Firms can certainly benefit from economies of scope, which is when a firm will produce two or more outputs from one source (or they themselves produce) rather than using two firms for this, and thus save on the cost of production. This is equivalent to sharing production. There are several methods this can be achieved:
- sharing common inputs over a range of production activities.
- joint promotion of goods and services.
- joint distribution of goods and services.
Organising Production to avoid economies of scale
So as to avoid diseconomies of scale, companies can arrange themselves to minimise the bureaucracy & increased decision making time associated with growth. This gives rise to the M-Form (multi-form) structure, where parts of the company operate with independence from one another, giving daily decisions to local managers. An example here might be a holding company such as the News Corporation.
Smaller firms however, tend to be managed through a clear hierarchy with little decentralised decision making. This is referred to as the U-Form (Unitary Form) structure (it must be noted that this is the classical definition and theory of company management although my experience and sentiment is that this is not the best form of company management for small firms, instead i would offer more autonomy and freedom in roles empowering people to make their own decisions – but for now i am revising… so i will stick with the text book – I will return to this i promise and give a decent post on this subject).
There are other ways to avoid diseconomies of scale, and these include:
- relocation of operations
- contracting out
- reorganising the management structure
- introduction of new and improved technology
Here are some basic ideas for you.
Static Cost reductions occur in the short run, and are associated with improving existing production.
Dynamic Cost Reductions are those alterations that occur in the long run and are associated with efficiency gains through improving production. These will normally occur through innovation, and are associated with reductions in the average cost per unit (please note the Experience Curve).
So what is the Experience Curve (aka the Learning Curve)?
This reflects the efficiency gains seen in a firm due to becoming more experienced about its production, and thus ‘fine tuning’ its processes.