What is expansion strategy like?

Cost complementarity measures how different product lines affect each other in terms of production; meanwhile, on the demand side, the elasticities describe the situation of the demand side in the market covering multiple products. For any company, when making its expansion action, it tends to expand its potential production capacity and maximize its profits over a longer time period.

The guidance from the production side and the guidance from the demand side contradict each other in some way. Based on the production side, a company should create new production line that has positive cost complementarity with its current production lines, so it could have lower costs for its expansion. The concept of studying from doing suggests such expansion is more likely to be within the company’s original sector and the new products produced under such expansion policy are likely to be the substitutes (including updates) for its original products. Such expansion may be effective in some certain sector; however, the company then bounds itself with the sector, while expansion across sectors may lower the company’s risk. Also based on the demand side, the company does not expand its company by producing its products’ own substitutes, as this would not boost the sales significantly. When the company tends to expand to other sector, the cost complementarity is likely to be negative.

To conclude, when companies choose their expansion strategies, the strategies that may lower the market risk are likely to worsen productivity and efficiency, and the strategies that may improve productivity and efficiency are likely to increase the market risk,