Question

1. How does the economies of scope concept differ from the economies of scale concept?

2. Related diversification causes bureaucratic costs to increase more than unrelated diversification. Explain why that is the case.

Answer 1

Answer 1:- Economies of scope include different types of economic factors which facilitate the concurrent production of a variety of products to be more cost-effective in comparison to the production where each product is produced individually.

This is a concept which explains the various conditions in which due to the production of identical products and services which complement each other, the long run average and the marginal cost of the organization reduces. Thus we can state that the production output of a product A will decrease the production cost of product B.

Economies of scale can be seen as the benefits which are obtained by the organizations when they start having efficient production. The economies of scale can be obtained by different organization when they can reduce the production cost by increasing the size of the production. This is resulted due to the distribution of various costs to a huge number of products. This can include both the fixed cost and variable costs. When the concept of economies of scale is used, the organization size plays a significant role. Greater the size of the organization, greater will be the cost saving

Economies of scale can be obtained in both the regards i.e. internally and externally. The bass of internal economies of scale is oriented to the decisions of the management while the external factors can play a significant role in the external economies of scale.

Answer 2:-

Related diversification can be seen as the strategy of the organization when it decides to expand its operations in the similar nature of the product lines which are being produced by them already, while unrelated diversification is related to the expansion of the operations in those product categories which are not being produced by the company at present.

As in the case of related diversification, it is important to have the close coordination between the different department and production units which are producing the existing products so that they can come up with the new related products, thus it can result in the form of bureaucratic costs. The major source of bureaucratic costs in case of related diversification is the outcome of diversification strategy which is oriented on sharing, moving, relocating and leveraging the competencies to the other departments.

For an effective related diversification, it is important to have an unrestricted sharing and transfer of resources between the various departments and this will necessitates the presence of effective coordination between the departments. As there will be a number of bureaucratic steps and processes, thus when there is an increased business unit in the portfolio of any business organization, it will have an adverse effect on the estimation, shifting and mutual distribution of resources between the different department.

However, these problems are not witnessed in case of unrelated diversification in which all the units will have their own individual and distinguished resources.