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 Economies of Scale and Scope

Dr Antony Beckett
 Introduction: Economies of Scale and Scope

Economies of Scale & Scope (ESS) central to strategy

Play key role in historical development of firms

Economies of scale

traditional definition:

Costs per unit fall as output increases as fixed costs are spread
across a high level of output

Fails in explaining what's really going on – what's driving the fall

in costs
 Types of Economies of Scale

1. Static - traditional economic focus

2. Volume – critical in driving lower costs

3. Learning – second cycle of scale

 Static Economies of scale
Traditional focus of economics

Fixed costs are spread as the volume of production rises

The larger the firm gets the lower the costs per unit of output

1. Inventory economies

2. Technical economies – costs of specialist machinery

3. Selling and marketing economies

4. Managerial economies

5. Pecuniary economies
Volume Economies 1908 – Model T introduced
1909 – 10,000 produced: $825
1912 – 70,000: $590
1913 – 203,000 (assembly line introduced):$525
1921 – over 1 million cars produced:$325
Template
Knowledge

Single
Work flow Purpose
Co-ordination Machines

Division
Of
Labour
Volume Economies
1. Elasticity of demand critical here
2. Basis of expansion for cameras etc.
Increasing
Production
Drives….

Economies of
Scale which
Increasing generates:
Demand Lower
Prices

Increasing
Market size
&
Market Share
 Learning Economies of Scale

Managers become better at organising mass production: work

flows better organised

Products designed for mass production

New machines created

Experience Curve: rising cumulative production results in falling

costs
 Economies of Scope

Generated as a body of knowledge is shared across a number of

products, channels and businesses

Re-using knowledge – 3M – see next slide

VW – SEAT/Skoda/Audi – see case study

 3M Innovation Model
Technology Platforms Markets
Architecture &
Abrasives
Construction
Adhesives
Consumer & Office
Ceramics
Display
Electronics Opportunity
Drives Electronics
Films Development
Filtration
and
Microapplication Utilisation Health Care
Nanotechnology
Renewable Energy
Non-wovens
Safety & Security
Precision Coating
Telecoms & Utilities
Transforming Technology into Consumer Brands at
3M
Pressure-sensitive and
Microsphere Adhesives

Non-wovens

Abrasives

Films

Precision coating

Fluorpolymers

Colloid Science
 Conclusion: Strategy and Scale & Scope
Strategy – search for economies of S & S

Platform business models

Industrial
Digital

Call centres

Diversification

Networked forms of organisation

Mass customisation – standardisation V. variety