Reduction in average costs that result from producing two or more products jointly instead of producing them separately

  C(A+B) < C(A) + C(B)

The revenue of the whole is greater than the sum of the parts.

  Revenue (A+B) > Revenue (A) + Revenue (B)

1. strategic considerations

2.efficient governance considerations

Types of strategic considerations

1.to gain power over actual and potential competitors

2. to leverage resources/capabilities in other business activities

3. to grow

4. to pursue product differentiation strategy

5. to access customers and obtain first hand information on customer preferences due to pull instead of push production paradigm 

1. transaction specific investment

2. improve timing coordination and reliability

3. deal with uncertainty

1. limited diversification >70%

2. related diversification <70%

3. unrelated diversification <70%

1. single business diversification

2. dominant business diversification

1. related constrained diversification

2. related linked diversification

1. value creating diversification

2. value neutral diversification

3. value reducing diversification

1. operational economies of scope

2. anticompetitive economy scope

3. financial economy of scope 

1. antitrust regulation

2. low performance

sharing activities- exploiting efficiencies of sharing business activities

spreading core competencies- exploiting core competencies in other businesses, competency must be strategically relevant

1. multipoint competition: a firm chooses not to compete agressively in one market to avoid competition in another market

2. market power: using buying power in one business to obtain advantage in another business

1. nonequity alliance

2. equity alliance

3. joint venture

1. improve current operations

2. shape the competitive environment

3. facilitate entry and exit

1. exploit economies of scale

2. learning from partners

3. risk and cost sharing

ways of shaping competitive environment

1. facilitating technology standards

2. facilitating tacit collusion

1. low cost entry into new industries

2. managing uncertainty

3. low-cost entry into new geographic markets

if:

no partner is available

transaction specific investment is high

low certainty about investment

if:

there are no anti-trust issues

low uncertainty about the investment

firm can be easily integrated

value of combined firms is not tied to independence

m & a  creates value as follows:

acquiring firm- no value created

target firm- value increased about 25%