This is “The Influence of Interaction Effects on Investment Decisions”, section 14.4 from the book Creating Services and Products (v. 1.0). For details on it (including licensing), click here.

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14.4 The Influence of Interaction Effects on Investment Decisions

New investments can interact positively or negatively with existing assets of the firm. For example, when Amazon started offering electronic books (Kindle) and electronic audio (Audible), there was an obvious and natural synergy with existing content and their core competencies. These investments improved Amazon’s strong performance because they complemented existing company assets. When Amazon began adding tools and a variety of other home improvement products and then started selling groceries in certain markets and branched out into cloud computing, there were concerns related to synergy. Part of the answer relates to Amazon’s core competencies. Amazon is good at online retailing and it is very good at maintaining a very scalable and robust server and processing infrastructure. They had core competencies that were transferable to those businesses.

There are numerous examples where an investment lacked synergy with existing assets. Many believed that eBay’s acquisition of Skype was ill conceived because there did not appear to be any positive synergies between the businesses. The businesses did not appear to mesh and the executives at both eBay and Skype were constantly fighting. eBay eventually sold Skype at what was considered a very modest amount. In some ways, eBay’s competitive advantage was undermined because of the relationship. The interaction effects between eBay’s assets and Skype’s assets were negative.