ECONOMIES OF SCOPE



In terms of industrial organization, economies of scope are present in enterprises that develop and manufacture a variety of related products. Such corporations extend expertise in core competencies or technologies to the full range of products related to those core competencies or technologies. Economies of scope differ from economies of scale in that the enterprise enjoys a cost advantage from manufacturing generally limited quantities of a variety of products based on a core expertise, rather than concentrating that core expertise on manufacturing large quantities of one product. That is, economies of scope may be realized when it is cheaper to produce one product in conjunction with other products than to produce that product alone.

General Motors Corp. (GM) provides an excellent example of a corporation with broad economies of scope. The core competency of GM rests in the development and fabrication of products powered by gasoline- or diesel fueled engines. The firm operates six automobile groups: Cadillac, Buick, Oldsmobile, Pontiac, Chevrolet, and Saturn. Each enterprise is engaged in the production of cars powered by internal combustion engines. This core competency is extended to larger vehicles through its GM Truck division—which manufactures small- and medium-size utility trucks and larger semi-trailer tractors—and to railroad locomotives through its Electro Motive division. In addition to conventional- and diesel-engine products, GM until recently enjoyed a position in a related propulsion technology, turbine engines, through its Allison division, which built a variety of turbojet engines for use in aircraft and power generation.

Ford Motor Co. was organized similarly across product lines, controlling the Ford, Lincoln, and Mercury automobile lines as well as the Ford Truck division. For a period during the 1930s, and again during World War II, Ford manufactured not only aircraft engines but also complete aircraft.

General Electric also achieved significant economies of scope around turbine engine technology, providing the company with significant positions in power-generating equipment, nuclear power, and jet engines.

During the 1980s General Dynamics provided an example of economies of scope within defense technology, specifically as it related to defense electronics. General Dynamics controlled the nation's largest nuclear submarine company, Electric Boat, the former Chrysler battle tank division, and Convair, manufacturer of F-111 and F-16 aircraft and numerous rocket systems.

AT&T is a company initially organized solely around a single business, telecommunications technology, operating on the principle of economies of scale. Once the largest telecommunications company in the world, its recent forays into computer technology, wireless mobile telephone, and broadband data communications represent a transformation in which core competencies are being extended to related businesses.

Zenith Electronics Corp. provides an example of the opposite transformation. Once involved in television and radio production, computers , lighting systems, and cable communications, representing economies of scope, Zenith has shed all but its television and cable businesses, choosing to concentrate its expertise only in those areas where it is exceptionally competitive.

Economies of scope have been realized in a number of industries, including telecommunications and the health-care industry. One should not conclude, however, that bigger is necessarily better. Studies of big banks , for example, that were operating efficiently, have shown that they often became more inefficient as they grew larger through consolidations and mergers . Problems associated with managing complex businesses can prevent companies from realizing the benefits of economies of scope.

Like the condition of economies of scale, economies of scope provide an enterprise with opportunities for significant cost savings. Economies of scope achieve this, however, not through increases in the scale of manufacturing apparatus, but through increases in the scope of those applications into related fields. This situation provides numerous consumer benefits by enabling technological developments in one area to be tested and applied to other areas. The result is faster application of new technologies to a wider range of products and greater product value to the consumer.

[ John Simley ,

updated by David P. Bianco ]

FURTHER READING:

Banker, Rajiv D., and others. "Economies of Scope in the U.S. Telecommunications Industry." Information Economics and Policy, June 1998, 253-72.

Baumol, William J. Economics: Principles and Policy. 7th ed. New York: Harcourt Brace College Publishers, 1997.

Donlon, J. P. "Three Pillars of Globalization." Chief Executive, September 1997, 62-69.

Dornbusch, Rudiger, and others. Economics. 4th ed. New York: McGraw-Hill, 1994.

Jagtiani, Julapa, and Anya Khanthavit. "Scale and Scope Economies at Large Banks." Journal of Banking and Finance, August 1996, 127-43.

Kamra, Atul, and Peter C. Davis. "Despite Banking Cult of Bigness, Few Benefits of Scale Are Realized." American Banker, 7 July 1998, 6.



Also read article about Economies of Scope from Wikipedia

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Feb 26, 2006 @ 2:14 pm
economies of scopeIn Buick, Oldsmobile, Pontiac, Chevrolet, and Saturn. Each enterprise is engaged in the production of cars powered by internal combustion engines. This core competency is extended to larger vehicles through its GM Truck division—which manufactures small- and medium-size utility trucks and larger semi-trailer tractors—and to railroad locomotives through its Electro Motive division. In addition to conventional- and diesel-engine products, GM until recently enjoyed a position in a related propulsion technology, turbine engines, through its Allison division, which built a variety of turbojet engines for use in aircraft and power generation.

Ford Motor Co. was organized similarly across product lines, controlling the Ford, Lincoln, and Mercury automobile lines as well as the Ford Truck division. For a period during the 1930s, and again during World War II, Ford manufactured not only aircraft engines but also complete aircraft.

General Electric also achieved significant economies of scope around turbine engine technology, providing the company with significant positions in power-generating equipment, nuclear power, and jet engines

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