Question

One source of growth is external growth from a merger and/or acquisition. Often merger/acquisition are justified on the basis of the expected benefits from 'synergies' created by the merger/acquisition. Economists know these as economies of scale and economies of scope. Select one of the below mergers and acquisitions and determine if the synergies come from economies of scope or economies of scale. Make sure you provide a clear explanation of the difference between economies of scope and economies of scale.

a) Sirius XM acquires Pandora;

b) the yet to be concluded merger of Sprint, T-Mobile and Metro PCS;

c) the merger of Strayer University and Capella; or

d) the Renault/Nissan/Mitsubishi Alliance.

Answer 1

Renault/Nissan/Mitsubishi Alliance

The automobile industry is simple in terms of sales but complicated in the market structure. It is quite simple that you develop a vehicle according to consumer preference and sell it. However, the consumer preference varies widely according to the geographies, demographics and price patterns. European customers prefer small to midsized cars while Americans have fond of muscular SUVs and MUVs. In India, they want higher quality at a lower price. The technology also varies in this hotly competitive market. Diesel cars might be cost-effective but they are at a higher level in creating pollution. Hybrid and electric vehicles are the new buzz word in the industry and that needs expertise as well as funds for R&D.

The automobile industry is the industry where economies of scale are very important but economies of scope is also necessary. Volkswagen Group has sales of over $200 billion but its profit margin is below 10%. The group was the largest in terms of sales a couple of years back. This indicates that the industry requires economies of scale but Fiat had a joint venture with Chrysler and Tata Motors and it provides its superior engine to their vehicles. This allows economies of scope as the companies can reduce costs on R&D and can develop a single platform.

The French auto company Renault had an alliance with Japanese automaker Nissan and they have included Mitsubishi in the alliance. It has created one of the biggest automobile companies in the world which could compete with Toyota and Volkswagen. There are other benefits of the alliance in cost-saving as well as market penetration. The alliance is able to reduce the costs significantly through its purchasing organization. Further, move towards developing common module platform for vehicles across the alliance means there will be synergies across the component and vehicle manufacturing.
The alliance also moved production in emerging countries and worked in conjunction to boost the market share.
The RNM alliance as it is called has also outlined the plans to develop an electric vehicle with a joint effort.
This indicates a considerable economies of scope.