"The power of economies of scope is having multiple arrows in your quiver." -Meg Whitman, Former CEO of HP.
What is Economies of Scope?
Economies of Scope refers to the ability of a business to increase its profitability by using its common resources more efficiently through diversification while producing products or services.
The gas station also has a convenience store,
The cafe also sells cups and thermoses,
Building a Business Center by a construction company with its own investment,
The health center, which specializes in a single field, begins to provide services in all fields through diversification,
Economies of Scope / History of Scope Economics
Economies of Scope Foundations of the concept Industrial Revolution (1760-1840), railway and telegraph It extends to mergers of companies.
Economies of Scope / Good practices in Scope Economics
IKEA: While it was initially a furniture store, over time it transformed into a store where you can buy all household products
Tchibo: Its journey started in 1949 with the sale of coffee via mail, then it opened coffee shops, produced coffee machines, and eventually expanded to the sale of personal products.
Amazon: While it was initially a bookseller, it later provides services in many areas such as cloud computing and artificial intelligence, as well as electronic commerce.
Apple: Expanding with the ecosystem logic from the beginning, producing computers, music players, phones, tablets and watches, respectively.
Benefits of Economies of Scope
Cost Savings: Using the same resources in the production of different products and services provides cost savings.
Efficiency: Optimizing operational processes increases efficiency and ultimately profitability.
Diversification: Using different products and services on the same infrastructure helps the company diversify its portfolio. This increases sales.
Market Expansion: Expertise in many areas allows the company to gain easier access to different markets.
Competitive Advantage: Companies that can use the same resources in more than one area may have an advantage over their competitors that focus on a single product or service.
Customer Satisfaction: When customers are offered more than one product and/or service under one roof, customer satisfaction generally increases.
Risk Reduction: Product diversification generally reduces the financial risks of institutions.
Supply Chain Optimization: Especially in Purchasing and Logistics processes, using common suppliers for different products and services can increase operational efficiency.
Risks of Economies of Scope
Increase in Complexity: Using the same infrastructure for different products or services can increase the complexity of business processes.
Loss of Focus: Focusing on too many products or services can lead to a decrease in performance in the company's core business.
High Initial Cost: The ability of various products or services to use the same resources brings about serious initial investment costs.
Return on Investment Risk: High initial costs may also negatively affect the rate of return on investment.
Quality Risk: When the same resources are used in more than one area, product or service quality may decrease.
Process Improvement Challenge: In complex systems with many products or services, process improvements can become more difficult.
Supply Chain Challenges: Where common suppliers are used, problems with one supplier can affect the entire product or service range.
Loss of Strategic Flexibility: Common infrastructure and resources can make it difficult for the company to quickly adapt to strategic changes.