METHODS OF ACHIEVING ECONOMIES OF SCOPE
Economies of scope are cost advantages that result when firms provide a variety of products rather than specializing in the production or delivery of a single product. Economies of scope also exist if a firm can produce a given level of output of each product line more cheaply than a combination of separate firms, each producing a single product at the given output level.
Economies of scope can arise from the sharing or joint utilization of inputs and lead to reductions in unit costs. Scope economies are frequently documented in the business literature and have been found to exist in countries, electronic-based B2B (business-to-business) providers, home health care, banking, publishing, distribution, and telecommunications.
Methods of Achieving Economies of Scope
Flexible Manufacturing
The use of flexible processes and flexible manufacturing systems has resulted in economies of scope because these systems allow quick, low-cost switching of one product line to another. If a producer can manufacture multiple products with the same equipment and if the equipment allows the flexibility to change as market demands change, the manufacturer can add a variety of new products to their current line. The scope of products increases, offering a barrier to entry for new firms and a competitive synergy for the firm itself.
Related Diversification
Economies of scope often result from a related diversification strategy and may even be termed “economies of diversification.” This strategy is operationalized when a firm builds upon or extends existing capabilities, resources, or areas of expertise for greater competitiveness. Firms select related diversification as their corporate-level strategy in an attempt to exploit economies of scope between their various business units. The cost-savings result when a business transfers expertise in one business to a new business. The businesses can share operational skills and know-how in manufacturing or even share plant facilities, equipment, or other existing assets. They may also share intangible assets like expertise or a corporate core competence. Such sharing of activities is common and is a way to maximize limited constraints.
Mergers
Mergers are an attempt to create scope economies. Pharmaceutical companies frequently combine forces to share research and development expenses to bring new products to market. Firms involved in drugs discovery realize economies of scope by sustaining diverse portfolios of research projects that capture both internal and external knowledge spillovers.
Linked Supply Chains
Today’s linked supply chains among raw material suppliers, other vendors, manufacturers, wholesalers, distributors, retailers, and consumers often bring about economies of scope. Integrating a vertical supply chain results in productivity gains, waste reduction, and cost improvements. These improvements, which arise from the ability to eliminate costs by operating two or more businesses under same corporate umbrella, exist whenever it is less costly for two or more businesses to operate under centralized management than to function independently.
Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chain. As firms become linked in supply chains, particularly as part of the new e-economy, there is a growing potential for economies of scope. Scope economies can increase a firm’s value and lead to increases in performance and higher returns to shareholders. The scope economies can also help a firm to reduce risks.
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