Exploiting Scope Economies

Economies of scope are important because they permit a firm to translate superior skill in a given product line into unique advantages in the production of complementary products. Effective competitive strategy often emphasizes the development or extension of product lines related to a firm's current stars, or areas of recognized strength.

For example, PepsiCo, Inc., has long been a leader in the soft drink market. Over time, the company has gradually broadened its product line to include various brands of regular and diet soft drinks, Gatorade, Tropicana, Fritos and Doritos chips, Grandma's Cookies, and other snack foods. PepsiCo can no longer be considered just a soft drink manufacturer. It is a widely diversified beverages and snack foods company for whom well over one-half of total current profits come from non-soft drink lines. PepsiCo's snack foods and sport drink product line extension strategy was effective because it capitalized on the distribution network and marketing expertise developed in the firm's soft drink business. In the case of PepsiCo, soft drinks, snack foods and sports beverages are a natural fit and a good example of how a firm has been able to take the skills gained in developing one star (soft drinks) and use them to develop others (snack foods, sport drinks).

The economies of scope concept offers a useful means for evaluating the potential of current and prospective lines of business. It naturally leads to definition of those areas in which the firm has a comparative advantage and its greatest profit potential.

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