Economies of Scale vs. Economies of Scope

Henry-Ford

Wikipedia defines economies of scale as reductions in the average cost (cost per unit) associated with increasing the scale of production for a single product type, whereas economies of scope refers to lowering the average cost for a firm in producing two or more products.

The notion of economies of scale dates back to the 1700s and a renowned Scottish philosopher and economist*, and was behind Henry Ford’s drive to create a car at the lowest cost possible. Economies of scope is based on work done in the late 1970s and was behind many of the large conglomerates that were formed in the 1970s and 1980s in the United States.

While I have no problem understanding and believing in the power of economies of scale, I am not so convinced of the benefits of economies of scope.

I think economies of scope encourages a proliferation of products, which creates complexity, which creates additional costs.

From a personal standpoint, economies of scope can lead to spreading yourself to thin, and not taking full advantage of your strengths.

While there are certainly several examples of companies, and people, who have taken advantage of economies of scope, I think such examples are the exception rather than the rule.

Nike, by one estimate, has over 400 separate styles of sports shoes. That’s economies of scope in action, and no one can argue with the success Nike has had.

James Patterson, the New York Times best-selling author has written thrillers, non-fiction, young adult, and children’s books, a great example of economies of scope. After all, if you’re already in the habit of writing, whey not try to expand in to some new styles?

But I like the approach of this American industrialist who is quoted as saying, “People can have the Model T in any colour – so long as it’s black“.**  That’s economies of scale in action, and no one can argue with the success Ford had in building a car for the masses.

And there are not many people who can accomplish what Patterson has done, and I don’t think they should try. For every James Patterson there are probably dozens, if not hundreds, of authors who are successful concentrating on just one form of writing, and bringing pleasure to millions through such writing. And as they do more of their type of writing, they get better at it. That’s the power of economies of scale.

So while being a person whose expertise spans a significant number of different subject areas*** may be helpful when playing Jeopardy, I think in the long run it is better to focus on what you do best so that you can become the best.

*Who is Adam Smith?

**Who is Henry Ford?

***What is a polymath?

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Jim Borden

Accounting Prof. at Villanova; happily married for 30+ years; father of 3 outstanding young men; vegan; interests: fitness, creativity, education, blogging, social media.

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