Economies of scope
Economies of scope are the cost savings that arise from producing a range of related goods together rather than separately.
Sometimes the advantage comes not from making more of one thing but from making several things together. That is economies of scope.
Economies of scope are the cost savings a firm gains by producing a range of different products together rather than separately. Where economies of scale are about the volume of a single output, scope is about variety: the efficiency that comes from sharing resources across several outputs.
Sharing what you already have
The savings arise when products can share something, a production facility, a distribution network, a brand, a research capability, a customer relationship. A company that already has a salesforce, a logistics system, or a trusted name can add a related product that uses the same assets at far lower cost than a standalone entrant building all of it from scratch. The shared resource is paid for once and used many times.
The logic behind diversification
Economies of scope are the soundest justification for a firm to operate in several related businesses. When the businesses genuinely share resources and capabilities, the combination is worth more than the parts, which is the better-off test of good diversification. When they share nothing real, the diversification has no scope economies to justify it and usually destroys value through added complexity. Scope is what separates sensible related diversification from empire-building.
The limits
Like scale, scope has limits and illusions. The shared resource must genuinely transfer; firms routinely overestimate how much a brand, a salesforce, or a capability will carry into a new product. And managing variety adds its own costs, complexity, distraction, conflicting demands on shared assets, that can swamp the savings. Claimed scope economies are a favourite justification for acquisitions that turn out to share far less than the slide deck promised.
Economies of scope explain why firms are often more than one business at once, and why some combinations create value while others merely create size. The test is always whether the businesses truly share something costly, or whether the synergy exists only in the telling.