Example 1: Avoid duplication of back-end resources
One of the first advantages of cost savings through diversification is the possibility of saving back-end resources. Firm operations such as human resources, IT, and procurement can be shared between different parts of the firm.
Example 2: Shared managment
Another opportunity for savings is through shared general management. Potentially there is savings for management running two separate areas (potentially being more fully utilized) relative to needing two sets of management across the firms.
Of course, the potential savings of shared management assumes that it is possible to share management across the areas. If a new set of firms are required, then not only may there be no shared management, but potentially a new corporate level of managers across the different parts of the firm may add additional costs.
Example 3: Better negotiation power
Another potential saving comes from better negotiating power with your suppliers. Since you are now purchasing items in larger volumes across the two areas of the business, there may be opportunities to exert greater power over your suppliers.
The extent to which firms can benefit from greater negotiating power through diversification depends on the overlap of similar components or materials. If there are shared suppliers or parts the opportunities for exerting greater power is inherently greater than if there is little overlap between the different parts of the business.
Example 4: Shared manufacturing and operations
Another opportunity for cost savings comes from the possibility of cost savings through shared manufacturing and operations. There is the possibility of shared manufacturing and operations – in turn reducing the costs relative to two firms operating completely seperately.
Final thoughts: Don't overstate the opportunities of cost saving synnergies
It is important not to overstate the possibilities of cost savings. It may seem obvious, but to achieve cost savings, it is actually necessary for the firm to avoid duplicated costs, or to be able to achieve savings through increased negotiating power. Sometimes synergies only exist on paper, anticipated, but when the company actually diversifies, it is discovered that separate resources are necessary and that it is not possible to share capabilities across areas.
This article explores the advantages of related diversification – the benefits of synergy from increasing the scope of the firm.
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This article considers ways diversification can opportunities to increase sales, with examples of revenue-increasing synergies.
This article explores some of the reasons for the discrepancy between expected and realized benefits when firms diversity or merge with others.
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This article explores examples of some of the primary cost savings that come from increased volumes.
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