“Economies of scope exist when it is less costly for a firm to produce two or more products jointly than to produce them separately in different firms. Economies of scope as arise from the shared use of inputs, assets, capabilities, or activities.” – Economies of scope
Economies of scope exist when it is less costly for a firm to produce two or more products jointly than to produce them separately in different firms. This concept arises from the shared use of inputs, assets, capabilities, or activities across multiple product lines, enabling organisations to achieve significant cost reductions whilst expanding their market reach.
The fundamental principle underlying economies of scope is synergy through diversification. Rather than specialising in a single product, a company leverages its existing infrastructure-manufacturing equipment, distribution networks, skilled workforce, and technological expertise-to produce complementary products more efficiently. When a restaurant produces both hamburgers and sandwiches using the same preparation and storage facilities, for example, the combined production cost is lower than if each product were manufactured separately. In this scenario, the cost savings amount to approximately 13.33% when products are produced together rather than independently.
Economies of scope differ fundamentally from economies of scale, which focus on cost reductions through increased production volume of a single product. Whilst economies of scale reduce the average cost per unit by producing more of the same item, economies of scope reduce costs by producing a greater variety of goods using shared operational resources. Both mechanisms serve to lower production costs, but they operate through distinct pathways.
Mechanisms of Cost Reduction
Economies of scope operate through two primary mechanisms: bundling effects and integration effects.
Bundling effects occur when a company expands its product range at the same level of the value chain, utilising existing resources such as machinery, skilled labour, and storage facilities. For instance, a food manufacturer producing biscuits might introduce a new cereal product using the same raw material suppliers, production equipment, and distribution channels. The volume discounts obtained from increased purchasing power, combined with the reuse of existing infrastructure, generate substantial cost savings.
Integration effects arise through vertical integration, where a company takes control of additional stages in the value chain. A manufacturer might produce its own raw materials or establish its own distribution channels, thereby increasing the depth of service. These vertically integrated operations can then be made available to other companies for a fee, generating additional revenue streams whilst achieving economies of scope.
Sources of Shared Resources
Organisations can exploit economies of scope across multiple dimensions:
- Logistics: Existing transport infrastructure and delivery routes can accommodate additional products, reducing per-unit distribution costs.
- Technologies: Proprietary technologies developed for one product can be applied across multiple product lines or licensed to other firms.
- Know-how: Accumulated expertise and research capabilities can be leveraged across related product categories.
- Skilled workforce: Employees with specialised knowledge can apply their expertise to the production of similar products.
- Distribution channels: Existing sales networks-whether direct sales teams or retail intermediaries-can promote multiple products simultaneously.
- Purchasing power: Increased order volumes enable better negotiation of supplier prices and terms.
Strategic Applications and Risk Mitigation
Economies of scope provide strategic advantages beyond simple cost reduction. By diversifying product portfolios, firms reduce vulnerability to market fluctuations. An automotive manufacturer producing only sport utility vehicles faces significant risk if consumer preferences shift towards fuel-efficient vehicles; a diversified product range mitigates this exposure. Additionally, related diversification allows companies to respond more flexibly to changing consumer preferences and market conditions.
Mergers and acquisitions frequently enable economies of scope by combining research and development capabilities, consolidating administrative functions, and integrating product portfolios. Two pharmaceutical companies merging can share research expenses whilst expanding their combined product offerings, achieving both cost efficiencies and market diversification.
Limitations and Diseconomies of Scope
Economies of scope are not universal. When a firm attempts to produce products that require fundamentally different technologies, expertise, or distribution channels, the costs of managing diverse operations may exceed the benefits of shared resources. A small artisanal shoemaker attempting to expand into unrelated product categories risks diluting brand identity and incurring management complexity costs that outweigh any operational savings. This phenomenon is termed diseconomies of scope.
David J. Besanko and the Economics of Strategy Framework
David J. Besanko is a distinguished economist and strategy scholar whose work has fundamentally shaped contemporary understanding of economies of scope within strategic management. As a professor at the Kellogg School of Management at Northwestern University, Besanko has spent decades investigating how firms create and sustain competitive advantage through strategic choices regarding production, diversification, and organisational structure.
Besanko’s seminal work, Economics of Strategy (co-authored with David Dranove, Mark Shanley, and Scott Schaefer), represents one of the most comprehensive treatments of how economic principles inform strategic decision-making. The text synthesises microeconomic theory with practical business strategy, providing managers and strategists with analytical frameworks for evaluating diversification decisions, vertical integration choices, and organisational design.
His relationship to economies of scope is particularly significant because Besanko positioned this concept within a broader framework of firm boundaries and organisational architecture. Rather than treating economies of scope as an isolated cost phenomenon, Besanko examined how the pursuit of scope economies influences fundamental strategic decisions: whether to produce internally or outsource, whether to vertically integrate, and how to structure multi-product organisations for optimal efficiency.
Besanko’s analytical approach emphasises that economies of scope must be weighed against the coordination costs and complexity of managing diverse operations. His work demonstrates that the mere existence of potential scope economies does not automatically justify diversification; managers must conduct rigorous analysis to ensure that shared resources genuinely reduce costs rather than creating bureaucratic inefficiencies. This nuanced perspective has influenced how strategists evaluate diversification strategies, moving beyond simplistic assumptions that broader product portfolios automatically generate value.
Throughout his career, Besanko has contributed to understanding how firms can leverage economies of scope as a source of sustainable competitive advantage, particularly in industries where technological capabilities, distribution networks, or customer relationships can be effectively shared across product lines. His work remains foundational to contemporary strategy education and practice, providing the intellectual scaffolding through which managers assess whether diversification creates genuine economic value or merely increases organisational complexity.
References
1. https://www.ionos.com/startupguide/grow-your-business/economies-of-scope/
2. https://corporatefinanceinstitute.com/resources/economics/economies-of-scope/
3. https://legal-resources.uslegalforms.com/e/economies-of-scope
4. https://www.business-to-you.com/terms/economies-of-scope/
5. https://www.masterclass.com/articles/economy-of-scope-explained
6. https://hbr.org/1983/11/plan-for-economies-of-scope
