Platt Perspective on Business and Technology

Economies of scale, economies of scope and the flexibility to innovate

Posted in strategy and planning by Timothy Platt on December 30, 2010

In a real sense writing this blog has been a process of peeling back the layers and going from over all generalities to analytically considered specifics. Think of this as a housekeeping posting in that regard, and my focus in this clean-up is on two specific but often loosely used terms: economy of scale and economy of scope.

I have written extensively about scale and scalability, and about scope and in a variety of contexts (see for example in Business Strategy and Operations and Macroeconomics and Business.) I have made an effort to use these terms with a measure of precision and with a specific meaning in mind while doing so. But there is a specific framework that these terms, and their “economies of” derivatives depend on for more effective and focused meaning. That is the topic of this posting.

First, a word as to what economies of scale and scope are not – but that they are often used as: they are not general and nonspecific terms that can carry meaning when simply applied ad hominem to a business or organization as a whole, and without consideration of detail or structure. Scale and scope, and more specifically economy of scale and economy of scope only carry useful meaning when they are applied in the specific context and with an awareness of the details. These are end result measures of the effectiveness and flexibility of strategy and planning, and of priorities and goals.

There are more than one way to define and differentiate between economy of scale and economy of scope and I simply offer one version here, but it is one I have found functionally quite useful.

• Economy of scale refers to strategic, operational and process flexibility that supports expansion and elaboration of a business and its reach along a path of development that it is already on. Conceptually, economy of scale is all about linear projections and predictions moving forward and is primarily quantitative in nature.
• Economy of scope, on the other hand refers to a strategic, operational and process flexibility that supports expansion and elaboration of a business in new directions. This is capacity to innovate and to deviate from the ongoing, and more readily discerned linear path of growth and development. Conceptually, economy of scope is primarily qualitative in nature.
• Both are context specific and connect into a business’ current strategy and planning, operations and processes, products and services, and market position – what the business currently is and where it is as a baseline starting point.
• Operationally, the goal would be to plan for changes in scale or scope in a quantifiable way so as to track performance of efforts made from that baseline.
• And these changes as a matter of practice take place at the level of specific processes and other operational steps, products and services or some other point where a unique value proposition can be created, maintained or expanded upon.
• Ultimately this is all about creating, maintaining or expanding the value of a unique value proposition to the marketplaces reached out to. Expansion or change simply for the sake of expansion or change and without explicitly planned impact on the bottom line simply create uncertainty and as such serve as cost centers. So this is all about return on investment, at least as a matter of anticipated and tracked performance achieved.

When I am talking with a colleague about their business and they cite economies of scale or scope I immediately start thinking detail:

• Wondering precisely where in their systems they see opportunity for effective, productive expansive change,
• How they would exploit this through development and
• How they would track their results to know the effectiveness of their efforts.

I would also be interested in better understanding whether this would involve changes in scale, scope or both – and if they have clearly thought out the distinctions there. Developing and offering new is different, after all than simply expanding to do and offer more of the same and as valuable as both can be.

As a final thought, much of this and most if not all of the potential for deriving positive value from it stems from underlying strategy and the core business model and on their flexibility in the face of new and emerging opportunity. If an organization lacks the flexibility to adjust and course-correct there, initiatives to capitalize on economies of scale or scope probably will not work. And I will add that organization may be challenged for simply staying in place too. And that is where a posting on change management might be appropriate to cite.

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