Economies of Scope: Beyond ‘Bigger is Better’
What Are Economies of Scope?
Economies of scope are the cost savings a company gets by producing a variety of products together, rather than producing each one separately. Instead of getting cheaper by being bigger, the company gets cheaper by being more diverse.
The key idea is that it’s often more efficient to use a single set of resources—like a factory, a sales team, or a brand name—to make multiple products. By doing this, the company can spread its fixed costs over an even wider range of outputs.
Think of it this way: a single kitchen can produce a variety of dishes. It’s more cost-effective to have one kitchen making pizzas, pasta, and salads than to have three separate restaurants with three separate kitchens, three sets of staff, and three sets of ovens.
How Do Companies Achieve Economies of Scope?
Companies realize these cost advantages through several mechanisms:
- Shared Resources:
- A manufacturing plant can be repurposed to produce different, related products. For example, a car company that already has a factory for sedans can use the same machinery and assembly line to produce a new line of SUVs, which share many parts. This is much cheaper than building a completely new factory.
- Shared Distribution and Marketing:
- A food and beverage company that already has a nationwide distribution network for its sodas can use the same trucks and relationships with retailers to launch a new brand of iced tea. The marketing team can also promote both products under the same brand umbrella, reducing the per-product marketing cost.
- Brand Recognition:
- A well-known brand like Apple can easily launch a new product—like a smartwatch—because consumers already trust the Apple name. The company doesn’t have to spend as much on building brand awareness from scratch.
- By-products and Waste:
- A beef processing plant can sell the leftover hides to a leather goods manufacturer, or render fat into products for other industries. The ability to use by-products reduces waste and creates a new revenue stream, lowering the overall cost of the primary product.
Economies of Scope vs. Economies of Scale: What’s the Difference?
While they both lead to lower costs, they are driven by different strategies.
| Feature | Economies of Scope | Economies of Scale |
|---|---|---|
| Goal | Cost savings through product variety | Cost savings through volume |
| Driver | Diversifying output | Increasing a single product’s output |
| Example | A single bakery making cakes, cookies, and bread. | A factory making millions of identical cookies. |
| How it Works | Spreading fixed costs and shared resources across multiple products. | Spreading fixed costs over a larger number of identical units. |
A company can, and often does, pursue both simultaneously. For instance, Amazon achieves economies of scale by selling millions of books, but also economies of scope by using its massive logistics network and customer data to efficiently sell electronics, clothing, and cloud computing services.
Why Economies of Scope Matter
For businesses, economies of scope are a powerful tool for growth and stability. They allow companies to:
- Increase efficiency by fully utilizing their assets.
- Diversify their revenue streams, reducing risk if one product line performs poorly.
- Gain a competitive edge by offering a broader range of products at a lower total cost.
The next time you see a company launch a new product that seems a bit different from its core business, it’s very likely they’re capitalizing on the cost-saving power of economies of scope.
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