Forget Economy of Scale! It’s All about Economy of Scope

Forget Economy of Scale! It’s All about Economy of Scope

Ulrika Mann

Ulrika Mann,

What’s the key to Scania’s uninterrupted profitability for over 60 years? According to Martin Sköld, Scania Associate Professor at Stockholm School of Economics, the secret sauce is modularization. The recipe contains standardized modules that can be combined in numerous ways to offer customized products or services, and the concept can be applied in every business.

Martin Sköld operates at the House of Innovation at Stockholm School of Economics, and much of his research in the automotive sector has been conducted in close collaboration with executives in large corporations. Among them is automotive company Scania, a company that has managed to be one of the most profitable for many years. When Cognizant hosted its Snapshot Breakfast – How to Deliver at Scale, Martin talked about his latest research findings: 

“Typically, there’s a tradeoff between volume and customization,” says Martin Sköld. “I saw that Scania has successfully achieved double competitiveness by combining the benefits from high volume and high customization.” 

The concept is described in Martin’s recently launched book Modularization, and its basic idea is that there are two kinds of efficiency. One is about efficiency linked to volume; you repeatedly produce high volumes of a certain item and can thus lower the cost per item. The other is about variation; you offer a variety of customized, individual items to fulfil customers’ wishes.  

”The problem is that customers don’t care about volume, they want variation,” says Martin Sköld. “Companies that achieve volume, tend to forget about variation, the customer demands.” 

What to do then? Think scoping up instead of scaling up. Martin Sköld illustrates with an example from a Stockholm based restaurant. Their menu is cleverly structured around 12 ingredients in 3 different categories: base, protein and sauce. By combining them, the total offering is 60 different dishes. The customization is at the end level – each customer can order an individual dish – while the restaurant’s volume is within the pieces. Scope has created scale.

This is how Scania is structuring their offering (the difference is that the ingredients are about engines and chassis instead) and the concept is applicable in all industries. Start with defining the value for your customer, then go on designing the appropriate ingredients within your system. 

Modularization gives you the benefits of both volume and variation while profitability, true customer value, resource efficiency and sustainability follow in its way. It’s really the greatest position to have.

Want to learn more about how to scope up your initiatives? Watch the video from Snapshot Breakfast – How to Deliver at Scale