Economies of scope are an economic concept which refers to the reduction in the overall cost of production while also referring to the increase in output. The concept is very useful for those businesses which operate on a small scale and have high levels of variation in operations. Such economies of scope would otherwise be hard to quantify as output would vary from market to market. This is why economies of scope are especially important for new businesses and startups, as well as for those industries which do not operate on a large scale.
The economies of scope approach is not new. In fact, it has been used before by industrialists and businessmen everywhere as a method of devising a more efficient way of producing and delivering goods and services. These days, economies of scope are becoming increasingly important to the modern manufacturing industry. This is because manufacturing companies are constantly searching for ways of producing their products at lower costs and in larger quantities.
There are basically two ways of approaching economies of scope: the first is to look for ways of reducing costs, while ensuring that quality is not sacrificed. The second is to look for ways of increasing productivity, while ensuring that the end product is of the same quality as one product produced at a lower cost. These concepts can easily be separated when talking about production costs. While reducing costs is vital to achieving economies of scope, increasing productivity is important from a business perspective as well. Both need to be considered whenever developing or improving the quality of the final product.
Looking at how to create economies of scope, the first step is to determine the kinds of inputs that will be necessary to produce a product. The industry in which the goods and services will be produced will have to be looked into, as will the location of factories. After this, consider what kind of technology can be brought to bear on the production process. This will include machinery, tools, common inputs, and so on. All of these factors play a role in determining the size of the economies of scope.
Obviously, the size of economies of scope can be increased if the number of factories manufacturing the goods or services increases. However, if more factories are built than are required to produce the same amount of goods, the economies of scope are reduced, as the volumes will not be large enough. To keep things simple, consider how many units it would take to produce a standard piece of clothing. If we assume that each unit can be manufactured on a factory scale, then we can conclude that the economies of scope of these items will be limited to the area of the plant that is used to manufacture them.
If we look at the way that mergers and acquisitions occur, we can see another example of economies of scope. When merging, two companies will typically focus on one part of the market rather than both. In this scenario, the merging companies are looking to eliminate any waste, save money, and improve efficiencies. By combining, these companies can leverage their size and resources to make better use of these assets.
A third example of a company that enhances its scope through mergers and acquisitions is the pharmaceutical industry. Mergers and acquisitions between pharmaceutical companies can result in the creation of manufacturing facilities to produce specific drug products, or the creation of brand new related diversification areas such as cardiovascular and metabolic products. By forming a partnership, the companies can focus on developing one or more of these products in order to provide better health and wellness experience to their patients.
Of course, the economies of scope are not just confined to the manufacturing sector. They extend to non-manufacturing activities such as research and development, commercializing new products, and leveraging one’s physical location. For example, if a business owns property, it may have an interest in improving its reach by investing in surrounding businesses and facilities, thereby increasing the scope of its operations. Similarly, if a landlord owns rental properties, the overall value of his properties will increase as a result of making improvements around his property, which will also increase his profits. All of these examples highlight how the size of one’s economy of scope can impact the quality of its output and its ability to generate a profit, while potentially reducing marginal cost.