Economies of Scale and Economies of Scope: Here is the difference…

As with most of us, I wear many hats and have several roles. In addition to serving as a strategy management consultant, I teach business education courses, and in both roles, I get several questions on various topics from students, corporate executives and business leaders, and recently one of the regular questions came up on a conference call.Question+Mark.small The question is “Terina, what is the difference between economies of scale and economies of scope?” What follows is a quick and easy answer with examples.

Economies of Scale

This refers to how an organization can focus on reducing the average per unit cost of its products/services by increasing the scale of production for a single product type.

Think “produce/deliver more of a given product or service by utilizing fewer or same amount of resources.”  Efficiency

Example using the Coca-Cola company: Economies of scale is at play when the company lowers the cost to produce/manufacture its signature beverage “Coke.” The company can produce more at a time by increasing output standards of its machines and people.

Economies of Scope

This refers to how an organization can lower the average per unit cost by expanding the number of products/services if offers. By using the same facilities, equipment, labor force, technology, etc., a company can use product diversification to become more efficient and increase revenue. The theory is that selling several different products/services can be done more efficiently than selling only one product/service because the company can distribute the costs over a greater revenue base.

Think “produce/deliver a differentiation or varied products/services using much of what you already have.”  Diversification

Example using the Coca-Cola company: Economies of scope is at play when the company decides to use its current equipment, facilities, technology, labor to produce more beverages (i.e., Sprite, Fanta, Minute Maid) in an effort to diversity and lower costs. When they ship the beverages, they save money on shipping because the more products you ship, the more efficient it can become.
 
 
by Terina Allen
President & CEO, ARVis Institute
Chair, ARVoices Strategic Leadership Network