Economies of scale

What is it?

Economies of scale is the term to describe how unit costs falling as volume (scale) increases. It happens because fixed costs can be spread over larger volumes, and variable costs fall too as there is increased purchasing power and most processes are more efficient at scale. It is one of the most frequently (over?) used concepts in strategy.

An associated concept is “Minimum Efficient Scale”. This represents the volume/capacity beyond which economies of scale are not material – all scale economies have been achieved and there is no more cost advantage to size.

Little discussed, but very real is the opposite term of diseconomies of scale. As a company gets larger there are negative consequences – time-delays, loss of focus, bureaucracy, depersonalization, loss of connection between your own performance and the companies results, increasing time spent on internal issues and less focus on the external world.

Reduced economies of scale as a result of new technologies have rebalanced competitive advantage in favour of smaller companies.

When is it useful?

An Example?


How do you do the analysis?

The impact of scale on costs is relatively easy to measure. It is the justification for many mergers and acquisitions as two companies combine their operations and eliminate overhead fixed cost.

 

What sort of scale matters? Is it:

1 SKU?

I Product?

1 Brand?

1 Segment?

1 Customer?

1 City?

1 Country?

Regional?

Global?

 

 

I want to know more

How can you adapt this concept?