Economies of scope are "efficiencies formed by variety, not volume". In economics, "economies" is synonymous with cost savings and "scope" is synonymous with broadening production/services through diversified products. For example, a gas station that sells gasoline can sell soda, milk, baked goods, etc. through their customer service representatives and thus gasoline companies achieve economies of scope.
Economics
The term and the concept's development are attributed to economists John C. Panzar and Robert D. Willig. Whereas economies of scale for a firm involve reductions in the average cost arising from increasing the scale of production for a single product type, economies of scope involve lowering average cost by producing more types of products. Economies of scope make product diversification, as part of the Ansoff Matrix, efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset. For example, as the number of products promoted is increased, more people can be reached per unit of money spent. At some point, however, additional advertising expenditure on new products may become less effective. Related examples include distribution of different types of products, product bundling, product lining, and family branding. Unlike economies of scale, "which can be reasonably be expected to plateau into an efficient state that will then deliver high-margin revenues for a period", economies of scope may never reach that plateau at all. As Venkatesh Rao of Ribbonfarm explains it, "You may never get to a point where you can claim you have right-sized and right-shaped the business, but you have to keep trying. In fact, managing the ongoing scope-learning process is the essential activity in business strategy. If you ever think you’ve right-sized/right-shaped for the steady state, that’s when you are most vulnerable to attacks."
Natural monopolies
While in the single-output case, economies of scale are a sufficient condition for the verification of a natural monopoly, in the multi-output case, they are not sufficient. Economies of scope are, however, a necessary condition. As a matter of simplification, it is generally accepted that markets may have monopoly features if both economies of scale and economies of scope apply, as well as sunk costs or other barriers to entry.
Advantages
Economies of scope have the following advantages for businesses:
Distributedprocessing capability made possible and economical by the encoding of process information in easily replicable software
Less risk: A company that sells many product lines, sells in many countries, or both will benefit from reduced risk
However, not all economists agree on the importance of economies of scope; some argue that the concept applies only to certain industries, and then only rarely.
Examples
Economies of scope arise when businesses share centralized functions or when they form interrelationships at other points in the business process. Economies of scope served as the impetus behind the formation of large international conglomerates in the 1970s and 1980s, such as BTR and Hanson in the UK and ITT in the United States. These companies sought to apply their financial skills across a more diverse range of industries through economies of scope. In the 1990s, several conglomerates that "relied on cross-selling, thus reaping economies of scope by using the same people and systems to market many different products"—i.e., "selling the financial products of the one by using the sales teams of the other"—which was the logic behind the 1998 merger of Travelers Group and Citicorp. 3D printing is one area that would be able to take advantage of economies of scope, as it is an example of same equipment producing "multiple products more cheaply in combination than separately". If a sales team sells several products, it can often do so more efficiently than if it is selling only one product because the cost of travel would be distributed over a greater revenue base, thus improving cost efficiency. There can also be synergies between products such that offering a range of products gives the consumer a more desirable product offering than would a single product. Economies of scope can also operate through distribution efficiencies—i.e. it can be more efficient to ship to any given location a range of products than a single type of product. Further economies of scope occur when there are cost savings arising from byproducts in the production process, such as when the benefits of heating from energy production has a positive effect on agricultural yields.
