Economies of Scope

Economies of scale come from producing more of the same product. Economies of scope come from producing a wider range of products using shared inputs.

For example, a bakery that already has ovens, staff and delivery vans can add sandwiches and cakes to its range at a lower cost than a separate business starting from scratch. Similarly, a bank can sell insurance and investment products to its existing customers using the same branches, systems and customer relationships.

Economies of scope are a common reason for diversification, product line extensions and some mergers. Shared brand names, customer data, research and distribution networks are frequent sources.

They do not always materialise. Managing many different products can create complexity, dilute focus and add coordination costs. When the products have little in common, the expected savings may be small, which is one reason some diversified companies break themselves up.