Related businesses often present opportunities to consolidate certain value chain activities or use common resources and thereby eliminate costs. Such cost savings are termed economies of scope – a concept distinctly different from economies of scale. Economies of scale are cost savings that accrue directly from a larger-sized operation. Economies of scope stem directly from cost-saving strategic fits along the value chains of related businesses. Most usually, economies of scope are the result of two or more businesses sharing technology, performing R&D together, using common manufacturing or distribution facilities, sharing a common sales force or distributor/dealer network, or using the same established brand name and/or sharing the same administrative infrastructure. The greater the economies associated with cost-saving strategic fits, the greater the potential for a related diversification strategy to yield a competitive advantage based on lower costs.
CORE CONCEPT: Economies of scope are cost reductions that flow from operating in multiple businesses; such economies stem directly from strategic fit efficiencies along the value chains of related businesses.
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