Tuesday 3 January 2012

Economies of Scale vs. Economies of Scope

Economies of Scale vs. Economies of Scope

Generally speaking, economies of scale is about the benefits gained by the production of large volume of a product, while economies of scope is linked to benefits gained by producing a wide variety of products by efficiently utilising the same Operations.

"Economies of scale" has been known for long time as a major factor in increasing profitability and contributing to a firm's other financial and operational ratios.

Mass production of a mature, standardised product can apply the most efficient line-flow process and standard inputs for reducing the manufacturing cost (per unit). Mass manufacturing is also associated with a significant market-share, and a tight supply-chain management (up to vertical integration with suppliers and retailers). To maintain the market-share, the market leader should come with continuous product improvements, so to sustain demand and avoid its dropping, following the product's maturity in the Product Life-Cycle (PLC).


"Economies of scope" is relatively a new approach to business strategy, and is heavily based on the development of high technology.


Economies of scope, as defined by usiDefinition of 'Economies of Scope'



Defination:


An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced. 

Investopedia explains 'Economies of Scope'


For example, McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production.

Another example is a company such as Proctor & Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the costs are spread out, this lowers the average total cost of production for each product.ng same processes for producing similar products, can fit the batch-flow or group-technology processes; nevertheless, for best results the flexible-manufacturing should be adopted.







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