Economies of Scale vs Economies of Scope
Both economies of scale and economies of scope are conceptually the same, and the nature of these two can change the structure of the competition in the industry over a time, as well as the profitability of supplying to consumers. They both provide companies ways of increasing the market share and being competitive.
Economies of Scale
This is the cost advantage that a business obtains due to expansion. That is the factor that cause the average cost of producing a product to fall, as output of the product rises as explained in the ‘Dictionary of Economics’. By achieving economies of scale, a company would have the cost advantage over its existing and new rivals. Further, the company could achieve lower long run average cost (i.e. productive efficiency). But if technology changes, this might alter the nature of costs in the long run, where it could allow small businesses to adapt new technology successfully and break into the established market segments. Have you ever wondered why the price of a digital camera keeps falling, while the functions and performance are high? This is Economies of Scale, which brings down the unit cost of production and hence, passes this advantage onto the consumer through lower prices. E.g. for a supermarket getting 5,000 cartons of milk as opposed to just 100, is cheaper. That is, the marginal cost of delivering 5,000 cartons will be low compared to that of getting 100.
Economies of Scope
These are factors that make it cheaper to produce a range of related products than to produce each of the individual products on their own (Dictionary of Economics). When a company produces a wide range of products as opposed to specializing in one or few handful of products economies of scope occurs. For example, a company could expand its product range in order to take advantage of the value of its existing brands – this would exploit economies of scope. In industries, such as telecommunications, healthcare industry etc, the economies of scope has been realized. E.g. when fast food outlets product multiple food items, they enjoy a lower average cost compared to that of firms producing the same food. Because the common factors such as storage, service facilities, etc can be shared among the different food items and hence, reducing the average cost.
What is the difference between Economies of Scale and Economies of Scope?
Both are conceptually similar, but the following differences exist.
· Economies of scale is about gaining benefits by producing large volume of a product, whereas economies of scope brings benefits by producing a wide variety of products by efficiently use of the operations.
· Economies of scale refer to reduction in average cost for a single product, whereas economies of scope refer to lowering average cost of producing two or more products.
· Economies of scale has been known for a long-time, whereas economies of scope is relatively new approach to business strategy.
· Economies of scale use the most efficient process, whereas economies of scope uses the same process to produce similar products using high technology.
Looking at different views of both economies of scale and scope, both are ways of increasing market share of the company. Like economies of scale, economies of scope also provides cost saving opportunities for companies.