Question

2- Consider the following list of strategies. In your view, which are examples of potential economies of scope underlying a corporate diversification strategy? For those strategies that are an economy of scope, which economy of scope are they? For those strategies that are not an economy of scope, why aren’t they?

a. The Coca-Cola Corp. replaces its old diet cola drink (Tab) with a new diet cola drink called Diet Coke.

b. Apple Computer introduces an iPod MP3 Player with a larger memory.

c. PepsiCo distributes Lay’s Potato Chips to the same stores where it sells Pepsi.

d. K-Mart extends its licensing arrangement with Martha Stewart for four years.

e. Wal-Mart uses the same distribution system to supply its Wal-Mart stores, its Wal-Mart Super Centers (Wal-Mart stores with grocery stores in them), and its Sam’s Club.

f. General Electric borrows money from Bank of America at 3% interest and then makes capital available to its jet engine subsidiary at 8% interest.

g. McDonald’s acquires Boston Market and Chipotle (two restaurants where many customers sit at the restaurant to eat their meals).

Answer 1

Economies of scope is a strategy in which a business tries to diversify the business so that the cost of individual items can be reduced by reducing the overall cost.

In my opinion, economies of scope are as follows.

a. The Coca-Cola Corp. replaces its old diet cola drink (Tab) with a new diet cola drink called Diet Coke.

This is not an example of economies of scope as one product is stopped, and another is introduced. It is a product replacement strategy. The cost of production, distribution etc. remains the same.

b. Apple Computer introduces an iPod MP3 Player with a larger memory.

This is not an example of economies of scope as the introduction of a new MP3 player with larger memory will in no way affect the price of an existing device.

c. PepsiCo distributes Lay’s Potato Chips to the same stores where it sells Pepsi.

This is an example of economies of scope as pepsico is trying to reduce the distribution costs by adding in more products to its supply chain. When more diversified products are delivered together, the distribution costs will get split up into all of those products, which will reduce cost.

d. K-Mart extends its licensing arrangement with Martha Stewart for four years.

K-mart extending licensing arrangement with Martha Stewart will not help reduce the price of any items that are sold. Therefore, this is not an example of economies of scope.

e. Wal-Mart uses the same distribution system to supply its Wal-Mart stores, its Wal-Mart Super Centers (Wal-Mart stores with grocery stores in them), and its Sam’s Club.

Walmart using the same distribution system to deliver products to several stores is not diversifying products that are delivered. The quantity of products delivered will change which is called economies of scale and not scope.

f. General Electric borrows money from Bank of America at 3% interest and then makes capital available to its jet engine subsidiary at 8% interest.

There is not product diversification and associated cost reduction in this example. This is not an example of economies of scope.

g. McDonald’s acquires Boston Market and Chipotle (two restaurants where many customers sit at the restaurant to eat their meals).

This is an example of economies of scope as by merging in the other two restaurants, McDonald's can reduce the total operating expenses. Management expenses, expenses like electricity, water etc. can be reduced, some ingredients of the restaurants can be common etc. This effort will help reduce cost.