Economies of Scope and Scale

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How, according to “The Functions of the HQ Unit in the Multi-Business Firm,” do economies of scale and economies of scope provide cost advantage opportunities to firms? · What considerations would be relevant to a firm’s deciding which strategy (scale or scope) to adopt? · How does the choice of executive focus – strategic planning, strategic control, financial control – influence HQ functions and approaches in a multi-business firm?

In economies of scale lower cost of goods sold by leveraging increased production volume and sales. This occurs when costs measured on a per item basis decrease as a result of fixed costs being divided among more items being produced. This higher yield on fixed costs is normally associated more with the production aspects of a business. Ultimately, savings can be passed on to the consumers if the characteristics of the products are capable of exploiting the achieved savings.

Examples of economies of scale at Yum! Yum! Gourmet Popcorn Company can be exercised through the purchase of ingredients in higher concentrations. These larger orders decrease shipping prices and fixed-costs associated with production. Additional examples can also be experienced by expanding into wholesale markets. The increased volume of sales would also decrease shipping and storage costs associated with products. In the latter example, the sales volume would have to occur at a level high enough to justify increases wages paid and equipment maintenance. Typically economies of scale are best implemented by larger companies able achieve and benefit from the volume of operations required to substantiate the increased investment. Economies of scope lower the cost of goods sold by focusing on specificity. The specificity achieved is not limited to any type of cost, but primarily involves variable costs. By channeling these resources, firms achieve higher efficiency in a concentrated capacity. Again, using Yum! Yum! Gourmet Popcorn Company as an...
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