Ezra Bar, PhD in Management of Engineering and Technology,
Northcentral University, Prescott, Arizona, USA. 2004.
Economies of Scale vs. Economies of Scope
Generally speaking, economies of scale is about the benefits gained by the production of
large volume of a product, while economies of scope is linked to benefits gained by producing a
wide variety of products by efficiently utilising the same Operations. Each of these business
strategies, their strengths and weaknesses, will be discussed in details in this paper.
“Economies of scale” has been known for long time as a major factor in increasing
profitability and contributing to a firm’s other financial and operational ratios. Mass production
of a mature, standardised product can apply the most efficient line-flow process and standard
inputs for reducing the manufacturing cost (per unit). Mass manufacturing is also associated with
a significant market-share, and a tight supply-chain management (up to vertical integration with
suppliers and retailers). To maintain the market-share, the market leader should come with
continuous product improvements, so to sustain demand and avoid its dropping, following the
product’s maturity in the Product Life-Cycle (PLC).
“Economies of scope” is relatively a new approach to business strategy, and is heavily
based on the development of high technology. Economies of scope, as defined by using same
processes for producing similar products, can fit the batch-flow or group-technology processes;
nevertheless, for best results the flexible-manufacturing should be adopted. Computer
Integrated Manufacturing (CIM) allows lowering the setup-time and required tuning between
products, so to be economically efficient for small batches of non-standardised products. In other
words, companies can compete on product customisation and short lead-time.
A case study at GM shows that new competition can reduce firm’s market share and its
benefits from economies of scale (Howell, 2003). The author argues that the