Economies of scale or economies of scope: which is better?
Economies of scale and economies of scope
Economies of scale occur when a company reduces its unit cost as the volume of production increases. In other words, the greater the number of products being manufactured, the lower the cost per unit. This phenomenon is due to several factors, such as greater efficiency in the use of resources, the specialization of the labor force, the optimization of production processes and the ability to negotiate better conditions with suppliers. Economies of scale can be of two types: internal and external. Internal economies of scale: they originate within the company itself as its production increases. For example, a factory that buys advanced machinery can produce more units at a lower cost. External economies of scale: occur when factors outside the company, such as the improvement of the infrastructure of a country or region, allow several companies in the sector to benefit from a reduction in costs. Economies of reach, on the other hand, occur when a company reduces its costs by producing a greater variety of products or services instead of focusing on just one. The idea is that the company’s resources can be used more efficiently if production is diversified. For example, a company that already has an efficient distribution chain could take advantage of it to introduce new products instead of creating a new infrastructure. Although both economies of scale and scope seek to reduce costs, their approaches are different. Main objective: Economies of scale focus on increasing the production of a single type of good or service, while economies of scope focus on diversifying the production of several goods or services, taking advantage of shared resources. Shared resources: In economies of scale, the focus is on improving the efficiency of production processes and optimizing the use of resources in a single product. In economies of scope, resources are shared for different products or services, generating synergies between them. Cost reduction: In economies of scale, costs are reduced thanks to specialization and the purchase of inputs on a larger scale. In economies of scope, cost reduction comes from the efficient use of infrastructure, technology and labor to deliver a diverse range of products. Risks and flexibility: Economies of scale may be more vulnerable if there are fluctuations in demand for a single product. Instead, economies of scope diversify risk by offering different products or services. Mercadona benefits from buying large volumes of products from its suppliers, allowing it to negotiate better prices and reduce logistics costs. In addition, its centralized production model and optimized distribution network allow it to reduce the cost per unit of the products it sells. Grupo Antolín, by producing in large quantities and supplying to a wide variety of customers in the automotive industry, is able to take advantage of economies of scale to reduce its manufacturing costs The manufacture of drugs in large quantities allows Almirall to optimize its production processes and to reduce unit costs, especially in mass-sale products. In addition, their capacity to produce on a large scale allows them to compete on prices with other players in the pharmaceutical sector. Meliá Hotels International operates different types of hotels, from luxury resorts to more affordable accommodations, in different geographic markets. This allows them to share infrastructure, such as the reservation system and property management, achieving a reduction in costs when operating in a wide range of tourism segments. Ferrovial has diversified its business model, investing in sectors such as transport infrastructure, highways and airports, as well as in urban services. This allows them to share resources and technical skills for different types of projects, generating economies of scope by taking advantage of their knowledge in multiple areas of the sector. Both economies of scale and economies of scope are key strategies in business management. The former allow companies to increase their production and reduce costs by focusing on a specific product, while the latter seek to reduce costs by diversifying products, taking advantage of shared resources. Understanding when to apply one or another strategy is essential for companies to remain competitive and to maximize their profitability in a globalized and increasingly complex market. Economies of scale and economies of scope
Comparison
Examples of companies with economies of scale and scope
