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Economies of Scope

"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.


For example:

  • 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,

  • etc.


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.



Comparison of Economies of Scope and Economies of Scale



 

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