What is Economies of Scope? Definition and Guide - Shopify
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Economies of scope is an economic principle in which a business's unit cost to produce a product will decline as the variety of its products ... Emailaddress Password Storename Yourstorename Createyourstore OpensinanewwindowOpensanexternalsiteOpensanexternalsiteinanewwindow Doyouwanttocreateyourownonlinestore? Yes No Home ShopifyBlog WhatisEconomiesofScope?DefinitionandGuide Asabusinessowner,youhaveavarietyofbusinessstrategyoptionsforgrowingyourcompany.Oneofthoseoptionsistoloweryourcostsusingeconomiesofscope. Inthisarticle,we'llexplainwhateconomiesofscopemeans,anddiscusshowthisconceptmightbenefityourbusiness. Whatiseconomiesofscope? Economiesofscopeisaneconomicprincipleinwhichabusiness'sunitcosttoproduceaproductwilldeclineasthevarietyofitsproductsincreases.Inotherwords,themoredifferent-but-similargoodsyouproduce,thelowerthetotalcosttoproduceeachonewillbe. Economiesofscopeexample Toillustratehoweconomiesofscopework,let'ssaythatyou'reashoemanufacturerproducingmen'sandwomen'ssneakers.Addingachildren'slineofsneakerswouldincreaseeconomiesofscopebecauseyoucanuseyourexistingproductionprocess,equipment,supplychain,storagefacilities,and distributionchannels tocreateanewlineofproducts.Theresultingcosttoproducemultipleproductsislowerthanifthreedifferentcompanieseachproducedalineofmen'sshoes,alineofwomen'sshoes,andachildren'sline. Buteconomiesofscopedon'tjustprovideacostsavingsforyournewchildren'sproductline:theyalsoreducetheaveragetotalcostofproductionforallofyoursneakerproductlines.That'sbecauseyoucanextendtheuseofyourresourcestomakemoreproductstobesoldtoyoursametargetmarket,helpingyoucontinuetodrivecostsdown. Howtoachieveeconomiesofscope Economiesofscopeoccurinavarietyofways. Flexiblemanufacturing. Oneofthemostcommonwaystoachieveeconomiesofscopeismakingdifferentproductsusingthesamerawmaterialsormanufacturingfacilities.Forinstance,ifyouownabusinessthatmakescustomshirts,youcoulduseexcessfabricleftoverfromyourproductionprocessestomakeheadbandsorhandkerchiefs. Sharedinputs.Inputslikeland,labor,andcapitalcanbeusedtocreatemultipleproductsorrevenuestreams,reducingoperatingcosts.Forinstance,ifyouownorleaseawarehousetostoreyourproducts,youcouldrentorsubleaseaportionofittostoregoodsforanotherbusiness. Mergersandacquisitions.Economiesofscopeexistwhencompaniesmakehorizontalacquisitionsofcompaniesproducingsimilarorcomplementaryproducts.Becausetheyusesimilarrawmaterialsandproductionprocess,twoseparatefirmsjoinedbyamergercanreducecostsonproductsmadeusingthesameassemblylines,ratherthanproducedseparately. Whatiseconomiesofscale? Anothereconomicprincipleforcostsavings,economiesofscaleenableabusinesstoreducetheunitcostoftheirproductbyincreasingvolume—inotherwords,byproducingadditionalunitsofthesameproduct. Bykeepingyourmanufacturingprocessesfocusedononeproduct, scaleeconomiessaveoncostsassociatedwithrunningmultipleproductlines,includingprocuringrawmaterials,maintainingequipment,andmanagingvariousbusinessunits.Economiesofscalecanalsoprovideacompetitiveadvantage,ascompanieswithlargerinventoriesofagivenproduct Economiesofscalevs.economiesofscope Whileeconomiesofscaleandeconomiesofscopebothreducethecostofgoods,theydosoindifferentways.Forexample,ifyouwereanecklacemanufacturer,youcouldachieveloweraveragecostperpiecethrougheconomiesofscalebyproducingmorenecklaces. Bycontrast,witheconomiesofscope,youneedtoproducemoredifferenttypesofproductsusingthesameresources.Soinsteadofproducingmorenecklaces,youwouldalsoaddnewtypesofproductsthatcouldbeproducedwiththesameequipmentandsameinputs—bracelets,rings,andearrings,forexample. ShouldIpursueeconomiesofscope? Thechallengeinpursuingeconomiesofscopeisthepossibilityofdilutingwhatyourbusinesswasoriginallyknownfor.So,let'ssayyou'vebuiltabusinessbasedontrendydogclothes.Yousupplyhandmadedogsweatersthatarelong-lastingandwarmandclever.It'swhatyouareknownfor. Tocontinuetobuildyourbusiness,youcouldfocusonsellingmoreofwhatyoualreadysell.That'seconomiesofscale.Italsopreservesyour brandidentity asadogfashionguru. However,anotherstrategyforgrowingyourbusinessisexpandingtonewmarketsbyaddingproductsforanimalsotherthandogs,likecats,andpigs,andgoats.Youcanstillsellpetsweaters,justtoabroaderaudience.You'dnolongerbeadogfashionguru,butratherapetsweaterguru. There'snorightorwronganswerhere:it'sjustamatterofdeterminingwhatmakesthemostsenseforyourbusiness.Doyougodeepordoyougobroadproduct-wiseinordertogrow? EconomiesofscopeFAQ Howdoyoudetermineeconomiesofscope? Toseeifyou'reachievingeconomiesofscope,takethecostofproducingtwoproductsseparatelyandsubtractthecostofproducingthemtogether.Dividethisnumberbythecostofjointproduction.Iftheresultisgreaterthan0,youhaveeconomiesofscope. Whatisanexampleofeconomiesofscope? Atypicalexampleofeconomiesofscopewouldbeadine-inrestaurantthatalsooffersabakerycounterforcustomerstopurchasepastriesorpiestoenjoyathome. Whatisanexampleofeconomiesofscale? AneverydayexampleofeconomiesofscalearemajorretailerslikeWal-MartandAmazon,whichreducetheirunitcostbybuyinginventoryandmanufacturingproductsinhugequantities. Email Pinterest Facebook Twitter LinkedIn Topics: Backoffice Join446,005entrepreneurswhoalreadyhaveaheadstart.Getfreeonlinemarketingtipsandresourcesdelivereddirectlytoyourinbox.EmailaddressSubscribe Nocharge.Unsubscribeanytime. Thanksforsubscribing. You’llstartreceivingfreetipsandresourcessoon.Inthemeantime,startbuildingyourstorewithafree14-daytrialofShopify. 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