Question

One source of growth is external growth from a merger or acquisition. Often mergers or acquisitions are justified on the basis of the expected benefits from "synergies" created by the merger or acquisition. Economists know these as economies of scale and economies of scope.

The focus of this discussion will be on defining economies of scale and economies of scope, as well as the key differences between the two within the context of a hypothetical scenario of your choice.

Instructions

Select one of the mergers and acquisitions below:

• Sirius XM acquires Pandora.
• The merger of Sprint, T-Mobile and Metro PCS.
• The merger of Strayer University and Capella University.
• The Renault–Nissan–Mitsubishi Alliance.

For your chosen scenario, address the following in your discussion post:

• What are the synergies that come from the economies of scope?
• What are the synergies that come from the economies of scale?
• How do economies of scope and economies of scale differ within the context of your chosen scenario?
  • How are these two concepts different in general?

Answer 1

The Renault- Nissan-Mitsubishi Alliance

The purpose of the Alliance is to work together to provide better scale and efficiency to better compete with the rest of the market. The three companies have also branched out to work with other car-maker through the Alliance. Together the trio is the second biggest car-maker in the world but on an individual basis none of them make it to top five. Collective sales of cars rose after the Alliance. The Alliance meant each individual firm was able to benefit from the scale provided by working together the alliance has enabled each entities to remain independent and brand focused but gaining economies of scale.

Economies of Scale and Economies of Scope provide the Companies a means to generate operational efficiencies.

• Synergies arising out of economies of scale

The alliance achieved its scale.The goal was to increase economies of scale. They jointly began developing engines, batteries, and other key components. and this has enabled them to increase the phase of development and save costs as they leverage,capitalize and complement each others resources and strength.

Renault builds nearly all of diesel engines in Nissan car sold in Europe. This has saved Nissan investing and developing diesel engines independently in Europe while Renault has gained from increased scale. Nissan uses these engines to accelerate sales through Europe, where it has been No. 1 Asian Brand in many key component.

The alliance combined various research and development, manufacturing and business operations to save costs and to accelerate development.

The alliance has jointly invested in various Capital intensive research projects. This reduces the cost and risk borne by individual companies and enables them to use the resources more optimally and effectively.

The Alliance oversees the purchases ensuring larger volumes and thus better pricing and get better deals with the suppliers as they enjoy the bargaining power due to the size of purchases .

The Alliance has also considered consolidating the logistics operations to reduce costs. They claim they can generate 200 million Euros per year by sharing warehouses, shipping crates, containers, seagoing vessels, Customs-related processing  .

The Alliance has led the development of Automobile manufacturing in developing countries such as Brazil, Russia, India. The Alliance share common purchasing organization in Brazil, which works closely with the suppliers throughout brazil to ensure all parties maximize economies of scale. In addition to purchasing, the companies also work closely with supply chain management and manufacturing issues. The Alliance has jointly began developing automobiles in India they share a common facility the facility is highly efficient as the alliance has used the latest technology and platforms to Improve efficiency and productivity.

Through the Alliance Renault entered world's largest automotive market in collaboration with Nissan. They share a common warehouse in China thus reducing costs burden and enabling improved utilization of fixed assets.

• Synergies from Economies of scope

The Alliance is the world's leading plug in electric vehicle manufacturing group. The conventional automobile manufacturers are foraying and penetrating into the EV segment,They are leveraging their existing infrastructure, human capital,supply chain,fixed assets, physical capital to do dominate the EV market as they have the luxury to save cost and not making investment from scratch as they already have the core assets and resources which can be deployed efficiently. they are spreading their fixed cost more efficiently now while diversifying their product portfolio and entering a new market.

Collaboration between Renault and Nissan also focuses on capital intensive research projects such as sustainable, zero emission transportation. They are able to diversify their activities and venture into new projects as the risk and cost borne by individual companies reduces when they have access to shared resources.

The alliance aims to double their annual synergies to 10 Billion Euro and to achieve this target they will accelerate collaboration on common platforms, power trains and next generation electric, autonomous and connected technologies and from the other side synergies will be from growing scale.

• Economies of scale refers to the cost advantage a company has with the increased output of a good. It is the savings in cost gained by an increased level of production.

• Theory of Economies of scope states that the ATC of a company's production decreases when there is an increasing variety of goods produced. Economy of scope gives a cost advantage to a company when it produces a complementary range of products while focusing on its core competencies. It is cheaper for two types of products to share the resources than for each to have separate resources.

• Difference of economies of scale and economies of scope with the Alliance:

Economies of Scope-The Alliance is able to use and leverage each others market dominance in their respective countries and region and penetrate into the market by utilizing the assets of each others effectively and is saved from the burden of making independent investment to gain entry into new market where the other companies of the Alliance already exist.

Economies of Scope- Electric Vehicle are gaining prominence and new players are entering the market. The existing companies are leveraging their existing resources, fixed assets, human capital to penetrate into the EV market and gain dominance. They are utilizing and capitalizing on their existing infrastructure, resources, fixed assets. They are spreading their fixed costs to a wider product portfolio as they are venturing into the EV segment.

Economies of Scale- They are jointly investing in new and advanced technologies such as autonomous technology, connected technology, IOT, Such investments in modern and advanced technologies.  

Economies of scale-They are sharing of  the warehouses, shipping containers, seagoing vessel, shipping crates, collaboration in logistics it enables to use each others resources more optimally and efficiently.  

Economies of Scale- Common purchasing organizations, collective purchasing of inputs enables them to get better prices and terms from the suppliers due to the scale of the purchases.

Economies of scale - The use of shared facilities in emerging markets enables them to use those facilities more efficiently. When the companies enter into new markets its hard for them to fully utilize the production facility as they would new entrants to the market without much market share. But when the companies share the facilities they would be able to utilize their resources more efficiently and gain better returns on the overheads.

• Economy of scope and economy of scale are two different concepts used to help cut a company's costs. Economies of scope focuses on the average total cost of production of a variety of goods, where as economies of scale focuses on cost advantage that arises when there is a higher level of production of one good.