Question

“Snack Giant Mondelez Makes $23 Billion Takeover Bid for Hershey” and “Sales Pressure on Mondelez, Hershey Could Bolster Case for Merger”

Describe/explain how Mondelez is pursuing economies of scope.

Answer 1

Economies of scope is when long term costs for a company decreases, not due to increase in volume of production (that is economies of scale) but due to increase in variety of production. An economy of scope means that the production of one good reduces the cost of producing another related good.

How does this apply to Mondelez and Hershey merger:

• A larger company is able to offer a wider choice of custom products. Rather than just producing off-the-peg models, a firm can produce a greater range of products to cater to every taste and preference. Mondelez may not have been able to Hershey market because of consumer preferences. Internalising it by a merger will help sales of Mondelez or Hershey, either way, Mondelez profits.
• Cut costs that go on competitive research and prices. These costs can be better utilised for quality augmentation and improving the supply chain, thus raising sales.
• Geographical expansion: Pockets of world may differently have preferences for either Hersheys or Mondelez. But with a merger, these geographical reach is evened out. It can offer regional variations.
• Goods in Hershe and Mondelez with same production process can be produced together reducing costs of production. Because both the companies manufacture many close goods, it is feasible to assume that many of them undergo similar production.
• Reduced anticipation of future: Both competitors may be under pressure to cater to changing consumer preferences and look to beat each other with different products. The research and manpower behind this effort can be saved substantially.

All the benefits that accrue from the merger will go into lowering the long term costs or augmenting sales of the company.

Thanks!