The external economies of scale are those economies which take effect outside the firm, instead in the industry. These occur when the expansion of the scale of operations for the organization occurs due to an external factor like better condition of the roads or an investment in the transport infrastructure. In the external economies if scale the effects of economies are not limited to the organization only. Instead the community and the industry as a whole are able to benefit through these economies of scale.
Another form of external economy of scale is when the organization is able to develop a supplier village near its operations or the component suppliers for the organization shift to a location near the operation depots of the organization. This economy of scale is beneficial to both the suppliers as well as the company as the costs are reduced for both the parties.