Nissan Renault Alliance

It was reported last month that the two automakers have agreed to develop 70% of their vehicles jointly along a "common module family" CMF method.

Under CMF, the major categories of vehicles, by size, are developed according to common engineering of front underbody, engine, cockpit, rear underbody, and electrical/electronic architecture. For example: The wand that controls headlamps and highbeams will be the same in all future Nissan and Renault subcompacts, allowing both companies to benefit from large-scale purchases from fewer suppliers.

The supply chain can create value by eking out cost savings from scale economies in some components. To do so, would-be rivals choose to cooperate so that their suppliers can enjoy scale economies. Thus, the vertical arrangement benefits from the horizontal arrangement.

Thoreau was a polluter

Economist Ed Glaeser talks about cities.  Watch for the knock on Thoreau, and the ecological disaster wrought by back-to-the-land environmentalists.  (see Stewart Brand's Ted Talk on this).
 If Prof Glaeser is right, that density is green, does this mean that organizations like the Tennessee Land Trust, who work to reduce density, are wrong?

I think the answer is clear:  the Land Trust offers tax breaks to private land holders, to keep their property from density increasing development. That they can claim that this somehow benefits the public interest is mere propaganda.

Joe Fresh at JCP

Joe Fresh is an upscale Canadian retail chain that appeals to a younger demographic. JC Penny is an struggling US retailer not know for being at the forefront of fashion. As widely reported, they have struck a deal in which Joe Fresh would obtain floor space with JPC stores.

The deal's exploitation of economies of scope stem from economies of scale in different complementary assets owned by each firm. Due to its successes, Joe Fresh has a hot brand that could be leveraged into more retail outlets. It is experiencing economies of scale marketing which the deal exploits very quickly. Due to its failures, JCP has plenty of underutilized floor space in its stores throughout the US. It has economies of scale in distribution which the deal could exploit very quickly. If done well, this moves these assets to a higher-valued use. Many of the news analyses focus on whether this is enough to save JCP (generate positive profits). This misses the point that JCP will almost surely be better off (higher profits even if still negative).

Airline Operations

The airline industry is so interesting because it demonstrates many of the concepts we study in Managerial Economics with many applications to pricing, strategy, costs, etc. We usually learn more when there is a big change, like the proposed AA/US Air merger. Douglas A. McIntyre's biggest complaint is that customer service falls off and this is not reviewed by government officials in the merger review. He does make a succinct statement of the possible economies of scale:

The theory behind airline mergers is that they create economies of scale. Back office operations can be chopped in half. Airport gates, most of which are expensive, can be consolidated. Planes can be taken out of service, and some duplicate routes can be cut. Staff reductions save employee expenses. The Delta, United and probable American mergers have each been set in turn to create the largest airline in the world. The size of an American tie up with U.S. Airways will create the largest one of all.

The theory behind merger effects does take into account affects on product offerings but, in practice, these are difficult to measure. This difficulty becomes apparent in Luke Froeb's contribution "Post-merger Product Repositioning:."

Auto Alliance Cost Svaings

Economies of scope in products are often the result of economies of scale in producing a common  component. Case in point is the alliance between GM and PSA Peugeot Citeroen. They will be collaborating on a number of models. Some models marketed by both will based on a platform developed by one.

The two firms will also collaborate on further improvements to PSA Peugeot Citroen's EB three-cylinder petrol engine used in the 208, and have signed a definitive deal for joint purchasing that should bring better economies of scale for PSA and GM brands.

Rental Car Formats

Avis is buying Zipcar. Where will the value be created? Avis is a traditional rental car company catering mostly to business travelers. Zipcar specializes in hourly rentals in dense cities for car-less residential customers to get errands done. Avis Chief Executive Ron Nelson claims three possible sources of synergies.

Avis expects the deal to lower the companies' combined costs by $50 million to $70 million a year. Mr. Nelson said the synergies were tied to three components: lower fleet costs, better fleet utilization and increased revenue by targeting corporate clients, one-way rentals and airport bookings.

In particular, there could be a cost complementarity as Avis's traditional business customers tend to rent during the week while Zipcar's tend to rent during weekends. A merger could decrease both units' idle time of their the chief asset, cars.

Auto Learning-by-Doing is Embodied in the Managers

While on my European excursion to multiple conferences (read junket), I was able to see Chad Syverson present his research coauthored with Steve Levitt and John List called, "Toward an Understanding of Learning by Doing: Evidence from an Automobile Assembly Plant." It seems that as a production line is setup for a new car model, there are substantial increases in productivity (2-3 fold) up to a point, at whch point it plateaus. But when a new model trim or work shift (usually a swing shift) is added, the productivity does not jump back to that of the initial model/trim or shift. And when problems are detected for one trim or shift, they are mostly fixed for all. This suggests that the learning-by-doing is not "embodied" in the workers but instead resides in the management practices. It is the job of managers to make sure that knowledge gained in one place is applied wherever it is useful.

Scale Economies of Stock Exchanges

The first question to ask for any acquisition is "why does this merger create value?" In this case, the Singapore Exchange and Australian Securities Exchange hope to create a more liquid market.

The deal would create the world's fifth largest listed exchange operator. It will benefit both parties, creating a roughly US$1.9 trillion market that would pose a serious threat to other Asian exchanges in Hong Kong and Tokyo by luring away big fee-paying clients like high-frequency traders and companies seeking to raise capital in a deep, liquid market.

Venti Merlot?

Suppose you have a brandname known worldwide for high quality beverages and restaurants on every other city-block, but they are only busy from 6am-4pm. Starbucks has considerable fixed capacity that is being wasted after, say, 4pm. To make their restaurants attractive to customers in the evenings, they are experimenting with evening beverages, namely wine and beer.

"This is in response to our customers telling us that they want more options for relaxing in our stores in the afternoon and evenings and reflects what we've learned from our "learning lab" stores (also in Seattle)," read a statement from Starbucks, "We hope to continue to learn from our experience at Olive Way and then consider bringing this concept to select stores in neighborhoods where it is relevant."

Since the fixed assets - both the brandname and restaurants - would represent common costs for both morning and evening beverages, there are likely to be economies of scope between the two.

What is the "cost" of locally grown food?

Eight dollars for a dozen eggs, and $3.90 for a pound of peaches, if you can get them:

Getting fruits and vegetables only from local farms necessarily limits variety—few crops are available everywhere all the time—and it doesn't come cheap. Economies of scale apply even to produce.

Urbanization makes possible variety and low prices.  It also eliminates what Stewart Brand (video below) calls that "poverty trap" and "ecological disaster" of subsistence farming.

Apple starts making its own chips

Lost in all the hoopla surrounding the introduction of the iPad, was the decision of Apple to make the A4 chip that powers it:

The iPad is a relatively high-end device, yet Apple believed it didn't need to look outside its own walls for a CPU, and thus could forgo paying any form of "Intel tax." By contrast, the iPhones and iPods tend to use a chip called ARM that Apple, like many other ARM customers, need to license.

Of course, Apple is a very big company and, especially for the sort of high-volume product it hopes the iPad to be, it can afford the sorts of up-front engineering expenses that would make smaller companies reel. But if it can afford to make an in-house chip good enough for the iPad in 2010, might it not also be able to make one good enough for the Macintosh in 2013? And if it can do so by then, why couldn't Hewlett-Packard ( HPQ - news - people ) and Dell also?

Kraft's Proposed Acquisition of Cadbury

Last week, Kraft announced a $16 billion offer to acquire British confectionary company, Cadbury. Potential benefits include providing Kraft access to new distribution channels, especially foreign markets, where Cadbury is particularly strong.

Cadbury rejected the offer saying that the 31% premium to its stock price at the time “fundamentally fails to reflect the current value of Cadbury as a standalone business.” Kraft shareholders appear to be skeptical that the synergies from the potential acquisition will exceed the premium Kraft would eventually have to pay - Kraft's stock fell around 7% following announcement of the offer.

eBay Sells Skype

Internet auction site, eBay, announced yesterday that it is selling off a majority interest in Skype, which provides voice and video connections over the Internet. Apparently there were fewer "synergies" between eBay and Skype than originally claimed, although it looks like the acquisition and subsequent sell-off won't end up costing eBay that much in dollar terms.

eBay (EBAY) will sell a controlling share of the Internet-calling service to a group of investors led by private equity firm Silver Lake for $1.9 billion in cash and $125 million in short-term debt. The sale values Skype at $2.75 billion, not far below the price eBay paid for the business in 2005, and higher than the value recently placed on Skype by some Wall Street analysts.

Demand for newspapers continues to decline

From Editor&Publisher

...for 538 daily U.S. newspapers, circulation declined 2.5% to 40,689,617.

• The New York Times was down 4.51% to 1,037,828
• The Washington Post was down 3.2% to 635,087
• The Wall Street Journal was down 1.53% to 2,011,882
• However, USA Today posted a gain of 1% to 2,293,137.

In response, daily newspapers are cutting back circulation in outlying [high cost] areas. Newspapers are also merging editorial deparments to take advantage of obvious scale economies and merging their adveritising to provide a more attractive vehicle to national advertisers.

If there is no scope, just say nope.

In a recent Business Week story, Atlanta-based Spectrum Brands is profiled. Over the last twelve years, the company has become a large conglomerate by buying a variety of different consumer products companies, including batteries, plant food, potting soil, rawhide dog bones, and aquariums.

From a prior post, we know the test for whether these acquisitions would add value. Indeed, the article notes that managers claimed value would be created through "synergies" and "diversification."

What do you think? How much synergy do you see between producing batteries and dog bones? How about potting soil and aquariums?

Somewhat predictably, synergies have largely failed to materialize and the article notes that Spectrum is currently "hobbled by a massive $2.5 billion debt load, one that is 10 times larger than Spectrum's value on the stock market." The CEO and senior managers have been replaced, and debt is being refinanced.

When faced with the tempting prospect of acquiring another company, remember: "If there is no scope, just say nope". Maybe I should trademark that phrase - another business bestseller perhaps??

P&G acquiring superbrands, selling "tired" ones

P&G, the biggest consumer goods company in the world, (sales of $76.5 billion), is acquiring "superbrands," like Gillette and Clairol, while selling off "tired" brands, like Sunny Delight, Jif, Crisco, Pert Plus, and Sure.

The Economist (article) reports that the superbrands are being acquired to allow the company take advantage of economies in purchasing (foodstuffs, packaging, chemicals and energy), and to improve its bargaining position with Wal-Mart, the world's largest retailer.

I suspect that the superbrands are being acquired so that P&G can plug them into its innovative supply chain. Not only does it allow P&G to get product to retailers more quickly and efficiently, sophisticated software tools allow retailers to better track customer behavior so that it knows how best to sell P&G's products (article). P&G's supply chain makes the superbrands more valuable to P&G than to current owners.

As more manufacturers develop supply chains that can capture and use information about consumers and their purchasing behavior, data aggregators like IRI and Nielsen becomes less important. Wal Mart has since dropped out of these data collection networks, so that market share data, like those we reported earlier on baby food, have to be interpreted carefully.

Also notable is that P&G has begun outsourcing its innovation activity. It has 75 "technology scouts" that travel the globe looking for new ideas ("R") that it can develop ("D").

Stock price reaction to these changes has been tepid.