Economies Of Scope

Published Mar 24, 2023

Definition of Economies of Scope

Economies of Scope refer to the cost savings that arise when a company produces two or more products together using a shared input or process instead of separately producing each product using separate inputs and processes. In other words, it is a measure of the cost efficiency that comes with producing multiple products instead of just one. In that sense, economies of scope are the counterpart to economies of scale, which describe cost savings from producing a higher quantity of a single product.

Example

To illustrate this, let’s look at an imaginary brewery that produces beer as its main product. During the brewing process, the brewery also generates a significant amount of spent grain, which is the leftover grain from the brewing process. Instead of disposing of this spent grain, the brewery decides to use it to make chips as a secondary product.

By doing so, the brewery is able to take advantage of economies of scope, because it does not have to purchase the spent grain that is generated during the production of the beer first. This reduces the production costs for the chips and saves disposal costs as well.

In addition, the brewery can leverage its existing distribution channels, marketing efforts, and customer base to sell its chips, which can lead to additional cost savings and revenue generation. By producing beer and chips together, the brewery can achieve greater efficiency and profitability compared to producing each product separately.

Why Economies of Scope Matters

Economies of scope are an essential concept in business strategy and management. Companies that can achieve economies of scope enjoy a competitive advantage over their rivals because they can produce multiple products at a lower cost than their competitors. This can lead to higher profits, increased market share, and a better ability to respond to changing market conditions. Thus, companies strive to identify and leverage economies of scope as part of their corporate strategy. It helps them to optimize their product mix, reduce their overall costs, and increase their profitability in the long run.