“Economies of scope” can also be called “economies of range”, so if you have heard of any of them, they come to the same thing. This type of operation is ideal when a company finds it more profitable to produce more products apart from the original for which it worked. It is a form of save on costs by selling more quantity than the one that was planned and established.
Next, you will see what they are really about economies of scope with examples of them. You will also be able to identify several companies that today practice this business philosophy. In turn, depending on the sector to which you belong, I hope that I can guide you or inspire you with a new idea in which you can benefit from this way of working. The idea here is to get more for less. Production is normally related to the sector in which the company is dedicated.
What are economies of scope?
The most accepted theory on the need to create economies of scope is the following: «when a company achieves produce 2 or more related products, with lower economic costs and time margins than if two companies produced them independently. In other words, the idea is to take advantage of the infrastructure already created to produce one or more goods when they can be related to the activity of the company.
When the company has the option to diversify and Expand your production lines without this representing an extra cost. This way of working can be present in many places and sectors, from the automotive industry, to logistics, textiles, agencies, etc. This does not mean that any company can carry it out, eventually there may be regulations depending on the sector that prevent them from dedicating themselves to something else. Nor should it be confused with economies of scale, where a dominant position comes from the high volume of orders and thus lower prices, but always engaging in the same activity.
Not to be confused with economies of scale
Economies of scale can easily be confused by their word with economies of scope. In those of scale, we are talking about very large companies or companies that, due to their size, gain an advantage due to the large volume of orders they have. This in turn drives down their material costs, and they are able to stay in business thanks to ultimately low prices.
For example, a company that is dedicated to economies of scale is the Walmart supermarket chain. They buy as many products as they can negotiate lower prices with your suppliersyes Consequently, they can win the loyalty of their customers by having the same products with more savings.
Examples of economies of scope
Economies of scope allow companies to expand their product catalog. This is achieved when the company employs efficiently its production, logistics and distribution processes. Today, we can find this methodology in many companies such as:
- Volkswagen The car company has been able to adapt to a changing market. Through acquisitions and strong economies of scope, the group has managed to grow to 12 vehicle brands in total. Among the best known we can find Audi, Seat, Skoda and even Porsche.
- Google. Known for being one of the most used search engines, Google, or rather, its parent company Alphabet, operates with different companies and its economy of scope is highly efficient. Not only the programming, but even the robotics, research, watches, smartphones, are just some of their products and services.
- KraftHeinz. Known for its tasty Ketchup, Kraft Heinz is known for its many sauces. In fact, the use of its entire production chain makes it an excellent company that is capable of combining to produce from sauce from Orlando tomato, to Oscar Mayer sausages. I am sure that the latter will have left more than one person confused.
Advantages and disadvantages of economies of scope
Among the main advantages we found a better Economy and Finance of the company. By earning more returns and more volume from your suppliers, your financial health improves. Also the greater use of the machinery, resources and processes help the company's activity not to decrease, but rather to increase. This in turn reduces the risk of bankruptcy, as new segments have been incorporated into the business.
However, among the disadvantages the most usual is that management efficiency is lost. When expanding products and productions, we must not forget to strengthen the part in charge of business management. At the same time, it is possible to lose the principles on which the company was based, since do not forget that quantity does not always mean quality. This reduction in the possible quality of the products could affect the reputation of the company, leading to a loss of customers.