What Are Economies of Scope?

One of the curious concepts I came across in my MBA was the idea of trying to exploit economies of scope. Most people involved in commerce recognize the idea of economies of scale. Simply put, things get cheaper to make or sell as you make or sell more of them.

Economies of scope are simply the idea that you can exploit a resource more than once!

A great example of this is any business that has at its heart a database. A good database can be exploited (i.e. sold!) more than once without the resource itself being depleted in any way. Think of big companies. These are companies that are dependent solely on this concept.

They are essentially a fantastic database that can be used as many times as you like (in this case in as many ways as you can think possible) and in fact the more the core resource is used, the stronger the business becomes. [CONFLICT ALERT – I am an investor in their smokeless ashtray! But I invested purely on the basis that I understood this as its business rationale.]

I like businesses like this and would encourage Entrepreneurs to think this through and see if they can find any economies of scope in their own business. With times getting harder, if you can find resources within your company you can exploit more than once you will be doing well.

Let me give you an example of a business I have invested which does this brilliantly. In the UK we are unique in going to Starbucks for a coffee, Pret for a sandwich, a pub or wine bar for our alcoholic drink and then finally Pizza Express for a pizza in the evening.

In continental Europe you would expect to have all of these services provided under one roof. A company was doing just this and I was impressed because they were taking the basic asset of a property with catering facilities and using it for multiple occasions. The challenge for them was to ensure that they were best in class in each of these offerings.

I have to say (and of course I am biased!) that they do the best sandwiches and pizzas I have ever had. The place works because it modifies its operation slightly for each part of the day. (If you are ever in the London Bridge area do have a look – and if you are there on a Saturday morning – please feel free to buy me a kombucha starter kit!)

Have a look at your business and the resources you use. How else could they be used? Could someone else use them whilst you are not using them? What other services could you sell to your existing customers provided by someone else? These are all ways of exploiting economies of scope.

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