Economies+of+scope

=Economies of Scope=

The concept of economies of scope is a rather rudimentary and a standard in corporate America in today's economy. The concept of creating multiple products using the same resources to create those products for the purpose of minimizing costs. The creation of costs through the creation of products is the baseline for all businesses due to the costs of materials, machinery, skills, and labor. If any of these variables can be used to create multiple outputs then the creation of economies of scope takes place.

For example, if Pepsi Co. purchases its own bottling company to further vertically integrate their company. In this move they can choose to either bottle both Pepsi and Mt. Dew in their new plant or choose to just bottle their best selling product, Mt. Dew. In this decision the Pepsi management team analyzes the costs to out source the Pepsi to another company while bottling Mt. Dew in their new plant, as well as, the costs associated with bottling both beverages in their new plant. After extensive research Pepsi Co. finds the following costs associated with each decision: Since the cost of producing the two beverages in the same plant has less cost than producing the beverages in different facilities, it is recommended to produce both Pepsi in Mt. Dew in the new facility. This is obviously a over simplified example, due to the real costs of producing a product would be far more complex. The example can still show that the utilization of the bottling factory for both would create an economy of scope by using the same resource for multiple purposes.

The concept is more commonly shown at the enterprise level where companies spread the cost of accomplishing their goals by working together or combing their output into a unitary product or task. This can be shown through the use of websites in corporate America. Initially websites were a way to inform people about the businesses' products and services. Over the past decade the explosion of the Internet has pushed companies to better utilize the power of their websites to perform many tasks such as, advertising (C1), sales(C2), employment services(C3), and investors services(C4).



As you can see from the graph above, with each added process that is moved to the website the cost associated with each business process is then dispersed using a single resource. The costs associated with advertising, sales, employment services, and investors services are still going to be a part of the businesses costs, but will be much lower due to the integration of those processes into the sunk cost of the website. The concept of economies of scope may seem like common sense, but is an essential process in businesses' economic plans.

Which resources would be applicable to be utilized via economies of scope? A. Skills B. Buildings C. Labor
 * D**. All the above

Which is the benefit of economies of scope? A. Reduce costs B. Better utilize current resources C. Generate new revenue
 * D**. All the above

Resources: Baye R., Michael. __Managerial Economics and Business Strategy__. McGraw-Hill Irwin: New York, NY 2006. Hofstrand, Don. __Economies of Scope__. Iowa State University. 2007. Retrieved from: http://www.extension.iastate.edu/AGDM/wholefarm/pdf/c5-205.pdf Hofstrand, Don. __Economies of Scope__. Iowa State University. 2007. Retrieved from: http://www.agmrc.org/agmrc/business/gettingstarted/econofscope.htm

By: Brent Rothgerber