Economy of Scope

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= doing more with the same thing, related to 'mutualization'


Definition

According to the Wikipedia:

"Economies of scope make product diversification efficient if they are based on the common and recurrent use of .. an indivisible physical asset." (http://en.wikipedia.org/wiki/Economies_of_scope)


Description

1.

"An economy of scope exists between the production of two goods when two goods which share a CommonCost are produced together such that the CommonCost is reduced.

The affect of an economy of scope is to increase the efficiency of production as a result of increasing the number of different but related products offered.

This may happen when the same knowledge and information is required both to produce something and to consume that product within subsequent productions. Also, this may happen when similar information is required both to produce something and to produce a different product." (http://appropriatesoftware.net/wiki?EconomyOfScope)


2. Michel Bauwens:

"My short definition of EoS is very simple and should be understandable I think: "doing more with less"; and this is mainly achieved by mutualizing infrastructures, both immaterial (open source knowledge, code, design) and material (co-working, fablabs, carsharing, idle-sourcing ...); for contemporary implementations we should add: using distributed machinery in distributed workplace to allow local production in microfactories, through the process of manufacturing on demand, while achieving scope through the global immaterial cooperation on both the design of the products, the design of the machinery to produce them, and even the processes through which to make both the previous aspects (ex. the xtreme manufacturing methodology of OSE/WikiSpeed)."


Discussion of the traditional definition within manufacturing circles

By Ludovico Alcorta:

"Scale refers to size of output or capacity of production units; economies of scale refer to reductions in unit costs due to increases in size of output. Economies of scale are said to exist if total cost rises less proportionately than output, and optimal scale occurs at the point where any increase in output no longer reduces but raises unit costs.

According to Scherer et al (1975) and Scherer and Ross (1991), scale and economies of scale are better analysed in terms of three dimensions: product, plant or firm. Product scale alludes to the volume of any single product made. Product-scale economies may arise from unit cost reductions due to the division of labour and specialisation of workers and equipment. Longer production runs allow for the separation of tasks and for workers to do their individual jobs rapidly and precisely, while avoiding the loss of time and effort associated with moving from one task to another. They also allow for the use of more efficient, specific-purpose machinery and mechanised production processes. A second source is the learning potential of long production runs. Where intricate operations and complex process adjustment are involved, unit costs may fall if workers learn by doing. A third source is the indivisibility or lumpiness of capital equipment. Machines are normally only available in a limited number of capacities and their price tends to increase less than proportionately with rises in capacity.

Another important source of product-scale economies, and particularly relevant to our subsequent discussion, is the cost of changing and setting-up the equipment for performing a particular batch or product run (Carlsson, 1989a; Kaplinsky, 1991; Pratten, 1975, 1991; Scherer et al, 1975; Silberston, 1972). Batch or lot size is the number of equal items or products treated in a certain process or sequence of operations. It refers to the total life of each production run, which could last hours, weeks, months or even several years.

The larger the batch or lot size --or the longer the production run-- the lower the unit costs due to refitting each machine with the appropriate tools, resetting the equipment, and/or changing the whole production line over from the previous item to the new one, and, therefore, the greater the incentive to continue producing the same item or product, although it may also mean keeping a large inventory of inputs and final goods to deal with short-term variations in demand.

Within a given production capacity and technology, the setting-up or change-over costs and the nature of demand are the key factors in determining when or whether a new product is manufactured (Ayres, 1991; Morroni, 1991). The classical example is Ford’s replacement of the model T car by the model A car, which required closing down the factory for nine months in 1926 (Abernathy, 1978). The car industry has always been under immense pressure not to change car model and hence why some models remain several years in the market. According to Carlsson (1989a), in many operations in the metalworking sector the ’typical’ set-up time was 20-30% of processing time. In other industries, such as printing, the initial typesetting costs can be so high that they sometimes make the publication of specialised or academic books or journals economically unfeasible. Very few books print as many copies as the Bible or Porter’s ’Competitive Advantage’.

Plant scale, in turn, is normally associated to the total output of an entire plant in process or ’fluid-flow’ industries, such as oil refining, chemicals, steel and cement, for a given period of time --normally one year. In addition to any relevant source of economies of scale already mentioned, plant-related economies may also emerge from the technical volume-surface relationship known as the ’0.6 rule’. The cost of construction of any container increases in line with its surface area, whereas the capacity increases with volume. Since the area of a sphere or cylinder varies as the two-thirds power of volume, the cost of building some process-industry plants rises roughly as the two-thirds power of their capacity. Another source of economies of scale at plant level arises from what is called the ’economies of massed reserves’. Larger plants can reduce the impact on unit costs of keeping reserve machines or spare parts for breakdowns or to replace those undergoing servicing. Cost savings can also arise from the fact that the number of staff required for maintenance and service increases much less than proportionately than output (Scherer and Ross, 1991; Pratten, 1975, 1991).

Although very little discussed in the traditional analysis of scale, plant scale also applies to discrete multi-product plants. Reality seems to be extensively populated by production facilities manufacturing many different products. Producers of garments, textiles, consumer electronics goods, home appliances, engines and machine tools, constantly have to switch models or manufacture according to varying technical specifications to satisfy differentiated demand. In these cases, plant scale alludes to the aggregate output of the plant.

Producing more than one good implies not only considering the setting-up, change-over and investment costs but also the potential cost effects of joint-production. Baumol et al (1988; see also Bailey and Friedlaender, 1982) have addressed this issue and have developed the concepts of scope and economies of scope which they consider a complement to the traditional concepts of scale and economies of scale.

Scope basically stands for product range; economies of scope arise when the cost of making goods jointly is less than making the same total quantity of the same goods separately.6 Economies of scope arise from the sharing or joint utilisation of inputs. It occurs when a given factor or input is imperfectly divisible, so that the production of a specific product or number of them may lead to under-utilisation of that input. It also happens when using inputs that may have some properties of a public good, so that when purchased for one production process they may be freely available to another (Baumol et al, 1988; Bailey and Friedlaender, 1982).

Turning to the firm dimension of scale --i.e. the total output of the firm-- economies of scale and economies of scope arise from both the ’fixed’ and ’shared’ nature of certain ’intangible’ investments, such as research and development (R & D), marketing and management.

Budgets for the development of new products and processes are normally ’rule of thumb’ amounts, reached on the basis of previous years’ sales, levels of retained profits, the expenditure of potential competitors, minimum threshold considerations, the average allocation of the industry and the emerging technological opportunities (Freeman, 1982; Hay and Morris, 1991). Marketing and distribution expenditures are also set amounts resulting from similar factors. For advertising to be effective there are certain minimum threshold levels of messages that have to be transmitted. Consumer durables and office automation industries necessarily require specialised dealer networks and after sales service. Operating a sales force requires investment in training and specialised equipment (Scherer and Ross, 1991). Management costs are also pre-set and depend on a minimum number of functions and hierarchical levels --and therefore managers-- and of specialised equipment that are required for the normal operation of any firm (Koutsoyiannis, 1980). Scale gains arise, therefore, from the possibility of spreading all these ’fixed’ costs among larger total volumes.

As far as economies of scope at firm level are concerned, they emanate from exchanging and pooling the information and knowhow available from several projects being undertaken simultaneously (Teece, 1980), and from using marketing, distribution and management facilities for more than a single product." (http://archive.unu.edu/hq/library/Collection/PDF_files/INTECH/INTECHwp05.pdf)

Discussion

Tom Atlee: MY CURRENT UNDERSTANDING OF ECONOMIES OF SCALE AND SCOPE

Tom Atlee:

"ECONOMIES OF SCALE (ground economics in "growth" - i.e., efficiently produced and monetized mass commodities which leave people hungry for more and more as they produce and consume more and more). This involves making lots of stuff at a cheap per-piece rate and getting everyone to buy it all so you make a good profit (partly to pay back the infrastructure investment required to make lots of stuff cheaply and massively). Externalize costs wherever possible, so you can continually profit while degrading society and nature wherever you deem it necessary for your business. Make things that break down so people have to buy replacements. Maintain a sense of scarcity: Make people feel inadequate (intrinsically or in contrast to others) and don't truly satisfy their deep needs, but keep them coming back to buy temporary pseudo-satisfyers (your products and services). Get people working at jobs they may not like in order to get money to buy the stuff you make, which they often buy to counter the stress they have accumulated doing their jobs. Privatize all parts of the commons you can manage so that people have to pay you to use them. Ship things from cheap-production areas to expensive consumption areas - even if they must be shipped great distances - to improve your profits (which works as long as you can externalize the environmental and social costs of all that transformation). Design machines and create technologies to facilitate mass production, to increase per-person "productivity" and to replace expensive human labor - and thus increase profits. Set up a massive financial industry to profitably manage the movement of money and to facilitate bets on the ups and downs of the resulting out-of-equilibrium economy. Use GDP as the primary economic indicator to keep the focus on the flow of money and the growth of consumption. The "efficiency" of such economies of scale lies in the monetarily cheap per-piece rate achieved by the mass-productivity and cost-externalization in the system as a whole.

ECONOMIES OF SCOPE (ground economics in the free creative participation of everyone, in the true satisfaction of deep needs, and in the natural abundance of peer production, immateriality, community, creativity and the commons). Make only the "stuff" your community really needs to function. Focus on satisfying deep personal/interpersonal needs using primarily non-material aspects of life like spirit, learning, beauty, community, relationship, nature, activity, conversation, creativity, games, celebration, and other forms of deep enjoyment and mutual pleasure that involve little material or money. Share ideas, culture, designs and all other immaterial knowledge, resources and enjoyables freely. Set things up so that people can meet most of their material needs through sharing and gifting networks: This vastly reduces how much "stuff" they and their community need to have on hand, thereby reducing environmental impact (less material flow-through) and making up for the possibly higher per-piece cost of locally producing smaller quantities of needed "stuff". Set things up (with, for example, guaranteed minimum income for everyone) so that people tend to do productive work that they enjoy; their productive activity then becomes part of their high quality of life, rather than a drain on it. Design machines and technology to facilitate on-demand local production and for replacement of unpleasant human labor to free people up to do what they want, thus enhancing quality of life while reducing environmental impact. Use quality of life/sustainability statistics as the main economic indicator(s) so that monetary considerations do not trump the long term (sustainable) satisfaction of deep human needs. Minimize the financial sector that does little truly productive work, freeing up resources for productive work and lessening the danger of arbitrary financial colonization or collapse. Likewise, minimize bureaucracy. The "scope" of economies of scope embraces the scope of participation and the depth, breadth and longevity of the needs met. The "efficiency" of such economies of scope lies in the lower costs (financial, social, and environmental - all!!) of reduced material consumption in the context of a refreshed sense of abundance and quality of life." (email: march 2013)


Michel Bauwens

"“And what are economies of scope? As a teaser, for now, this short definition: “An economy of scope exists between the production of two goods when two goods which share a common cost are produced together such that the common cost is reduced.” In other words, something that brings down the common cost of a factor of production, not by producing more of a unit but through shared infrastructure costs.

[…]

Indeed, economies of scale work well in periods of energy ‘ascent’, when more and more energy is coming online, but they work less and less in periods of energy ‘descent’ when the overall supply of energy and resources are diminishing. What you need then are economies of scope, when you can ‘scale up from one’, as with today’s emerging “making on demand” infrastructure.

Economies of scope is exactly what peer production (in its different iterations of open knowledge, free culture, free software, open and shared designs, open hardware and distributed manufacturing, etc.) is all about.

Let’s recap what is wrong with the current global system, which is entirely predicated on economies of scale, and actually in many instances makes economies of scope illegal.

Our current system is based on the belief of infinite growth and the endless availability of resources, despite the fact that we live on a finite planet; let’s call this feature, runaway ‘pseudo-abundance’. The current system believes that innovations should be privatized and only available by permission or for a hefty price (the IP regime), making sharing of knowledge and culture a crime; let’s call this feature, enforced ‘artificial scarcity’. Peer production methodologies are based on the exact opposite economic and social DNA. Peer production communities believe that knowledge is a commons for all to share, and hence, no innovation can be withheld from the human population as a whole.

In fact, withholding a life-saving or world-saving innovation is seen as unethical, and this represents a true value inversion. And peer production designs for distribution and inclusion, i.e. small scale, even personal fabrication. Planned obsolescence, which is a feature and not a bug of the current system, is totally alien to the logic of peer production. In other words, sustainability is a feature of open design communities, not a bug.

[…]

So, what are the economies of scope of the new p2p age? They come in two flavors:

The mutualizing of knowledge and immaterial resources The mutualizing of material productive resources The first principle is easy to understand. If we lack knowledge as individuals (and nobody can know everything) as a community, local or virtual, it is much more likely that someone knows. Hence, the mutualizing of knowledge and ‘crowd-accelerated innovation’, now already a well-known feature of the collaborative economy. But the advantage of scope is created when that knowledge is shared, and thus, it can be used by others. With this social innovation, the common cost of the joint production factor that is knowledge, is dramatically reduced.

Take the example of the paradigmatic Nutrient Dense Project.

This global community of agrarian workers and citizen scientists is interested in experimenting with better nutrients to obtain better quality food. Hence joint research can be carried out to test various nutrients in various soils and climate zones, and they will instantly benefit not just the whole participating community, but potentially, the whole of humankind. Strategies that are based on privatizing intellectual property, cannot obtain such advantages of scope, or at least, not at that level.

[…]

The second principle, of mutualizing physical productive resources, is exemplified [in] collaborative consumption. The general idea is the same. Alone, I may lack a certain tool, skill, or service, but seen from the point of view of a community, it is likely someone else has it, and that other person could share, rent or barter it. No need to all possess the same tool if we can access it when we need it. Hence the proliferation of p2p marketplaces.

Let’s take an illustrative example: car-sharing. Car-sharing projects can be mutualized through the intermediary of a private company which owns the cars (fleetsharing, like Zipcar), through p2p marketplaces which link car users to each other (RelayRides and Getaround), or through nonprofits or public entities (Autolib in Paris). But they all achieve economies of scope. According to a study cited by ZipCar, for every rented car, there are 15 fewer owned cars on the road. And carsharing members drive 31% less after they join. So, in 2009 alone, car-sharing diminished global carbon dioxide emissions by nearly half a million tons.

Imagine similar developments in every sector of production.

So, what will the new system look like if economies of scope become the norm and replace economies of scale as the primary driver of the economy and social system? We already mentioned the global open design communities, and we suggest that it will be accompanied by a global network of microfactories, who are producing locally, such as the ones that the open source car companies like Local Motors and Wikispeed are proposing and which are already prefigured by the networks of hackerspaces, Fablabs and co-working spaces.” (http://thescienceofdestruction.wordpress.com/2012/04/17/michel-bauwens-on-peer-production-and-economies-of-scope/)


The heart of change today: less scale, more scope, lower cost

David de Ugarte:

“This common pattern is an across-the-board reduction in the scale of productive units and the growing centrality of economies of scope. What are economies of scope? The disproportionate improvement of productivity obtained from two things:

  • The capacity obtained through the intensive use of multi-purpose machines and systems–3D printers in prototyping, “recyclable” production chains in manufacturing, systems integrated into logistics–of multiplying the diversity of low-cost supply, marking a tendency towards low-cost customization.
  • The capacity for reaching, at a low cost, across greater distances by using networks and identifying concrete identarian networks, to make them customized offers.

The result of the balance between large scales that are suffering more and more inefficiencies and a new productive “SME” community that is producing a greater diversity of things, in smaller runs, and selling them globally by differentiating more kinds of customers, is clear: the whole sector of the new “small and global” produces at a lower cost and is simply more efficient.

So the slogan of the change, in any setting, could well be less scale, more scope.

The Internet of the giants of scale, the world of finance, and the industrial sector that is still dominant today, are the results of the connection of a series of centralized and centralizing systems. Twitter, Facebook, and Google are such centralized networks that they show the user a single entry page. Volskwagen, Endesa or any other industrial giant are such centralized transnational systems that they can plan not only their margins but updates to their equipment from their providers with their corresponding financial costs. These providers, who live in a true monopsony (a market with a single buyer) have no margin for any other technological innovation than that dictated and funded by the buyer.

But starting at certain scale, decentralized systems not only accumulate more inefficiencies, but turn them into costs that are higher than those of their distributed alternatives. These alternatives are not just more and more competitive in industry and even in the credit market. They are, by definition, more robust and resilient, and with a minimal regulation, as we saw in finance, they have systemic effects that underpin the main path of socio-economic and technological progress in our era: the dissipation of rents.

Additionally, when we joined the logic of distribution to that of free software, the free [of charge] nature of the underlying infrastructure appears easily, and the result is the appearance of resilient and accessible markets, and above all of a social fabric that gives a leading role to the community in the city and in conversation.” (https://english.lasindias.com/the-pattern-of-the-coming-changes)


Example

Local Motors

John D. "Rogers' first big idea was building up localized and digitized made-to-order manufacturing, powered by 3-D printing, to unleash the so-called economy of scope, an antithesis to the economy of scale.

"High volume, low pricing power, low cost, low margin — that's what Toyota or Hyundai have done very well with the automotive industry," Rogers says.

His sights are on low volume, high price, low production cost, high margin: "My economy comes from being able to drive up my price because I can introduce new technology and get you to pay more because it's not available on another vehicle."

Rogers says his aspiration is to create a million vehicles, "each one of a 20,000-unit run, where I'm profitable on a hundred vehicles in each of those runs"." (http://www.npr.org/sections/alltechconsidered/2016/06/29/471599187/a-24-year-old-designed-a-self-driving-minibus-maker-built-it-in-weeks?)


More Information

  1. Transaction Costs
  2. Coordination Costs
  3. Economy of Scale