At the core of Apple’s magical success is the economies of scope. To leverage it, Apple has been using the same software technology core in all its products, starting from iPod mini to iMac. On the other hand, Nokia used more than a dozen software architectures for its array of defunct mobile handset models. Unlike Apple, Nokia suffered from weak economies of scope benefits as it developed every significant model from scratch. Due to a lack of synergy among similar products, Nokia struggled to update its handsets to respond to iPhone’s invasion, leading to loss of business. In the absence of economies of scope, innovators suffer from the loss of reusability of their intellectual, physical, and human capital. Furthermore, it takes too long and costs too much to update each innovation individually. Hence, the focus should be on developing a family of products for leveraging high economies of scope advantage.
Economies of scope refer to saving gained from innovation and production of a family of products. This saving originates due to the commonality of product family members. It happens at multiple levels such as components, design, production facility, and skill requirements. Although many of us refer to economies of scope as the production of one good reducing the cost of producing another related good, the reuse of core assets in developing a family of products distills the most economies of scope benefit. For example, if a gas station that sells gasoline can sell soda, milk, and baked goods, it benefits from economies of scope. On the other hand, if two products are developed around the same technology core assets, it also distills economies of scope benefit. It seems, in innovation strategy, this latter form of economies of scope is the target for leveraging.
Sharing capital expenditure, R&D investment, and resources:
One of the common forms of benefit that we derive from economies of scope is from the reuse in producing and delivering multiple products over the same facility. For example, telecom infrastructure development incurs substantial capital expenditure, as high as 80 percent of the total cost of delivery. But over the same facility, we can deliver multiple products such as voice, TV signals, and data. As the marginal cost of providing each product over the same facility is negligible, producers benefit from economies of scope advantage by delivering multiple products. It could be expanded further by offering various value-added services.
Innovators have been incurring a growing cost for R&D investment. But a family of products having standard features or commonalities may benefit from the same R&D investment. For example, R&D efforts for enhancing images may help medical imaging and face recognition innovations simultaneously. Similarly, the advancement of image sensors benefits both smartphone cameras and computer vision applications for industrial inspection. Therefore, to reduce the cost of each product innovation, innovators should target a family of products having strong common cores.
Utilization of the same human and physical capital for innovation and production of various goods and services strongly contributes to economies of scope advantage. For example, the same human capital may support the innovation of various image processing products. Similarly, the human capital needed for innovating multispectral image interpretation-based solutions for crop disease identification could be good enough to innovate machine vision applications for industrial or medical applications.
Product family architecture:
Contrary to designing closely related products from scratch, product-family engineering pursues an architecture that is based on commonality and planned variabilities. As it creates an underlying architecture of an organization’s product platform, every member of the family inherits common modules. Due to the reuse of intellectual assets, it offers high cost-saving scope from commonality. Furthermore, if those core modules are software assets, cost-saving would be increasing linearly. Moreover, it also increases the ease of evolution of products. A single enhancement could be easily propagated to the incremental advancement of all the family members.
As various product variants can be derived from the primary product family, it creates the opportunity to reuse common assets. Of course, all types of products have the potential to benefit from product family architecture. But the most economies of scope benefits distill from software innovations, as the cost of reuse of the same core components in multiple products is extremely low. Hence, product family architecture for maximizing the economies of scope benefit has been at the core of innovation strategy. Like Apple, hardware companies like Intel and Toyota have been benefiting from economies of scale due to the adoption of product family architecture. By the due its focus on the rescue of common assets, it differs from scale advantage.
Rising economies of scope advantage due to growing role of software:
As mentioned, economies of scope distill from the reuse of assets in multiple products. But unlike many other products, the cost of copying software assets in multiple products is basically zero. Hence, software-based reuse offers very high economies of scope advantage. For example, Apple has benefited from adopting the same operating system technology core in its multiple products.
But does it mean that economies of scope benefit from the zero cost of copying software are only for conventional software products? Fortunately, the answer is no. The hardware components of many existing products are candidates for replacing with software. For example, Apple replaced the physical keyboard of smartphones with software one. Similarly, remote controllers of Television, Air conditioners, and many other products are subject to replacement with smartphone apps. In addition to user interfaces, many internal hardware components of products are going through replacement with software. For example, the software has taken the role of physical telephone switches. Hence, replacing hardware components with software opens the door of cost-saving from rescue further. But for availing this opportunity, we need to redesign products as a family.
Innovation strategy for leveraging economies of scope advantage:
For the increasing role of software and growing R&D cost in the innovation of products and services, there has been increasing emphasis on economies of scope advantage. Hence, innovation strategy should have product family architecture at the core. In addition to cost-saving, it also offers a similar look and feel experience across the product family. Hence, it contributes to brand value and reduces the learning barrier in using different products of the same company. Furthermore, using the same core assets for deriving economies of scope advantage leads to ease of maintenance. Besides, it makes the evolution of innovation easier. Therefore, maximizing economies of scope advantage should be innovators’ core winning strategy. Besides, its combination with economies of scale and network externality solidifies the strategy further.
...welcome to join us. We are on a mission to develop an enlightened community by sharing the insights of wealth creation out of technology possibilities as reoccuring patters. If you like the article, you may encourage us by sharing it through social media to enlighten others.