large production volumes create economies of scale by spreading which type of costs?

Handbook of Media Economics

Kenneth C. Wilbur , in Handbook of Media Economics, 2015

5.3.1 Media Complementarities

Do firms achieve economies of scope by simultaneously advertising in multiple media? These might be achieved by spreading the media budget across multiple media to reinforce the message with multitasking consumers in a way that single-medium advertising is unable to do. Also, advertising in more media may reach single-tasking consumers who might otherwise remain uncontacted. Numerous recent studies have found evidence of synergistic effects between television advertising and Internet advertising on offline sales ( Kolsarici and Vakratsas, 2011; Naik and Peters, 2009; Naik and Raman, 2003; Naik et al., 2005; Ohnishi and Manchanda, 2012; Stephen and Galak, 2012). However, these studies mostly used aggregate data, which may have trouble disentangling multimedia synergies from other unobserved variables that may correlate with both advertising expenditures and sales. Further corroborating evidence has been found in investigations of individual-level data by Bollinger et al. (2013) and Zantedeschi et al. (2014).

There now exists substantial evidence that television advertisements can prompt consumer search. Zigmond and Stipp (2010, 2011) offered several case studies showing that search queries entered at google.com responded immediately to television advertisements broadcast during the Winter Olympics. Lewis and Reiley (2013) showed that search queries at yahoo.com for particular brands spiked instantly during Super Bowl commercial breaks when those brands advertised (and did not spike during commercial breaks when the brands did not advertise). Joo et al. (2014, 2015) investigated hourly advertising and Google search data for a mature category (financial services) over a 3-month period, showing that TV advertising generated new searches in the product category and also increased the share of searches that included branded keywords.

There is also a substantial body of evidence that Internet behavior prompted by advertising leads to online sales. Wu et al. (2005) offered the first such evidence. They showed that online-only firms' use of magazine advertising can lead shoppers to a website, and that subsequent conversion rates depend on website characteristics. They also found that joint modeling of user acquisition and conversion was required for correct inference, as unobserved characteristics in visit generation and sales leads may be correlated. More recently, Kim and Hanssens (2014) examined data on advertising, blog mentions, online search, and revenue for motion pictures. They found that pre-launch advertising generated both search and blogging, and blogging generated further search. Hu et al. (2014) brought search data collected from Google Insights for Search into a sales/advertising response model. Using aggregate data, they found that automotive advertising is associated with a positive search lift for automotive brands, as well as a heightened conversion probability among interested consumers. Liaukonyte et al. (2015) estimated how measures of online shopping behavior (traffic and sales) at 20 brand websites changed in narrow windows of time around the airing of television advertisements, and how those effects depended on ad content. They found that direct response tactics increase both visit probability and purchase probability. In contrast, informative or emotional branding tactics reduce traffic while simultaneously increasing sales among those who do visit, consistent with improving the efficiency of consumer search, as predicted by Anderson and Renault (2006).

Finally, there is substantial evidence supporting the converse effect: Internet content can influence television viewing. Early work in this area focused on the effects of online "buzz" on television viewing and book sales (Chevalier and Mayzlin, 2006; Godes and Mayzlin, 2004). More recently, Gong et al. (2015) ran field experiments in China, showing that television program ratings respond to promoted posts and content posted on a microblogging service. Hill and Benton (2012) developed a method by which consumers' Twitter accounts can be mined to generate television program recommendations. In summary, there is ample evidence that television content and advertising can drive online behavior, and that online information can influence television viewing choices.

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Introduction to Mergers and Acquisitions

Donald DePamphilis , in Mergers and Acquisitions Basics: All You Need To Know, 2011

Synergy

Synergy is the rather simplistic notion that two (or more) businesses in combination will create greater shareholder value than if they are operated separately. It may be measured as the incremental cash flow that can be realized through combination in excess of what would be realized were the firms to remain separate. There are two basic types of synergy: operating and financial.

Operating Synergy (Economies of Scale and Scope)

Operating synergy comprises both economies of scale and economies of scope, which can be important determinants of shareholder wealth creation. ² Gains in efficiency can come from either factor and from improved managerial practices.

Spreading fixed costs over increasing production levels realizes economies of scale , with scale defined by such fixed costs as depreciation of equipment and amortization of capitalized software; normal maintenance spending; obligations such as interest expense, lease payments, and long-term union, customer, and vendor contracts; and taxes. These costs are fixed in that they cannot be altered in the short run. By contrast, variable costs are those that change with output levels. Consequently, for a given scale or amount of fixed expenses, the dollar value of fixed expenses per unit of output and per dollar of revenue decreases as output and sales increase.

To illustrate the potential profit improvement from economies of scale, let's consider an automobile plant that can assemble 10 cars per hour and runs around the clock—which means the plant produces 240 cars per day. The plant's fixed expenses per day are $1 million, so the average fixed cost per car produced is $4,167 (i.e., $1,000,000/240). Now imagine an improved assembly line that allows the plant to assemble 20 cars per hour, or 480 per day. The average fixed cost per car per day falls to $2,083 (i.e., $1,000,000/480). If variable costs (e.g., direct labor) per car do not increase, and the selling price per car remains the same for each car, the profit improvement per car due to the decline in average fixed costs per car per day is $2,084 (i.e., $4,167 –$2,083).

A firm with high fixed costs as a percentage of total costs will have greater earnings variability than one with a lower ratio of fixed to total costs. Let's consider two firms with annual revenues of $1 billion and operating profits of $50 million. The fixed costs at the first firm represent 100 percent of total costs, but at the second fixed costs are only half of all costs. If revenues at both firms increased by $50 million, the first firm would see income increase to $100 million, precisely because all of its costs are fixed. Income at the second firm would rise only to $75 million, because half of the $50 million increased revenue would have to go to pay for increased variable costs.

Using a specific set of skills or an asset currently employed to produce a given product or service to produce something else realizes economies of scope , which are found most often when it is cheaper to combine multiple product lines in one firm than to produce them in separate firms. Procter & Gamble, the consumer products giant, uses its highly regarded consumer marketing skills to sell a full range of personal care as well as pharmaceutical products. Honda knows how to enhance internal combustion engines, so in addition to cars, the firm develops motorcycles, lawn mowers, and snow blowers. Sequent Technology lets customers run applications on UNIX and NT operating systems on a single computer system. Citigroup uses the same computer center to process loan applications, deposits, trust services, and mutual fund accounts for its bank's customers. Each is an example of economies of scope, where a firm is applying a specific set of skills or assets to produce or sell multiple products, thus generating more revenue.

Financial Synergy (Lowering the Cost of Capital)

Financial synergy refers to the impact of mergers and acquisitions on the cost of capital of the acquiring firm or newly formed firm resulting from a merger or acquisition. The cost of capital is the minimum return required by investors and lenders to induce them to buy a firm's stock or to lend to the firm.

In theory, the cost of capital could be reduced if the merged firms have cash flows that do not move up and down in tandem (i.e., so-called co-insurance), realize financial economies of scale from lower securities issuance and transactions costs, or result in a better matching of investment opportunities with internally generated funds. Combining a firm that has excess cash flows with one whose internally generated cash flow is insufficient to fund its investment opportunities may also result in a lower cost of borrowing. A firm in a mature industry experiencing slowing growth may produce cash flows well in excess of available investment opportunities. Another firm in a high-growth industry may not have enough cash to realize its investment opportunities. Reflecting their different growth rates and risk levels, the firm in the mature industry may have a lower cost of capital than the one in the high-growth industry, and combining the two firms could lower the average cost of capital of the combined firms.

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An Introduction to Mergers, Acquisitions, and Other Restructuring Activities

Donald M. DePamphilis Ph.D. , in Mergers, Acquisitions, and Other Restructuring Activities (Ninth Edition), 2018

Operating Synergy

Operating synergy consists of economies of scale, economies of scope, and the acquisition of complementary technical assets and skills, which can be important determinants of shareholder wealth creation. ² Gains in efficiency can come from these factors and from improved managerial operating practices.

Economies of scale often refer to the reduction in average total costs for a firm producing a single product for a given scale of plant due to the decline in average fixed costs as production volume increases. Scale is defined by such fixed costs as depreciation of equipment and amortization of capitalized software, normal maintenance spending, and obligations such as interest expense, lease payments, long-term union, customer, vendor contracts, and taxes. These costs are fixed since they cannot be altered in the short run. Variable costs are those that change with output levels. Consequently, for a given scale or amount of fixed expenses, the dollar value of fixed expenses per unit of output and per dollar of revenue decreases as output and sales increase.

To illustrate the potential profit improvement from economies of scale, consider the merger of Firm B into Firm A. Firm A has a plant producing at only one-half of its capacity, enabling Firm A to shut down Firm B's plant that is producing the same product and move the production to its own, underutilized facility. Consequently, Firm A's profit margin improves from 6.25% before the merger to 14.58% after the merger. Why? Because the additional output transferred from Firm B is mostly profit as it adds nothing to Firm A's fixed costs (Table 1.2). ³

Table 1.2. Economies of Scale

Period 1: Firm A (premerger)	Period 2: Firm A (postmerger)
Assumptions: • Price = $4 per unit of output sold • Variable costs = $2.75 per unit of output • Fixed costs = $1,000,000 • Firm A is producing 1,000,000 units of output per year • Firm A is producing at 50% of plant capacity	Assumptions: • Firm A acquires Firm B, which is producing 500,000 units of the same product per year • Firm A closes Firm B's plant and transfers production to Firm A's plant • Price = $4 per unit of output sold • Variable costs = $2.75 per unit of output • Fixed costs = $1,000,000
$\begin{array}{l} Profit & = price \times quantity - variable costs - fixed costs \\ \begin{array}{l} = $ 4 \times 1, 000, 000 - $ 2.75 \times 1, 000, 000 \\ - $ 1, 000, 000 = $ 250, 000 \end{array} \end{array}$	$\begin{array}{l} Profit & = price \times quantity - variable costs - fixed costs \\ = $ 4 \times 1,500,000 - $ 2.75 \times 1,500,000 - $ 1,000,000 \\ - $ 6,000,000 - $ 4,125,000 - $ 1,000,000 = $ 875,000 \end{array}$
$\begin{array}{l} Profit margin (%) = \frac{$ 250,000}{$ 4,000,000} = 6.25 \\ Fixed costs per unit = \frac{$ 1,000,000}{$ 1,000,000} = $ 1.00 \end{array}$	$\begin{array}{l} Profit margin (%) = \frac{$ 875,000}{$ 6,000,000} = 14.58 \\ Fixed cost per unit = \frac{$ 1,000,000}{1,500,000} = $ .67 \end{array}$

Notes: Contribution to profit of additional 500,000 units = $4 × 500,000 − $2.75 × 500,000 = $625,000.

Margin per unit sold at fixed cost per unit of $1.00 = $4.00 − $2.75 − $1.00 = $0.25.

Margin per unit sold at fixed cost per unit of $.67 = $4.00 − $2.75 − $0.67 = $0.58.

Economies of scale may also affect variable costs such as a reduction in purchased material prices due to an increase in bulk purchases and lower production line setup costs resulting from longer production runs. When one company buys another, the combined firms may be able to negotiate lower purchase prices from suppliers because of their increased negotiating leverage. Suppliers often are willing to cut prices, because they also realize economies of scale as their plant utilization increases if they are able to produce and sell larger quantities. Setup costs refer to the expense associated with setting up a production assembly line. These include personnel costs in changing from producing one product to another, any materials consumed in this process, and the time lost while the production line is down. For example, assume a supplier's initial setup costs are $3000 per production run to produce an order of 2500 units of a product. Setup costs per unit produced are $1.20. If the order is doubled to 5000 units, setup costs per unit are cut in half to $0.60 per unit. Suppliers may be willing to pass some of these savings on to customers to get the larger order.

Economies of scope refers to the reduction in average total costs for a firm producing two or more products, because it is cheaper to produce these products in a single firm than in separate firms. Economies of scope may reflect both declining average fixed and variable costs. Common examples of overhead- and sales-related economies of scope include having a single department (e.g., accounting and human resources) support multiple product lines and a sales force selling multiple related products rather than a single product. Savings in distribution costs can be achieved by transporting a number of products to a single location rather than a single product. In 2012, following its emergence from bankruptcy, Hostess Baking achieved significant reductions in distribution costs when its unions allowed the firm to transport both bread and other baked goods to customers in the same truck rather than in separate trucks as had been the case. Economies of scope also include the cost savings realized by using a specific set of skills or an asset currently employed in producing a specific product to produce multiple products. Procter & Gamble, the consumer products giant, uses its highly regarded consumer marketing skills to sell a full range of personal care as well as pharmaceutical products. Honda employs its proprietary knowledge of internal combustion engines (an intangible asset) to enhance the manufacturing of engines used in cars, motorcycles, lawn mowers, and snow blowers.

Complementary technical assets and skills are those possessed by one firm that could be used by another to fill gaps in its technical capabilities. Gaining access to this know-how can be a significant motivation for one firm to acquire another. For example, merger activity is likely to occur between firms pursuing related research and development activities, with certain technologies owned by one firm appearing to be very attractive to the other. ⁴ Both firms gain potentially from an increased rate of innovation after the merger, because they have access to each other's technical skills and patent portfolios. For example, when Pharmacia & Upjohn combined with Monsanto to form Pharmacia, the merger gave Pharmacia & Upjohn access to Monsanto's Cox-2 inhibitors and Monsanto access to the other's expertise in genomics. The merger allowed for expanded in-house clinical R&D, resulting in an increase in the average size of R&D projects and a reduction in the time required for getting products to market.

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An Introduction to Mergers, Acquisitions, and Other Restructuring Activities

Donald M. DePamphilis Ph.D. , in Mergers, Acquisitions, and Other Restructuring Activities (Seventh Edition), 2014

Synergy

Synergy is the value realized from the incremental cash flows generated by combining two businesses. That is, if the market value of two firms is $100 million and $75 million, respectively, and their combined market value is $200 million, then the implied value of synergy is $25 million. The two basic types of synergy are operating and financial.

Operating Synergy

Operating synergy consists of both economies of scale and economies of scope, which can be important determinants of shareholder wealth creation. ¹ Gains in efficiency can come from either factor and from improved managerial operating practices.

Economies of scale refers to the reduction in average total costs for a firm producing a single product for a given scale of plant due to the decline in average fixed costs as production volume increases. Scale is defined by such fixed costs as depreciation of equipment and amortization of capitalized software, normal maintenance spending, and obligations such as interest expense, lease payments, long-term union, customer, and vendor contracts, and taxes. These costs are fixed since they cannot be altered in the short run. Variable costs are those that change with output levels. Consequently, for a given scale or amount of fixed expenses, the dollar value of fixed expenses per unit of output and per dollar of revenue decreases as output and sales increase.

To illustrate the potential profit improvement from economies of scale, consider the merger of Firm B into Firm A. Firm A has a plant producing at only one-half of its capacity, enabling Firm A to shut down Firm B's plant that is producing the same product and move the production to its own, underutilized facility. Consequently, Firm A's profit margin improves from 6.25% before the merger to 14.58% after the merger because of the higher profit margin associated with the additional output from Firm B, which adds nothing to Firm A's fixed costs (Table 1.2). ²

Table 1.2. Economies of Scale

Period 1: Firm A (Premerger)	Period 2: Firm A (Postmerger)
*ASSUMPTIONS:*	*ASSUMPTIONS:*
● Price=$4 per unit of output sold ● Variable costs=$2.75 per unit of output ● Fixed costs=$1,000,000 ● Firm A is producing 1,000,000 units of output per year ● Firm A is producing at 50% of plant capacity	● Firm A acquires Firm B, which is producing 500,000 units of the same product per year ● Firm A closes Firm B's plant and transfers production to Firm A's plant ● Price=$4 per unit of output sold ● Variable costs=$2.75 per unit of output ● Fixed costs=$1,000,000
Profit=price×quantity−variable costs−fixed costs	Profit=price×quantity−variable costs−fixed costs
=$4×1,000,000−$2.75×1,000,000	=$4×1,500,000 – $2.75×1,500,000 – $1,000,000
– $1,000,000	=$6,000,000 – $4,125,000 – $1,000,000
=$250,000	=$875,000 ¹
Profit margin (%) ² =$250,000/$4,000,000=6.25%	Profit margin (%) ³ =$875,000/$ 6,000,000=14.58%
Fixed costs per unit=$1,000,000/$1,000,000=$1.00	Fixed cost per unit=$1,000,000/1,500,000=$.67

1: Contribution to profit of additional units=$4×500,000 – $2.75×500,000=$625,000.
2: Margin per unit sold=$4.00–$2.75–$1.00=$.25.
3: Margin per unit sold=$4.00– $2.75–$.67=$.58. Note that this illustration does not reflect any costs incurred in closing Firm B's plant.

Economies of scope refers to the reduction in average total costs for a firm producing two or more products, because it is cheaper to produce these products in a single firm than in separate firms. Economies of scope may reflect both declining average fixed and variable costs. Common examples of overhead- and sales-related economies of scope include having a single department (e.g., accounting and human resources) support multiple product lines and a sales force selling multiple related products rather than a single product. Savings in distribution costs can be achieved by transporting a number of products to a single location rather than a single product. Additional cost savings can be realized using a specific set of skills or an asset currently employed in producing a specific product to produce multiple products. Procter & Gamble, the consumer products giant, uses its highly regarded consumer-marketing skills to sell a full range of personal care as well as pharmaceutical products. Honda employs its proprietary know-how (an intangible asset) to enhance internal combustion engines to manufacture, in addition to cars, motorcycles, lawn mowers, and snow-blowers.

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Introduction to Mergers and Acquisitions

Donald M. DePamphilis Ph.D. , in Mergers, Acquisitions, and Other Restructuring Activities (Sixth Edition), 2012

Synergy

Synergy is the rather simplistic notion that the combination of two businesses creates greater shareholder value than if they are operated separately. The two basic types of synergy are operating and financial.

Operating Synergy

Economies of scale refer to the spreading of fixed costs over increasing production levels. Scale is defined by such fixed costs as depreciation of equipment and amortization of capitalized software, normal maintenance spending, and obligations such as interest expense, lease payments, long-term union, customer, and vendor contracts, and taxes. These costs are fixed in that they cannot be altered in the short run. By contrast, variable costs are those that change with output levels. Consequently, for a given scale or amount of fixed expenses, the dollar value of fixed expenses per unit of output and per dollar of revenue decreases as output and sales increase.

To illustrate the potential profit improvement from economies of scale, consider the merger of Firm B into Firm A. Firm A is assumed to have a plant producing at only one-half of its capacity, enabling Firm A to shut down Firm B's plant that is producing the same product and move the production to its own underutilized facility. Consequently, Firm A's profit margin improves from 6.25% before the merger to 14.58% after the merger (Table 1.2).

Table 1.2. Economies of Scale

Period 1: Firm A (Premerger)	Period 2: Firm A (Postmerger)
*ASSUMPTIONS*	*ASSUMPTIONS*
• Price = $4 per unit of output sold • Variable costs = $2.75 per unit of output • Fixed costs = $1,000,000 • Firm A is producing 1,000,000 units of output per year • Firm A is producing at 50% of plant capacity	• Firm A acquires Firm B, which is producing 500,000 units of the same product per year • Firm A closes Firm B's plant and transfers production to Firm A's plant • Price = $4 per unit of output sold • Variable costs = $2.75 per unit of output • Fixed costs = $1,000,000
Profit = price × quantity – variable costs – fixed costs = $4 × 1,000,000 – $2.75 × 1,000,000 – $1,000,000 = $250,000	Profit = price × quantity – variable costs – fixed costs = $4 × 1,500,000 – $2.75 × 1,500,000 – $1,000,000 = $6,000,000 – $4,125,000 – $1,000,000 = $875,000
Profit margin (%) ^a = 250,000/4,000,000 = 6.25% Fixed costs per unit = $1,000,000/$1,000,000 = $1.00	Profit margin (%) ^b = 875,000/6,000,000 = 14.58% Fixed cost per unit = $1,000,000/1,500,000 = $0.67

a: Margin per $ of revenue = $4.00 – $2.75 – $1.00 = $.25
b: Margin per $ of revenue = $4.00 – $2.75 – $.67 = $.58

Economies of scope refer to using a specific set of skills or an asset currently employed in producing a specific product or service to produce related products or services, which are found most often when it is cheaper to combine multiple product lines in one firm than to produce them in separate firms. For example, Procter & Gamble, the consumer products giant, uses its highly regarded consumer marketing skills to sell a full range of personal care as well as pharmaceutical products. Honda knows how to enhance internal combustion engines, so in addition to cars, the firm develops motorcycles, lawn mowers, and snowblowers. Citigroup uses the same computer center to process loan applications, deposits, trust services, and mutual fund accounts for its banks' customers.

Assume Firm A merges with Firm B and combines the data processing facilities such that a single center supports both firms' manufacturing operations. By expanding the scope of a single data processing center to support all of the manufacturing facilities of the combined firms, significant cost savings can be realized in terms of lower labor, telecommunications, leased space, and overhead costs (Table 1.3).

Table 1.3. Economies of Scope

Premerger	Postmerger
• Firm A's data processing center supports five manufacturing facilities • Firm B's data processing center supports three manufacturing facilities	• Firm A's and Firm B's data processing centers are combined into a single operation to support all eight manufacturing facilities • By combining the centers, Firm A is able to achieve the following annual pretax savings: • Direct labor costs = $840,000 • Telecommunications expenses = $275,000 • Leased space expenses = $675,000 • General and administrative expenses = $230,000

Premerger

Postmerger

•: Firm A's data processing center supports five manufacturing facilities
•: Firm B's data processing center supports three manufacturing facilities

•

Firm A's and Firm B's data processing centers are combined into a single operation to support all eight manufacturing facilities

•

By combining the centers, Firm A is able to achieve the following annual pretax savings:

•: Direct labor costs = $840,000
•: Telecommunications expenses = $275,000
•: Leased space expenses = $675,000
•: General and administrative expenses = $230,000

Financial Synergy

Financial synergy refers to the impact of mergers and acquisitions on the cost of capital of the acquiring firm, or the newly formed firm, resulting from the merger or acquisition. The cost of capital is the minimum return required by investors and lenders to induce them to buy a firm's stock or to lend to the firm. In theory, the cost of capital could be reduced if the merged firms have cash flows that do not move up and down in tandem (i.e., so-called coinsurance), realize financial economies of scale from lower securities issuance and transactions costs, or result in a better matching of investment opportunities with internally generated funds.

Combining a firm that has excess cash flows with one whose internally generated cash flow is insufficient to fund its investment opportunities may result in a lower cost of borrowing. A firm in a mature industry that is experiencing slowing growth may produce cash flows well in excess of available investment opportunities. Another firm in a high-growth industry may not have enough cash to realize its investment opportunities. Reflecting their different growth rates and risk levels, the firm in the mature industry may have a lower cost of capital than the one in the high-growth industry, and combining the two firms could lower their average cost of capital.

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Introduction to Mergers and Acquisitions (M&As)

Donald M. DePamphilis Ph.D. , in Mergers, Acquisitions, and Other Restructuring Activities (Fifth Edition), 2010

Operating Synergy (Economies of Scale and Scope)

Operating synergy consists of both economies of scale and economies of scope. Gains in efficiency can come from either factor and from improved managerial practices. Empirical studies suggest that such synergies are important determinants of shareholder wealth creation (Houston, James, and Ryngaert, 2001; DeLong, 2003).

Economies of scale refer to the spreading of fixed costs over increasing production levels. Scale is defined by such fixed costs as depreciation of equipment and amortization of capitalized software; normal maintenance spending; obligations, such as interest expense, lease payments, and union, customer, and vendor contracts; and taxes. Such costs are fixed in the sense that they cannot be altered in the short run. Consequently, for a given scale or amount of fixed expenses, the dollar value of fixed expenses per dollar of revenue decreases as output and sales increase. To illustrate the potential profit improvement impact of economies of scale, assume an auto plant can assemble 10 cars per hour or 240 cars per day and that fixed expenses per day are $1 million. Average fixed costs per car per day are $4,167 (i.e., $1 million/240). If improved assembly line speed increases car assembly rates to 20 cars per hour or 480 per day, the average fixed cost per car per day falls to $2,083 (i.e., $1 million/480). If variable costs per car do not increase and the selling price per car remains the same, the profit improvement per car due to the decline in average fixed costs per car per day is $2,084 (i.e., $4,167 – $2,083).

A firm with high fixed costs as a percent of total costs has greater earnings variability than one with a lower ratio of fixed to total costs. Assume two firms have annual revenues of $1 billion and operating profit of $50 million. However, fixed costs are 100 percent and 50 percent of total costs for the first and second firms, respectively. Assume revenues at both firms increase by $50 million. The first firm's income increases to $100 million, because all its costs are fixed. However, income at the second firm rises to only $75 million, as one half of the $50 million increase in revenue goes to pay for increased variable costs.

Economies of scope refers to using a specific set of skills or an asset currently employed in producing a specific product or service to produce related products or services. They are most often found when it is cheaper to combine two or more product lines in one firm than to produce them in separate firms. For example, Procter and Gamble, the consumer products giant, uses its highly regarded consumer marketing skills to sell a full range of personal care as well as pharmaceutical products. Honda utilizes its skills in enhancing internal combustion engines to develop motorcycles, lawn mowers, and snow blowers, as well as automobiles. Sequent Technology lets customers run applications on UNIX and NT operating systems on a single computer system. Citigroup uses the same computer center to process loan applications, deposits, trust services, and mutual fund accounts for its bank's customers. In each example, a specific set of skills or assets are used to generate more revenue by applying those skills or assets to producing or selling multiple products.

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Diffusion of open source software: institutional and economic feedback

Nir Kshetri , in The Rapidly Transforming Chinese High-Technology Industry and Market, 2008

Economies of scope

OSS has the additional virtue that it can be used in a number of applications. Economies of scope exist if the cost can be reduced by increasing the variety of activities that can be performed by OSS. The size of the Chinese electronic industry provides a proxy for the potential economies of scope. As noted in Chapter 7, the Chinese electronic industry was estimated to exceed US$300 billion in 2006 (In-Stat, 2006a).

It is worth keeping in mind that the cellular industry is among the many sizable sectors for potential Linux deployment. Given the size and growth of the Chinese mobile market, the development of Linux for mobile devices will have a powerful global impact. The Chinese mobile market is the biggest in the world. Working with Red Flag, Eforce, Culturecom and Mobile Telecom introduced the Chinese 2000 Mobile Linux Operating System for handheld devices in 2002, and the Beijing government adopted it as the country's official operating system. Similarly, in mid-2003, Transmeta Corporation, the developer of Midori Linux, formed an alliance with China 2000 Holdings to develop a Linux operating system for mobile devices in China. In July 2004, Datang Telecom Technology, the intellectual property owner of the TD-SCDMA standard, confirmed that it had selected Linux as its 3G handset's operating system (SinoCast China, 2004c). According to research firm Research and Markets, Linux will have gained 34 per cent of the Smartphone Operating System market by 2010.

Foreign multinationals in the cellular telecoms sector are engaged in designing Linux-based cellphones in China. By 2004, 10 per cent of mobile handsets sold globally by Nokia were designed in Nokia's product development centre in Beijing. In May 2005, Nokia announced its plan to expand R&D activities in China so that 40 per cent of handsets produced by its mobile phone business division would be designed and developed in the country. Similarly, in 2000, a group of engineers at Motorola's Beijing R&D centre started working on cellphones based on Linux. Since then, Linux has been an integral part of the company's software strategy. As of 2005, Motorola offered five Linux-based phones globally.

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Thai ICT Policy and the Globalising Role of the Internet

Brian Corbitt , in The Globalisation of Executives and Economies, 2006

The Key Drivers of Globalisation and the Internet

Malmgren (2001) argues that there are four groups of globalisation drivers. These are Information, Economies of Scope, Network Reach and Language and Culture. He argues, with reference to information, that if products or services have high information value or are in (or can be transferred to) a digital format, the globalisation driver is strong ( Malmgren, 2001, p.98). Further, he notes that the penetration and growth of Internet access determines the timing and scale of globalisation. Globalisation is also impacted on by the extent to which the culture and language of a community absorbs the impacts of technologies like the Internet. Finally, he argues that where there is the opportunity to alter the traditional value chain, the case to do so is strong and it will drive globalisation of the participants in an industry (Ibid., p.99). This argument can be extended to one that suggests that, if a country sees opportunity in technology and derives policy as a result, then globalisation might have an impact. However, to what extent does this acceptance of global trends, i.e. globalisation, actually have at the national level in Thailand? Is globalisation or Thai economic and social development the stronger and prevailing discourse?

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Historical Background and State of the Art on Domino Effect Assessment

Valerio Cozzani , Genserik Reniers , in Domino Effects in the Process Industries, 2013

1.3 Domino Effects and Chemical Industrial Areas

As already indicated in the beginning of this chapter, in the (petro)chemical industry, economies of scope, environmental factors, social motives and legal requirements often force companies to "cluster". Therefore, chemical plants are most often physically located in groups and are rarely located separately. Clearly, such industrial areas are characterized by reciprocal danger between equipment and infrastructures being part of the area. Since the first study of the Canvey area ( HSE, 1978) and in several further studies in Europe (HSE, 1981; Rijnmond Public Authority, 1982; Egidi et al., 1995), risk in such chemical clusters was analyzed considering entire industrial areas and not the single chemical plants.

Within chemical clusters, intangible interdependencies between equipment and infrastructures may exist from a safety (and security) point of view. Every chemical installation represents a hazard depending on the amount of substances present, the physical and toxic properties of the substances and the specific process conditions. Hence, such installations present—to a greater or lesser extent—a danger to the other installations in the neighborhood.

Although many chemical companies are grouped into industrial parks, safety and security efforts are currently concentrated on individual chemical facilities. At present, very limited approaches or concepts are available for enhancing cross-company collaboration concerning safety and security topics (see also Reniers, 2010). However, dealing with cross-company-related threats might prove very important in reducing domino risks. More attention should therefore be devoted to the need of cross-company disaster management (dealing with preventing and mitigating domino effects potentially involving more than one plant), from a safety as well as a security viewpoint. Management strategies for countering cross-company major hazards should be developed in chemical industrial parks through systematic and guided collaboration between the companies composing the cluster.

A picture is slowly emerging of chemical industrial clusters that will set their own safety and security standards through intensive collaboration. The growing complexity of chemical processes, organizations and chemical logistics, global companies with independent business units, corporate goal-setting policies with local implementation, intracluster outsourcing and increased involvement by the public are all trends that chemical industrial parks have to take into account when dealing with potential domino scenarios.

Summarizing, all the theories, concepts, definitions, tools, and methodologies discussed in this book can be applied to chemical industrial areas. An industrial area can (most obviously) be a chemical plant, but it can also be several chemical plants at once or an entire chemical cluster. When reading this book, the reader should keep this in mind.

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Business Strategies Evolving in Response to Regulatory Changes in the US Electric Power Industry

JOHN L. JUREWITZ , in European Energy Industry Business Strategies, 2001

III.B. Utility mergers and acquisitions

Probably the most publicly visible sign of emerging corporate strategies is the large number of recent utility merger announcements. Table VII.1 shows a list of the largest of these mergers. Even though merger activity had increased from historical levels during the years immediately preceding EPAct, it has accelerated enormously in subsequent years, especially since 1997.

Table VII.1. Selected major utility mergers and acquisitions in the last ten years.

Partners	New name	Completion
Pacific Power & Light	PacifiCorp	1989
Utah Power & Light
Midwest Energy	Midwest Resources	1990
Iowa Resources
IES Industries	IES Industries	1991
Iowa Southern Utilities
UtiliCorp United	WestPlains Energy	1991
Centel Corp.
Indiana Michigan Power		1992
Michigan Power
Iowa Power	Midwest Power System	1992
Iowa Public Service
Kansas Power & Light	Western Resources	1992
Kansas Gas & Electric
Northeast Utilities		1992
Public Service of New Hampshire
Entergy	Entergy	1993
Gulf States Utilities
Texas Utilities	Texas Utilities	1993
Southwestern Electric Service
PSI Resources	Cinergy	1994
Cincinnati Gas & Electric
Midwest Resources	MidAmerican Energy	1995
Iowa-Illinois Gas & Electric
Duke Power	Duke Energy	1997
PanEnergy
Enron	Enron Portland General	1997
Portland General Electric	Electric
Houston Industries	Houston Industries	1997
NorAm Energy	(Renamed Reliant)
Ohio Edison	FirstEnergy	1997
Centerior Energy
Texas Utilities	Texas Utilities	1997
ENSERCH
Public Service of Colorado	New Century Energies	1997
Southwestern Public Service
Puget Sound Power & Light	Puget Sound Energy	1997
Washington Energy
Southern Company	Southern Company	1997
Vastor Resources
Union Electric	Ameren	1997
CIPSCO
WPL Holdings	Alliant Energy	1997
IES Industries
Interstate Power Co.
LG&E Energy	LG&E Energy	1998
KU Energy
Delmarva Power & Light	Conectiv	1998
Atlantic Energy
Long Island Lighting	KeySpan Energy	1998
Brooklyn Union Gas
Enova	Sempra Energy	1998
Pacific Enterprises
Boston Edison Company (BEC)	NSTAR	1998
Commonwealth Energy
AEP		1998
Louisiana Interstate Gas
NiSource		1998
Bay State Gas
CalEnergy	MidAmerican Energy	1999
MidAmerican Energy
Duke Energy	Duke Energy	1999
UP Fuels
Carolina Power & Light		1999
North Carolina Natural Gas
Dominion Resources	Dominion Resources	Pending
Consolidated Natural Gas
Energy East (NYSEG)		Pending
Connecticut Energy
Northern States Power (NSP)	Xcel Energy	Pending
New Century Energies
National Grid Group		Pending
New England Electric (NEES)
UtiliCorp United		Pending
St. Joseph Power & Light
New England Electric (NEES)		Pending
Eastern Utilities Associates (EUA)
SCANA	SCANA	Pending
Public Service of North Carolina
AES		Pending
CILCORP
Consolidated Edison	Consolidated Edison	Pending
Orange and Rockland
Sierra Pacific Resources	Sierra Pacific Resources	Pending
Nevada Power
Scottish Power		Pending
Pacificorp
American Electric Power	American Electric Power	Pending
Central and South West
Western Resources	Westar Energy	Pending
Kansas City Power & Light
Dynegy	Dynegy	Pending
Illinova
Energy East (NYSE&G)		Pending
Central Maine Power
Northeast Utilities		Pending
Yankee Energy System
Indiana Energy	Vectren	Pending
Southern Indiana Gas & Electric (SIGCORP)
UtiliCorp United		Pending
Empire District Electric
S.W. Acquisition		Pending
TNP Enterprises
Energy East (NYSE&G)		Pending
CTG Resources
Wisconsin Energy Corp.		Pending
WICOR Inc.
Carolina Power and Light		Pending
Florida Progress Corp.
Unicom		Pending
PECO
Consolidated Edison		Pending
Northeast Utilities
Detroit Edison (DTE)		Pending
Michigan Consolidated Gas (MCN)
Allegheny Energy		Pending
West Virginia Power
Berkshire Hathaway		Pending
MidAmerican Energy
KeySpan Energy		Pending
Eastern Enterprises
Sierra Pacific Resources		Pending
Portland General Electric

^* Source: Edison Electric Institute, Electric Utility Restructuring Activity and Utility Merger Status Update, October 1999.

In reviewing utility merger activity, it is important to keep in mind that the market for corporate control of utilities in the US is unusually constrained by PUHCA. There may well be many potential suitors for utilities who have no desire to become PUHCA-registered holding companies. Therefore, until PUHCA is either substantially amended or repealed, eligible suitors appear to be practically restricted to either other domestic utilities or foreign companies.

The potential explanations for utility mergers are diverse. Public announcements generally emphasise two rationale: achieving efficiency savings through combined operations, and creating a larger and more diverse organisation better able to survive competitively. Less-public explanations might include an expectation of increasing the ability to exercise market power as well as simple satisfaction of management egos. In truth, it is not so obvious that simple horizontal mergers of neighboring electric utilities will produce strategic benefits. The publicly claimed cost efficiency improvements are usually no more than 2–3% of revenue (and largely unverifiable in any event). Moreover, in view of open transmission access, it is questionable whether the merged entities would have any greater ability to exercise vertical market power. The FERC is likely to order the merged entity to join an RTO, thereby virtually eliminating its ability to exercise greater vertical market power through control of transmission access. The FERC will also scrutinise any increase in horizontal market power and may order some amount of generation divestiture as a precondition of merger approval.

Setting aside satisfaction of management egos, this leaves the increased ability to survive competitively as the best hypothesised motivation for mergers. Such a rationale must be based on increased economies of scale and scope. No doubt many of the almost 200 IOUs in the US are too small to achieve sufficient scale economies to survive in a competitive market and many of the mergers may be warranted on this basis. However, in the new market there will be many niches and becoming a giant may not be the best survival strategy for many of these niches. In energy trading, for instance, profits depend on speed of response. Mega-mergers may simply create large bureaucracies unable to respond profitably in such a fast-paced environment. To the extent that mergers are a substitute for a more imaginative competitive strategy, they may prove worse than doing nothing at all.

In addition to horizontal mergers which may or may not achieve significant scale economies, the list in Table VII.1 also contains many mergers apparently based on achieving increased economies of scope—especially so-called "convergence" mergers between electricity and gas companies. One rationale for these mega-mergers is to form a full-service energy company capable of supplying integrated energy solutions to medium and large customers over a wide geographic area. A separate but complementary motive is to capture efficiencies in the wholesale gas and power markets. Most observers believe that nearly all new large power plants built in the next few decades will be gas-fired. Moreover, combining gas and electric businesses provides electric companies with a strategic hedge on the unknown future of distributed generation and its possible impact on the economic viability of the electric grid. Thus the competitive futures of large-scale combined-cycle plants as well as small-scale gas-fired fuel cells, cogeneration, microturbines, and aeroderivative turbine technologies may all be the kinds of commercial speculation driving interest in convergence mergers. These convergence mergers are clearly evident in Table VII.1. Among the most notable are:

•: Enron – Portland General Electric
•: Duke – PanEnergy and UP Fuels
•: TXU – ENSERCH
•: Southern Company – Vastor
•: AEP – Louisiana Interstate Gas
•: NiSource – Bay State Gas
•: LILCO – Brooklyn Union Gas
•: Enova – Pacific Enterprises
•: Dominion – Consolidated Natural Gas
•: CP&L – North Carolina Natural Gas
•: EnergyEast – CMP, Connecticut Energy, and CTG Resources
•: SCANA – Public Service of North Carolina
•: Northeast Utilities – Yankee Energy System
•: Indiana Energy – SIGCORP
•: Wisconsin Energy – WICOR
•: DTE – Michigan Consolidated Gas
•: KeySpan – Eastern Enterprises

Many more convergence mergers between electric and gas utilities can be expected in the future.

Another phenomenon worth noting in Table VII.1 is that major acquisitions of traditional electric utilities have not been limited to purchases by other US utilities and foreign companies (as discussed later). For instance, independent marketer Enron purchased Portland General Electric in 1997. ⁶ More recently, two large independent developers of power plants, CalEnergy and AES, have each moved to acquire major utilities—MidAmerican and CILCORP (pending)—paying $2.42 billion and $885 million respectively. Another large generation developer, Dynegy, has recently announced its plan to acquire Illinova in a $7.5 billion merger. Some observers speculate that these acquisitions of traditional utilities by large independent power producers are motivated primarily by interests in acquiring retail customers and that these companies may later sell the associated distribution wires businesses.

One final thing worthy of note is that moves were made in 1999 by small groups of investors to turn two publicly traded utilities into privately held corporations. In May 1999, an investor group headed by a former chairman and CEO of LILCO announced an agreement to acquire TNP Enterprises, parent of Texas–New Mexico Power, for approximately $1 billion including assumed debt. In October 1999, billionaire Warren Buffet of Berkshire Hathaway announced his intention to purchase MidAmerican Energy (recently merged with CalEnergy) for approximately $2 billion of equity and $7 billion of assumed debt.

Fig. VII.4 shows the impact of recently completed or announced mergers on the change from 1996 to 1999 in the size distribution of the largest 20 US utilities (as measured by total retail kilowatthour sales in 1996) assuming all announced mergers are completed. Despite the long list of mergers in Table VII.1, the impact on the size distribution of the largest 20 utilities is not especially visually impressive even though 8 mergers impact this size distribution. In addition to the creation of some giant utilities (e.g., AEP/CSW, Unicom/PECO, and ConEd/Northeast) within the top 20, mergers are also having a significant effect on the consolidation and absorption of smaller utilities toward the bottom end of the size distribution. This may be the more impressive structural change taking place.

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