So we're discussing why to diversify. And I just discussed a series of financial arguments for diversification and suggested that many of these arguments have fallen out of favor in the last couple decades. Now, let's talk about an argument that I think is more standard that you see in this day and age. And those are operational reasons to diversify. And more often than not, these are framed around the term, synergy. This idea that by operating in multiple business, we create some type of synergy that benefits the individual lines of business. So, let's discuss what some of those operational reasons may be. First, there might be an ability to exploit various economies of scale and scope. Economies of scale would be how much you produce in any given business. Economies of scope is in essence economies that exist across businesses here. So, for example, the most obvious one would be simply lowering your costs by reducing duplicate effort. So if we have two businesses, and we share, let's say, a finance or accounting function within the organization, we might be able to economize on costs by sharing that resource between the two entities. A second thing we wanna think about, is the ability to transfer or leverage our core capabilities, or rent generating assets between businesses here. So this would be the idea that we have ability to shared know-how or technology, maybe even our reputation between businesses that helps raise both of them up. Maybe it's underutilized rent-producing assets that we have, that we get to put into use. So let me give you an example here, think about Honda Motor Company. Now, you might know Honda as an automobile company. But Honda is actually very diversified into a large number of motorized devices, including lawnmowers, jet skis, motorcycles, and the like. What they all share in common is highly efficient, high quality, small engines. And so at the end of the day, Honda has been able to successfully take a core capability that they have in making small, energy efficient engines. And then leverage it into a number of different related markets together and sharing that underlying technology and know-how. So again, they're transferring that expertise across different businesses, that are arguably different markets, but they have the same core technology at the heart of them. Third thing we want to think about, improving coordination among businesses here. So there might be ways that you can create broad incentives for cooperation and information exchange by holding a portfolio of businesses together. I go back to Disney once again. So in Disney when you have at one level the theme parks and another level the movies, you can now coordinate with one another. So you know your theme parks are gonna capitalize on the new movie, maybe the new Marvel movie that Disney has coming out here. And, by having it under one organizational entity here, you can correctly line incentives and coordination so to best leverage those synergies across those businesses. Now a caution here, synergies are sometimes hard to actually realize in practice. And in fact, I think I find whenever you see a merger and acquisition proposed, for example, you'll always hear the synergies comment. And history has not been kind to a lot of mergers and acquisitions here. Synergies are often hard to realize at the end of the day. My argument would be, it's not that synergies that don't exist, but it is that you need to be very critical of the existence of synergies. Really do your homework in trying to analyze really what synergies are we creating between these two businesses. The end of the day, it's often the case that these synergies can actually be achieved through market mechanisms, particularly contracts, rather than actually integrating them together. So we can think of alternatives such as outsourcing activity or forming formal alliances with other organizational players. One would argue that if you can find some type of alternative form of integration, once again, through outsourcing or alliances, that might be more efficient than trying to bring it all under one organization there. So again, there are many times where operational regions can justify diversification, these synergies exist. But be critical here. And think about the alternative mechanisms by which you might still be able to achieve some of those synergies that you're looking for, beyond just integrating them into the same organization.
