Glamor Economics

Chapter 59

Chapter 8 Section 6 Clever Collocation, Keeping Resources from Idle - Economies of Scope

When it comes to economies of scope, many people think that it is economies of scale, but this is actually incorrect.Economies of scope are those brought about by the scope of the firm rather than the scale, that is, the cost of producing two products at the same time is lower than that of producing each product separately.Economies of scope exist whenever it is cheaper to produce two or more products together than separately.Economies of scope generally refer to the reduction of unit costs caused by the expansion of business scope, the increase of product categories, and the production of two or more products.Unlike economies of scale, it is usually the savings that a firm or production unit derives from the unit cost of producing or supplying a certain series of products (as opposed to producing the same product in large quantities).And this savings comes from departments such as distribution, research and development, and service centers (like accounting, public relations).Economies of scope generally become the theoretical basis for enterprises to adopt diversification strategies.Economies of scope is a basic category to study the relationship between the production or business scope of economic organizations and economic benefits.Take the thermal power plant below as an example.

A thermal power plant builds a brick factory nearby, and the raw material for producing bricks is the cinder produced during the power generation process.Cinders are completely waste for power plants. In the past, power plants had to spend special funds to clean them up. Now brick factories can not only help clean up cinders, but also turn them into useful products and sell them in the market.The power plant not only saves on the cost of cleaning up the cinders, but also generates additional income through the sale of bricks.The increase in total income makes it have a cost advantage over its peers. Even if the selling price of electricity is lower than that of its competitors, it can still obtain higher profits than its competitors.

Economies of scope do not necessarily exist within the scope of an enterprise, and economies of scope can also be formed between enterprises.In the above example, if the brick factory is not built by the power plant, but by another firm, there will be economies of scope between firms.In such a case, the power plant may sell the cinder to the brick factory for a very low price, and it can still save on clean-up costs, and still get income from selling the cinder.But we look at it from the brick factory, because its raw materials are waste from other manufacturers, so the cost must be extremely low.Therefore, compared with other brick factories, it enjoys the benefits of cost savings, and the reduction of costs allows it to lower prices to gain a competitive advantage.

In summary, economies of scope have the following advantages:
1. Cost advantage.Economies of scope can reduce production costs by increasing the scale of production.It is mainly manifested in apportioning fixed costs and reducing variable costs.The apportionment of fixed costs is mainly reflected in the apportionment of depreciation expenses of fixed assets, thereby reducing the fixed cost of unit products; the reduction of variable costs is mainly manifested in reducing procurement costs and improving resource utilization.

2. Product differentiation advantage.Economies of scope can obtain differentiation advantages through product diversification, including product quality, function, appearance, variety, specifications and services provided, etc. This diversity can make consumers identify with the product and distinguish it from similar products provided by other companies. .

3. Marketing advantage.The cost advantages and product differentiation advantages brought by economies of scope can bring marketing advantages to enterprises.The key to marketing is to correctly locate the needs and desires of the target market, and to provide the satisfaction required by the target market more effectively than competitors.Marketing emphasizes meeting the needs and desires of consumers. From the perspective of marketing theory, it is to reflect the competitiveness of enterprises in terms of products, prices, locations, promotions, public opinion, politics or power.The cost advantage and differentiation advantage formed by economies of scope reflect the competitiveness of enterprises in terms of products, quality and price.At the same time, on the internal marketing platform, we can use the original channels to sell a variety of products, and we can also make better use of the brand advantages that the company has formed to open up markets for new products, making it easier for consumers to accept, and at the same time Followers form a huge barrier to entry.

4. Advantages of technological innovation.Economies of scope are conducive to the introduction and innovation of technology.First of all, the understanding and benefits of economies of scope make the management of the enterprise pay more attention to the development of new products and new processes; Breakthroughs in materials, adoption of new technology, training of innovative teams, and strengthening of market research will eventually form a strong core competitive advantage of the company.

5. The advantage of resisting risks.Economies of scope gain competitive advantages in terms of cost, differentiation, marketing and technological innovation, which actually increases the ability of enterprises to resist risks.At the same time, economies of scope also strengthen the "metabolism" and complementarity of enterprises.

[links to related words]

Cluster economy The cluster development model in which a large number of upstream and downstream small and medium-sized enterprises gather around large enterprises and large groups to engage in supporting processing and production is called cluster economy.This is not only different from the organizational form in which some large enterprises internalize the division of production, because small and medium-sized enterprises are independent legal entities, but also different from the disorderly situation where small and medium-sized enterprises are scattered and lack of connections, because the horizontal and vertical connections of specialization Organically organize small and medium-sized enterprises in a region.

Production complementarity refers to the phenomenon that the joint production and operation of two or more enterprises can optimize the division of labor and share resources, so that the overall benefit of joint production is greater than that of independent production.Production complementarity can occur within a firm or between firms.In either case, producers of both products stand to benefit.Many enterprises may generate a lot of waste or leftovers in the production process. These seemingly useless things may be useful or even important to other enterprises or produce other products.Therefore, enterprises should not only look at them from the perspective of their own products or industries, but should explore their value from a higher height and a wider perspective, and try their best to turn waste into treasure.

(End of this chapter)