254 Chapter 6 Cost AnalysisRecent research has looked more closely at how firms in a variety of industries
can successfully exploit economics of scale and scope. In the automobile indus-
try, the advent of flexible manufacturing has begun to upend traditional think-
ing about the importance of returns to scale. In many circumstances, it is more
profitable to be flexible than to be big.^9 At a new production facility, Honda
workers can produce the Civic compact car on Tuesday and can switch pro-
duction lines to produce the company’s crossover SUV on Wednesday. When
gasoline prices soar, causing demand for small fuel-efficient vehicles to rocket,
the carmaker can immediately adjust its vehicle model production levels
accordingly.
By producing many different models under the same factory roof, Honda
is exploiting economies of scope. Large-scale production runs aren’t necessary
to hold down average cost per vehicle. The same factory can combine large
production runs of popular vehicles and much smaller runs of specialty or out-
of-favor models. (A decade earlier, retooling a factory to produce a separate
model could have required as long as a year and hundreds of millions of dol-
lars in changeover costs.) Honda is hardly alone. Ford Motor Company’s state-
of-the-art plant in Wayne, Michigan, can produce multiple models including its
compact Focus, the Fiesta subcompact, and the new C-Max, a van-like multi-
activity vehicle. Changeovers mean switching the software programs that con-
trol nearly 700 assembly-line robots and reallocating the increasingly
sophisticated responsibilities of the production-line workers. (Costly capital
and equipment changes are unnecessary.)
Economies of scope are also demand driven. Consumer product firms
have ample opportunities to provide related but differentiated and tailored
products. Micromarketing is the process of differentiating products in order
to target more markets. Years back, Procter & Gamble sold one type of Tide
laundry detergent; now it sells a half-dozen kinds. E-commerce firms find it
easy to customize the online buying experience. Amazon.com automatically
recommends items based on a user’s past purchase history. Retailers such as
Nordstrom and the Gap offer much more clothing variety at their online sites
than in their stores. Boeing uses computer-aided design to develop simulta-
neously several types of sophisticated aircraft for different buyers (domestic
and international airlines).
By expanding its scope, the firm can frequently leverage its distinctive
capabilities—brand name, reputation, control of a platform or industry stan-
dard, access to financing, to name a few—over a wide variety of activities. An
interesting question is whether wider scope provides an innovationadvantageFlexibility and
Innovation(^9) This discussion is drawn from various sources, including T. Bresnihan, S. Greenstein, and R.
Henderson, “Schumpeterian Competition and Diseconomies of Scope: Illustrations from the
Histories of Microsoft and IBM,” Harvard Business School, Working Paper 11-077 (2011); C.
Woodyard, “Ford Focuses on Flexibility,” USA Today(February 28, 2011), p. 1B; J. Whalen, “Glaxo
Tries Biotech Model to Spur Drug Innovation,” The Wall Street Journal(July 1, 2010), p. A1.
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