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The Concept Of Economies Of Scale With Economies Of Scope. Give Illustrations Of The Two Concepts Through Real World Examples.

4399 words - 18 pages

Compare the concept of economies of scale with economies of scope.Both concepts have same principle which is to lower the production cost, cost savings and increase the marketing competitive advantage in order to gain the high return. However, they have different approach and strategy to save cost and increase return.The concept of economies of scale is cost savings that accrue from increases or expands in size or number. If two plants produce same unit, unit cost are lower in a large plant than in a small plant. Also, unit cost are lower in a large distribution center than in a small one, lower for large-volume purchases of components than for small-volume purchases. If firms are interested in getting or staying large, there are significant economies of scale. For economies of scale, a smaller firm has higher costs than the larger firms, thus a smaller firm is hardly to compete with the larger firms in terms of price.In contrast, Economies of scope are cross-business cost-saving opportunities. The concept of economies of scope is related to diversification. It is less costly to carry out certain value chain activities for two or more businesses operated under the same and centralized management than the certain activities perform individually or independently. In order to help a diversified company save money, there are certain methods, for example, sharing technology, performing R & D together, sharing manufacturing or distribution facilities, using a common sales force or distributor network, sharing an established brand name, and sharing administrative support functions. Thus greater the economies of scope connected with cross-business cost-saving opportunities, creating a competitive advantage has greater potential which base on lower costs.Example of economies of scale :Since the companies want to gain economies of scale, thus they wish to acquire another. The Renault/Volvo merger proposed in 1993.Renault which is the French car and trunk manufacturer, was 79% state owned. Volvo was privately owned. It produces cars, trucks, aero marine engines and include food processing business. On 6 September, 1993, they proposed merger between Renault and the automotive division of Volve. In cars area, Renault produced for all market segments from the Renault 5 and Clio to the saframe, a large fire seater model. Volvo produced only for the luxury car markets. The merger increased European market share. In trucks area, Renault produced all sizes whilst Volvo produced mainly heavy trucks and no light commercial vehicles. The Economist (1993) states that the companies expected in gaining markets as the product portfolios complement each other well. Renault has a special ability to produce small cars, whereas Volvo focus on produce large cars. In production aspect, Renault was reported that it reduced cost by $5.3 billion in the year 2000. After the merger, they achieved by combining their orders for components to gain lower prices, combining their...

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