Economies of scale refer to an increment in production as a result of an increase in a firm’s size in order to decrease the marginal costs and incur operational efficiencies (Baumol, et al, 2011, p. 47). Economies of scale can be achieved by reducing the average cost per unit and dividing the fixed costs among the production that has been increased. Economies of scale are beneficial to a firm because they enable it to gain competitive advantages over other firms leading to greater profitability. Economies of scale increased the profitability margins of companies not only by discouraging potential competitors from entering the market but also by eliminating rivals that are less efficient (Besanko et al., 2009). In essence, it refers to the costs advantages that a business entity derives as a result of expansion. An increase in the scale of output emerges as a result of the factors causing the average cost of production per unit to decrease. Economies of scale fall into two categories namely internal and external economies of scale (Baumol, et al, 2011).
Definition of Economies of Scope
Economies of scope refers to the process of reducing the unit cost through the addition of various services or products to a company’s line or lines of production in order to improve operational efficiency (McEachem, 2011, p. 318). For economies of scope to exists or happen, then the production cost of a set of products together within one firm or enterprise should be less than the production cost of the products separately in independent business enterprises. From the two descriptions, it can be acknowledged that both economies of scope and economies of scale have an impact on operational efficiencies (Besanko et al., 2009). It is basing on this that the differences between the two can be distinctly mentioned. In general, economies of scope are the average production costs in total which decreases because of increasing the amount of various products produced. Economies of scope theory lead to the production of two or more product items of a product through the use of the same machine efficiently (Hirschey, 2008).
Definition of Learning Economies
Learning economies refers to the reduction of the average cost of production as a result of experience gained by a firm or company after a time of producing the items or products which can be improved through efficient utilization of labor (Baumol, et al, 2011, 51). Learning economies can be achieved when more organizations or individuals perform a task more efficiently thus, bringing about efficiencies as a result of their experiences. In order to enhance the learning economies, then improvements should be made in the working and managing methods. In addition, production equipment and technology used should be better acknowledged. Redesigning of products and making better use of resources in an organization can also enhance the economies of learning in an organization (Besanko et al., 2009).
The differences between Economies of scale, Economies of scope and the Learning Economies
In contrast to economies of scale, a firm can only gain benefits from economies of scope through production of smaller varieties of products as opposed to economies of scale in which the fixed costs are reduced or minimized through increase in the production of an item (Haberberg, 2008). Unlike economies of scale, economies of scope are known to be more dependent on other efficiencies in distributions and marketing. On the other hand, despite the fact that the learning economies also have the same impact of increasing efficiencies through the reduction in average costs just like in economies of scale, there is always a change in the cost average cost when the learning economies take effect. Given the same high cumulative volume of the learning economies and economies of scale, the lower cost in the learning economies is the most significant difference (Panzar, & Willig, 2005). In a situation where the products or items of a company are at high volume, the learning economies in operational efficiencies will lower the cumulative volume or cost over a long period of time and thus making the company to be in a better placed position as compared to its competitors (Haberberg, 2008).
The Managerial Implications of Economies of scale, Economies of scope and Learning Economies
Managerial Implications of Economies of scale
Economies of scale, economies of scope and the learning economies are important aspects in business which every manager should fully comprehend and understand their implications on a business entity. It is vital that a manager should become aware of these terms and how they differ from one another and their application in the business environment. In order to enhance their business’s competitive advantages, managers have been under intense pressure in their search for the best innovative practices or actions that best suit their organizations (Haberberg, 2008).
For a business to gain from economies of scale, then managers ought to understand the fact that any business entity is capable of growing organically either through external growth in which it take taker over other companies or grow internally through by ploughing back its profits into the business. It is such kind of growth that managers can ensure that their businesses can benefit from economies of scale which can have profound implications or impacts on the economics of production. managerial economies of scale should therefore adopt the use of technologies which will ensure reduction of costs while at the same time making sure that the quality control are kept to high levels with no defects (Panzar, & Willig, 2005).
It is through managerial economies of scale that companies or businesses can employ production managers who are highly skilled and have the required experience to work with modern technologies. This will ensure that factories, which are state of the art, are managed in a proper and efficient way. By growing a business to operate on a large scale, it makes it possible for such an entity to benefit from various production economies of scale. These economies of scale in turn enable the large scale production of goods or products at a much lower cost as it could have been in a small business enterprise or plant (Png, 2007).
Managerial Implications of Economies of Scope
Economies of scope are important to any business managers because it enables them to know how it can be relatively cheaper for production of two products or items which are linked together through economies of scope. Combination in the production of goods or provision of services can enable managers to deliver the goods or services to customers at a relatively lower cost as opposed to specialization of such services (Panzar, & Willig, 2005). In order to achieve a strategy in brand extension of a company’s products in marketing, then economies of scope in promotion and advertising are essential for managers. The advertising of a company’s name helps such a business entity to promote the sale of each and every product that has its brand. For example, an initiative by Sony to spend $1 in advertisement makes it possible for the company to promote each and every product that has a Sony brand, which may include play stations, TVs, computers (Besanko et al., 2009, p. 48). Such a joint venture therefore yields to economies of scope not only in promotion but also in advertising. The application of economies of scale by managers therefore help them to apply the Strategic concept known as core competence which is a generalized expertise in production, design and marketing of services or products based on close or common related technologies. The use of such core competencies by managers results in a joint cost which eventually results in economies of scope (Hirschey, 2009).
Managerial Implications for Learning Economies
The combination of economies of scale, economies of scope and learning economies can be used by managers to improve their business operations and increase the profitability margins of their businesses (Panzar, & Willig, 2005). Learning outcomes, on the other hand help the management in resource requirement planning and in the establishment of incentive rate schemes that are based on statistical findings. Learning economies which are related to distribution, selling and production can lead an organization to improved efficiency if management practices it well. This is because it has been ascertained that people improve on their performance towards a certain task as they continue in gaining experience. Employees will, therefore, be in a good position to have the necessary experiences in their specialized work while the management will be capable of learning their customers’ satisfaction of offering them with benefits to attain customer satisfaction (Moschandreas, 2000).
Economies of scale and economies of scope are related and used interchangeably. However, management should ascertain the fact that whilst economies of scope will only exist if a company achieves its savings as well as increasing its line of services and goods, economies of scope are defined in terms of the reducing average cost functions. Economies of scale, economies of scope and learning economies should be used by management for the benefit of the whole organization (Brickley, et al, 2007).