| ally speaking, economies of scale is about the | | | | Ang and Lin (2001) bring a case study from the |
| benefits gained by the production of large volume | | | | financial industry, and the ways economies of |
| of a product, while economies of scope is linked | | | | scope and economies of scale work for mutual |
| to benefits gained by producing a wide variety of | | | | fund offerings. At Fidelity, an example of |
| products by efficiently utilising the same | | | | economies of scope at work, investors had the |
| Operations. Each of these business strategies, | | | | option for high diversified portfolio at the same |
| their strengths and weaknesses, will be discussed | | | | institution. But aiming at cost reduction (which is of |
| in details in this paper. | | | | interest to clients and investors), the economies |
| “Economies of scale” has been | | | | of scope did not provide the desired objectives, |
| known for long time as a major factor in | | | | while economies of scale did, in the case of |
| increasing profitability and contributing to a | | | | mutual funds. Trying to find the ideal conditions |
| firm’s other financial and operational ratios. | | | | for economies of scale and economies of scope, |
| Mass production of a mature, standardised | | | | the authors say that a single-product firm should |
| product can apply the most efficient line-flow | | | | pursue the economies of scale. However, |
| process and standard inputs for reducing the | | | | economies of scope for a two-product firm is |
| manufacturing cost (per unit). Mass manufacturing | | | | said to exist “if the cost of producing the |
| is also associated with a significant market-share, | | | | two products jointly is less than producing the |
| and a tight supply-chain management (up to | | | | same products separately”. When it |
| vertical integration with suppliers and retailers). To | | | | comes to three or more products, the number of |
| maintain the market-share, the market leader | | | | production combinations increases, so evaluation |
| should come with continuous product | | | | of the economies of scope becomes more |
| improvements, so to sustain demand and avoid | | | | complicated and requires more data to analyse. |
| its dropping, following the product’s | | | | Advocating for a different view of the economies |
| maturity in the Product Life-Cycle (PLC). | | | | of scope and scale, Peppers and Rogers (1995) |
| “Economies of scope” is relatively | | | | put the customers under the spotlight. They |
| a new approach to business strategy, and is | | | | argue that market share can be seen as share of |
| heavily based on the development of high | | | | customer, pursuing customer differentiation rather |
| technology. Economies of scope, as defined by | | | | than product differentiation, managing customers |
| using same processes for producing similar | | | | and not only products and more emphasis on |
| products, can fit the batch-flow or | | | | economies of scope at the expense of scale. |
| group-technology processes; nevertheless, for | | | | As expected, between these two approaches |
| best results the flexible-manufacturing should be | | | | there is a “grey area”, in which |
| adopted. Computer Integrated Manufacturing | | | | firms found a way to enjoy both worlds of |
| (CIM) allows lowering the setup-time and required | | | | economies of scale and scope. |
| tuning between products, so to be economically | | | | Mass-customisation, I believe, provides few similar |
| efficient for small batches of non-standardised | | | | customised products (the concept behind |
| products. In other words, companies can compete | | | | economies of scope) along with operating |
| on product customisation and short lead-time. | | | | mass-production and controlling large |
| A case study at GM shows that new competition | | | | market-share for each of these products. |
| can reduce firm’s market share and its | | | | REFERENCES |
| benefits from economies of scale (Howell, 2003). | | | | Ang, J.S. & Lin, J.W. (2001, May). A |
| The author argues that the main problem was | | | | fundamental approach to estimating economies of |
| the neglect of innovation, as a side-effect of | | | | scale and scope of financial products: The case of |
| GM’s strategy (until the Japanese cars | | | | mutual funds. Review of Quantitative Finance and |
| entered the US market, in the late 1970s). Cachon | | | | Accounting, 16(3), 205-221. |
| and Harker (2002) found that scale economies are | | | | Cachon, G.P. & Harker, P.T. (2002, October). |
| so powerful that to provide a strong motivation | | | | Competition and outsourcing with scale economies. |
| for outsourcing, too; even though the outsourcing | | | | Management Science, 48(10), 1314-1333. |
| contractors are not allowed reaching the same | | | | Dobson, G., & Yano, C. A. (2002, Fall). |
| scale as the outsourcer. Dobson and | | | | Product offering, pricing, and make-to-stock |
| Yano’s (2002) article is an in-dept scholarly | | | | make-to-order decisions with shared capacity. |
| analysis of the factors associated with economies | | | | Production and Operations Management, 11(3), |
| (and diseconomies) of scale and economies (and | | | | 293-312. |
| diseconomies) of scope. The authors argue that | | | | Howell, H.J. (2003, May/June). Adapting GM |
| mass-customisation, which means broader product | | | | research to a new corporate strategy. Research |
| lines, “may help to increase market share | | | | Technology Management, 46(3), 14-20. |
| and may allow higher prices to be charged, but | | | | Peppers, D., & Rogers, M. (1995). A new |
| they also cause challenges associated with | | | | marketing paradigm: Share of customer, not |
| diseconomies of scope” such as setup | | | | market share. Managing Service Quality, 5(3), |
| time. | | | | 48-51. |