Horizontal Jurisdictional Boundaries
Economies of Scale – lower per unit costs from producing and selling more of the
same good or service
 Spread fixed costs
o Management (one each of executive officers/senior managers)
o Capital (expensive)
o Purchasing (bulk purchases, lower transaction costs)
o Advertising (advertising reach, umbrella branding)
o Research and development
o Physical properties of production (cube-square rule)
o Inventories (lower inventory sales ratio as sales increase)
 Specialization and division of management
 Tradeoffs with other technologies
 Capital-intensive more so than labor-intensive
 Specialization versus generalization (thoracic v general surgeons)
 Minimum efficient scale
 Specialization limited by extent of the market
 Natural monopolies
Diseconomies of scale – higher per unit costs from producing and selling more of
the same good or service
 Labor-intensive more so than capital-intensive
 Principle-agent problems
 Labor problems
 Bureaucracy – increased bureaucratic red tape
Economies of scope – lower per unit costs from producing and selling different
products (airlines, different cities from a hub and spoke process)
Strategic fit
Economies of density – lower per unit costs from increasing volume
 lumping together and then batch processing (airlines, load factor on a plane)
Learning economies – shifts LRAC down
Diversification
 Efficiency-based
o Spread Management (one each of executive officers/senior managers)
o Internal capital market – cross-subsidization (cash cow  rising star)
o Adds value
 Not justified
o Diversification of shareholder portfolio (good if company can find
undervalued firms or firms that have some efficiency basis; bad if
diseconomies set in; e.g., Sears: socks and stocks)
o Marginalizes managers of “dog” divisions, who think that they could
mange better if not combined.
o Influence activities – managers waste time and money trying to
influence the powers that be to direct resources toward their divisions
instead of focusing on improving the division; increase cost with not
comparable revenue results