Economies of Scope and Scale

It’s a topic that has passed here before, but not explicitly. Why? It is hard to explain the differences between ‘Economies of Scale’ and ‘Economies of Scope’ and more importantly why that matters. Telescopes are a beautiful metaphor where this can be made visual, no pun intended.

It all started with the Dutch using two lenses to bring distant objects closer (so they could recognize incoming ships earlier and use that knowledge on the stock exchange) and Galilei using it to study the sky. Through the centuries they built bigger and bigger lenses (telescopes) to capture more of the sky in greater detail. The bigger the lens, the more photons you could capture. The clearer the lens the more efficient it became. Today bigger and clearer lenses are not an option anymore; they can not carry their own weight and any clearer is not cost effective. The solution to getting better resolution is simple, put the telescopes far apart and connect them to each other to combine the images. The visible spectrum was not enough to gain new insight into distant solar systems, so radio telescopes where introduced. These can be linked efficiently and size is not an option anymore. You can link 2000 radio telescopes and combine the resulting images; together with the visible spectrum of 50 linked telescopes you gain new insights into the how and what of the universe.

To those of you who have been reading my blogs, this should sound familiar. The ‘Economies of Scale’ aspect is the bigger lens; the ‘Economies of Scope’ aspect is linking the telescopes. Through efficiency more could be done in the same time, through combining different locations and disciplines (a network!) new insights led to new discoveries at lower cost. A beautiful combination!

That is what we are about. Not replacing one approach with the other, but expanding the possibilities. Efficiency is an important ingredient of today’s business, so ‘Economies of Scale’ are essential. Agility and flexibility are just as important, and this is where ‘Economies of Scope’ come in.