What are Economies of Scope:

• Economies of Scope arise when unit costs are lower when a business produces a wider range of products rather than specialise in just one or a few products

Examples of economies of scope:

• Sharing resources:

  • Companies can use the same resources to produce multiple products, which can lower the average cost per unit. For example, a restaurant can use the same fryers, cooks, and cold storage to produce chicken fingers and french fries. 

• Co-production:

  • Companies can use the production process for one product to create another product. For example, a company that makes dried fruit can use the peels to produce fruit oil for the skincare or culinary industries. 

• Mergers:

  • Companies can merge to share research and development costs and diversify their product portfolio. For example, two pharmaceutical companies might merge to create new products. 

• Brand extension:

  • Companies can expand their product range to take advantage of existing brands. For example, the Easy Group applies its business model to a range of markets, including gyms, pizza delivery, and estate agencies. 

• Optimising the use of resources:

  • Companies can optimise the use of resources to reduce costs. For example, airlines can transport freight cargo underneath passenger planes to make better use of the plane, fuel, and flight crew. 

Business examples of economies of scope:

• Airlines:

  • Passenger airlines often transport cargo under the plane, which makes better use of the plane, fuel, and flight crew. 

• Warehouses:

  • Warehouses can store goods for multiple companies, which maximizes the investment in the warehouse. 

• Restaurants:

  • Restaurants can produce multiple items, like chicken fingers and french fries, at a lower cost than if each item was produced separately. 

• Shoe manufacturers

  • Shoe manufacturers can produce multiple lines of shoes, like men's, women's, and children's, using the same production process, equipment, and distribution channels. 

• Procter & Gamble

  • Procter & Gamble produces many hygiene-related products, like razors and toothpaste, using the same inputs. 

• Co-production

  • Companies can use the production process for one product to produce another, such as using the peel of dried fruit to produce fruit oil for skincare

Benefits:

• Efficiency:

  • Companies can save time and money by using the same resources to produce multiple products. 

• Lower production costs:

  • Companies can reduce the average cost of production by using the same resources to make different products. 

• Increased revenue:

  • Companies can increase revenue by selling more products. 

• Improved customer satisfaction:

  • Companies can improve customer satisfaction by reducing product costs and offering various products. 

• Reduced risk:

  • Companies can reduce risk by diversifying into related products. For example, a car producer that only makes SUVs is vulnerable to market changes, but a company that produces a variety of vehicles can respond to consumer preferences. 

• Quicker incorporation of new technology:

  • Companies can incorporate new technology into product designs more quickly.

Drawbacks:

• Risk of damaging reputation: Expanding too quickly into too many products can dilute a brand's value, especially if the business was originally built on a niche. 

• Less experience with new products: The second product a company tries may not be as successful as the first, which can reduce the brand's value. 

• Disorganisation: Expanding too fast can lead to the accumulation of expansion costs that the company can't pay. 

• Fewer job opportunities: Economies of scope can mean fewer job opportunities because the company doesn't have to take on as many employees. 

• May never reach a plateau: Economies of scope may never reach a point where the business is right-sized and right-shaped. 

• Substantial initial outlays: New manufacturing technologies may require substantial initial outlays. 

• Risk is higher: With increased costs, the risk is higher and the gamble is greater.

What are Economies of Scale:

• Economies of Scale arise when unit costs fall as output rises