OTC medicines include Panadol, Eno. Oral healthcare products include Aquafresh and Sensodyne. Nutritional healthcare products include Horlicks, Ribena and Lucozade.
Economies of scope enable GSK to leverage core competences, such as R&D. It also enables them to moblilize invisible assets, such as their 12 800 highly skilled researchers.
The scale of manufacturing in GSK is huge, with the manufacture of over 4 billion packs per year in 28,000 different presentations (including tablets, creams/ointments, inhalers, injections, liquids
and steriles), which are then supplied to over 150 markets. Over £3.7 billion was spent by GMS on production in 2009.
For pharmaceutical companies, it is important to screen as many compounds as possible. GSK screens 65 million compounds every year to discover new medicines. This can only be achieved through economies of scale.
Finally, economies of scale enable GSK to supply to over 150 countries worldwide, develop technical expertise and resources, corporate global support network, and cost-effective supply solutions and specializing in complex, difficult to produce products.
Economizing on transactional costs
Since GSK relies primarily on research, ideas from one project can help another project. GSK set up a research centre in Biopolis, Singapore. Biopolis is a world class research hub. By setting up a research centre in Biopolis, GSK can economize on transactional costs.
Internal capital markets
In a diversified firm, some units generate surplus funds that can be channeled to units that need the funds. In 2009, GSK’s core pharmaceuticals and vaccines businesses delivered sales of £19.1 billion. Sales in the Emerging Markets pharmaceutical business grew to nearly £3 billion. Consumer Healthcare sales grew to £4.7 billion. Through these profitable businesses, GSK is able to absorb the impact of losing more than £1 billion of sales to genericisation in the US market in 2009.
Diversifying shareholders’ portfolios
Individual shareholders benefit from investing in a diversified portfolio. Hence, a shareholder can invest in a single diversified firm and achieve the benefits of portfolio diversification. Examples of GSK diversifying their portfolio by acquiring other companies include acquiring Stiefel for $3.6 billion in 2009 and Maxinutrition for £162 million in 2010. In 2009, GSK completed 10 bolt-on acquisitions.
Identifying undervalued firms
Finally, a firm’s shareholders may benefit from diversification if its managers are able to identify other firms that are undervalued by the stock market.
Advantages of diversification
In synergizing , businesses can increase their collective value which would be more than their individual or separate value. Maxinutrition is Europe’s No. 1 sports nutrition company by market share. By acquiring Maxinutrition, the deal will extend GSK’s reach into wider categories, complementing its existing Nutritional Healthcare business. GSK will also bring its marketing excellence and R&D innovation capability to extend the growth of Maxinutrition in the UK, European and International markets where the products are available.
Reduces cost when firms share resources and activities common to the businesses. Across the entire business, GSK continue to implement restructuring programme to simplify operations and reduce costs. In 2009 this programme delivered £1 billion of annual savings.
Take advantage of existing expertise, knowledge and resources in the company when expanding into new activities. This may result in transfer of skills, such as research and development knowledge and sharing of resources.
Finally, diversification spread risk by avoiding having all eggs in one basket. For example, instead of just relying on traditional pills and euro markets, GSK has diversified into oral care products, skin care products, sports products, nutritional products, as well as diversifying into emerging markets and Japan.
Disadvantages of diversification
May result in slowing growth in its core business.
Adding bureaucratic complexity. In addition to direct financial costs, there may additional bureaucratic complexities necessitated by the need to coordinate and control core activities with additional activities.
Losses may be incurred during market consolidation process resulting in some business units being subsidized by other profit making units.
Diversification through acquisition across national boundaries may result in the organisation having to deal with varying intricacies of the political and legal requirements of the different countries in which the organisation has controlling interests.
