Tuesday, December 22, 2009

Examining Economies of Scope

There has been a lot of discussion lately around the benefits of so called "economies of scale" found in the cloud. This scale has been described as a main driver for those choosing to use remote cloud computing services and infrastructure rather then using your own. The discussion usually points to the "fact" that these companies have greater economic scale that smaller companies can't match. A scale that dictates that only the largest companies can afford the capital expense required to the build out the massive global data center footprints required to adequately compete as multi-faceted cloud providers. I'm here today to propose another reason why these companies may have a unique advantage, and it's not only scale, but it's also scope, more specifically, Economies of scope.

According to Wikipedia, "Economies of scope are conceptually similar to economies of scale. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. "

So my hypothesis is that beyond just the money these companies bring to bear, they also bring the power of a large and well developed sales & marketing channel. In effect they can bundle a variety of applications and services to a well established network of customers and partners. Regardless if your product is better, if your brand, marketing and sales channels are strong enough you can sell anything. (Microsoft owns the Desktop, Google Owns the Net, both have key advantages) If one of your product lines falls out of fashion the company will, most likely, be able to continue operating because of diversification. It's been one of Google's key advantages, they can try out a million product directions, because they have the customer visibility and money (thanks for search world ads) to do so in the hope that one of these random products will revolutionize both their business and hopefully the world.

This may also be why often a product sold to Oracle, IBM, Google or Microsoft is more successful then one left independent. Of course there are aways exceptions to these rules. These very market leaders themselves at one point were all new entrants in the market and had to endure to overcome the incumbent players. But as a generally rule of thumb it certainly seems to give the incumbent a huge advantage. So the key to success may just be to be to outlast your competitors and continually try new things.

Just a random thought.

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