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Leverage economies of scale and economies of scope to increase profitability

Economies of scale: cost advantages because of high volume production

Economies of scale are cost advantages of a company due to its large size. Most companies and businesses can realize advantages of scale that are a result of two effects:

  • Fixed costs - spread across large volume of units, decreasing cost per unit
  • Variable costs - low due to operational efficiencies and synergies
    • Larger production processes can be split into smaller, repetitive and simpler tasks.
    • Larger sizes of raw materials and production technologies, resulting in bulk discounts.
    • Risks are distributed on a larger scale, leading to less demand peaks.
    • Cheap automatized production technologies become feasible.

Example:

A power supplier has high initial costs for setting up the infrastructure. Once the infrastructure is set up, the additional costs of providing their service to an additional household is very little. Fixed costs will be split onto more households and sudden demand drops have less impact because other households still require sufficient energy levels.

Want to see a full case how to apply the concept of Economies of Scale? Solve the Paper Print case


Economies of scope: cost advantages because of similar processes of different products

Economies of scope are conceptually similar to economies of scale. While economies of scale for a firm primarily refer to reduction in the average cost per unit, economies of scope refer to lowering the average cost for a firm in producing two or more products that could share resources. These two effects lead to economies of scope:

  • Bundling effect: a single process serves the production of different products at the same time. Costs are distributed onto a larger product base.
  • Clustering: because of proximity, infrastructure (as an example) can be used by different companies without additional costs.

Verwandte Cases

Smart Meters

29,7 Tsd. mal gelöst
Smart Meters The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for the operations and maintenance of the gas and electricity grid on customer level. In the course of the energy transition in Germany, the responsible board member for the technical grid operations, Jan Bremer, thinks about deploying Smart Meters in the gas and electricity grid. He approaches you with the request to conduct a feasibility analysis and to give a clear recommendation whether or not Hamburg Energized should use Smart Meters in its gas and electricity grid in the future.
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The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for t ... Ganzen Case öffnen

Unified Health

21,8 Tsd. mal gelöst
Unified Health Our client is Unified Health, a health care company in the US. It insures patients and provides health care services. Employers pay a premium to UH for their employees and UH covers all necessary medical costs. UH has 300,000 patients enrolled. It has 300 salaried physicians covering 6 health centers which aren't owned by UH, but UH contracts local hospitals. If a patient needs medical care not covered by a UH physician, the patient is reffered outside the network and UH pays for all costs. Over the past 6 months UH has suffered declining profitability and you are hired to figure out what is wrong.     
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Our client is Unified Health, a health care company in the US. It insures patients and provides health care services. Employers pay a premium to UH for their employees and UH covers all necessary medical costs. UH has 300,000 patients enrolled. It has 300 salaried physicians covering 6 health center ... Ganzen Case öffnen

Central hospital

15,4 Tsd. mal gelöst
Central hospital Our client, Central hospital, is a 350-bed hospital based in a medium-sized city. The company has normally seen strong financial results with a 1-4% operating gain each year for the last five years. However, this year they are projecting a $14 m operating loss and the situation is expected to worsen in the future. The CFO expects to be out of cash in 2 years if not resolved.  They hired you to identify the cause of this  loss and how they can hit break-even again. However, since they are an important employer, laying off staff is not an option.
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Our client, Central hospital, is a 350-bed hospital based in a medium-sized city. The company has normally seen strong financial results with a 1-4% operating gain each year for the last five years. However, this year they are projecting a $14 m operating loss and the situation is expected to worsen ... Ganzen Case öffnen

Grocery Wholesaler

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Grocery Wholesaler Our client Fresh Groceries is a prominent wholesale food company that is trying to increase their profitability. The client currently sells a variety of food items and is collecting a significant amount of business and generating sufficient profit. However, the company is trying to gain more profitability from its existing lines of business.
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Chinese Chess - Airline Business During COVID-19

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Chinese Chess - Airline Business During COVID-19 Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April.  They've brought you in to first investigate what can be done immediatedly to prevent hemorrhaging cash and surive in the short-term. They are also looking to see how the current situation can be viewed as an opportunity, and what can be done to prepare for the future. 
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