Economies of scope:
Situation in which joint output of single firms is greater than output that could be achieved by two different firms when each produces a single product.
This refers to how an organization can lower the average per unit cost by expanding the number of products/services if offers. By using the same facilities, equipment, labor force, technology, etc., a company can use product diversification to become more efficient and increase revenue. The theory is that selling several different products/services can be done more efficiently than selling only one product/service because the company can distribute the costs over a greater revenue base.
Example using the Coca-Cola company: Economies of scope is at play when the company decides to use its current equipment, facilities, technology, labor to produce more beverages (i.e., Sprite, Fanta, Minute Maid) in an effort to diversify and lower costs. When they ship the more and more beverages using the same vehicle, they save money on shipping because the more products you ship, the more efficient it can become.
The difference between Economies of Scale and Economies of Scope:
Both are conceptually similar, but the following differences exist.Economies of scale is about gaining benefits by producing large volume of a product, whereas economies of scope brings benefits by producing a wide variety of products by efficiently use of the operations.Economies of scale refer to reduction in average cost for a single product, whereas economies of scope refer to lowering average cost of producing two or more products.Economies of scale has been known for a long-time, whereas economies of scope is relatively new approach to business strategy.Economies of scale use the most efficient process, whereas economies of scope uses the same process to produce similar products using high technology. Looking at different views of both economies of scale and scope, both are ways of increasing market share of the company. Like economies of scale, economies of scope also provides cost saving opportunities for companies.