Have you ever heard of a economy of scope, here you will know everything related to the subject, so you can learn how and when to apply it in your business.
economy of scope
Una economy of scope It is an economic factor that makes the simultaneous manufacture of different products more profitable than the individual production of each one. This means that the production of one good reduces the cost of producing a similar one.
Generally, it occurs when producing a wide range of products together is better for a company than creating less variety or producing each good independently. In such a case, the long-run average and marginal cost of a business decreases due to the production of complementary goods and services.
How and when to apply it in your company?
Una economy of scope It is essential for any company and it can be applied in various ways:
The main thing, and the most common, is the idea that efficiency is gained through diversification. Goods that share the same inputs or have complementary production processes offer great opportunities for economies of scope.
Horizontal merger or acquisition of another company is also a way to apply this type of economy. Products that can share common inputs are well suited to generating economies of scope through horizontal acquisitions; For example, two regional retail chains can merge with each other by combining different product lines and lowering average storage costs.
Examples of economy of scope
Procter & Gamble is an excellent example of a company that practices this economy efficiently from common inputs, since it produces hundreds of hygiene-related items, from razors to toothpaste, thanks to which it can afford to hire expensive graphic designers and marketing experts who employ their skills in all product lines, adding value to each of them.
Another representative example is the company General Motors, which bases its main activity on the manufacture of gasoline or diesel engines, but is not limited to supplying its products to a specific brand of automobile, but rather operates with six different groups, from Cadillac to Chevrolet. It has also expanded its operations to trucks, vans and even propelled turbines.
Advantages of the economy of scope for a company
- It enables the company to respond to changing consumer preferences and product life cycles.
- It makes it easier to produce variations on the same products through automation, computer-aided manufacturing, and improved technology.
- It reduces risk for a company through diversification.
- It offers regional and international variations.
Other key points on economy of scope
- Describes situations in which producing two or more goods together results in a lower marginal cost than producing them separately.
- It results from goods that are co-produced through the same process, that have complementary production processes or that share inputs for production.
- La economy of scope it differs from economy of scale in that the former seeks to produce a variety of different products together to reduce costs, while the latter involves producing more of the same good, reducing costs and increasing efficiency.
If you liked this article, continue reading in the following link the best business development examples of market, where you will be able to analyze the successful strategies for your enterprise.