Economy of scope is a valuable but insufficient condition for a diversification strategy to be economically valuable. What is the other essential condition and why is it difficult to achieve?

Question

What will be an ideal response?

Answer 1

Scope economies can take many forms in the diversified enterprise, obvious ones being the
efficiencies arising from central co-ordination of operational policies and procedures, deployment of
internal resources and external relationship management with major stakeholders. Shared resources
activities that would otherwise be duplicated and under-utilised contribute to these economies.
However, these mechanisms are typically what external consultants might recommend and if
requested would probably be able to implement. Thus they are what any competing enterprise might
be expected to have or have access to – they are imitable, unable in isolation to create singular
advantage and exceptional economic value. The crucial extra condition is the existence of synergism
among the scope factors that make them difficult or impossible for a competing enterprise to imitate
i.e. to replicate in its own circumstances. Referring to Kay’s typology (chapter 7) of reputation,
innovativeness and (internal and external) architectures, these enterprise-specific, synergistic
qualities and capabilities arise through intended strategies and seredipitous outcomes, often over
many years. For example, portfolio management and the allocation of new investment capital. Such
capabilities equate with expertise and experience that are much harder, sometimes impossible to
replicate. In large enterprises no single person may be able to appreciate exactly how they confer
advantage, though senior executives may come to recognise when skills have evaporated, perhaps
through lack of maintenance or intelligent use.