More recent posts

Follow these links for more recent posts on 

1. 5 Forces
2. Aligning Interests
3. All or Nothing
4. Big Data 
5. Costs
6. Org Design
7. Rational Actor Paradigm
8. Simple Pricing
9. Social Responsibility
10. Strategy
11. Vertical Integration
12. WFH
13. Writing Well

The Conglomerate Paradox: As GE splinters, Facebook becomes Meta

Are diseconomies of scope becoming more prevalent in the old American conglomerates while economies of scope are emerging in the technology spaces? (Planet Money, Nov. 2021)

Why Conglomerates Split Up

Sounds like diseconomies of scope is at work (WSJ Nov 2021).

FYI: A driver for conglomerates has disappeared. One reason that conglomerates were the rage in the 1960s is that the firm's stock served as a diversified portfolio of income streams from different sectors in the economy. A key lesson in finance is not to put all of you eggs in one basket. By buying shares in a conglomerate, an investor automatically had many baskets. Now, with lower transactions costs and ETFs and index funds, investors can easily and cheaply purchase a diversified portfolio AND can tailor to their individual preferences.   

General Electric to Split Into Three Public Companies

The stock price of GM rose when it announced the split (WSJ, Nov. 2021). Does the increase in market capitalization indicate that producing all three divisions under one roof creates economics of scope or diseconomies of scope?

What are the limits of economies of scope?

 

HT: MURevolution, April 2021

Is GM responding to economies of scale or scope?

"For years, the mantra in the capital-intensive car business has been that bigger is better. But in nearly seven years running GM, Ms. Barra has found success with an unlikely strategy: shrinking a company that for much of the 20th century was the nation’s biggest corporation by revenue and profit."

"GM now makes cars or parts in just nine countries, down from 25 before Ms. Barra took over, and employs 164,000 workers today, 25% fewer than before. Her get-smaller approach is especially unusual because it came at a time of prosperity in the car business.

Global industrywide auto sales have risen 9% since the year Ms. Barra became CEO. GM’s sales fell 25%."

"The moves have, until recently, helped GM notch record operating income and profit margins."

WSJ, Sept. 2020

The article also discusses GM's attempts to position itself to prosper as consumers move to electric vehicles.

Will economies of scope drive more mergers in the automobile industry?

The WSJ reports that the goal of the proposed merger of Fiat Chrysler and Peugeot is to increase profit. My question is, why would the merger => more profit. I see two alternatives. One way that a merger might increase profit is the merger's impact on the 5-forces. The combined market share of the two firms might gives them more bargaining power over buyers and sellers; it could reduce rivalry within the industry and it could make entry more difficult. The second way that a merger might increase profit is because the larger firm is able to take advantage of economies of scope. The article reports some evidence that economies of scope may be important.

"But Sergio Marchionne, the legendary Fiat Chrysler chief who died last year, was a persistent advocate for deeper consolidation. He drafted a 25-page manifesto in 2015 imploring the industry to share the costs of developing parts most customers never notice, such as engines in small cars.

“'It’s duplicative, does not deliver real value to consumers and is pure economic waste," the report said."

The previous mega-merger that was supposed to herald major changes in the structure of the industry was between Daimler and Chrysler two decades ago. That merger did not end well.