Economies of Scope

Many of us would have read and understood the importance and benefits of economies scale (are factors that cause the average cost of producing something to fall as the volume of its output increases.). 

Economies of scope, as it is rightly called as the first cousin to economies of scale 'is a factor that make it cheaper to produce a range of products together than to produce each one of them on its own.' This could be understood better when two centralised functional dept i.e., finance and marketing are involved or any other interdisciplinary departments. For example: The IDBI Bank and its wholly owned subsidiary IDBI Capital can use their sales teams to cross-sell their individual  financial products to their existing customers. Bancasuurance, for instance, is based on the logic where a bank can sell a financial (insurance) product to their existing/new account holders.

Now, we can also think on why many companies moved from core competancy to convergence strategy. ITC, for instance, cigratte manufacurer to textile to biscuits etc,. One of the cause would be presence of economies of scope. However, all the theories has its own issues and challenges.

Excerpts: " The Economist Guide to Management Ideas and Gurus", by Tim Hindle.