Economies of Scale

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Summary

What is Economies of Scale? Meaning.

Economies of Scale (EoS) refers to the reduction in per unit costs which arises from the ability to perform activities differently and/or more efficiently at larger production volume.

EoS is one of the Ten Cost Drivers of Porter that determine the cost position of a firm. Another one is Capacity Utilization.


Additional investments in capital can be diffused through an increase in production. After all, the marginal cost of producing a good or service decreases when additional units of production are added. Economies of scale may be achieved in a number of areas. A larger firm may be able to

  • Buy in bulk (Purchasing Economies of Scale)
  • Organize production more efficiently (Production Economies of Scale)
  • Raise capital cheaper and more efficiently (Financial Economies of Scale)
  • Spread the costs of uncertainty more efficiently (Risk-bearing Economies of Scale)
  • Spread the costs of advertising and promotion more efficiently (Marketing Economies of Scale)
  • Spread transportation costs more efficiently (Logistical Economies of Scale) (see also Factory Gate Pricing).

Economies of scale can also be achieved by Outsourcing secondary (supporting) processes, see Facility Management.


Note that bigger is not always better. Larger firms can be more difficult to manage, due to their complexity. This may cause diseconomies of scale, especially when the external environment of firms is complex or changes quickly. But compare: Organizational Absorption.


Do not confuse economies of scale with Capacity Utilization, which spreads the fixed costs of existing facilities and workforce over a larger volume.


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Diseconomies of Scale
What is the difference between diseconomies of scale and economies of scale?...
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🔥 NEW Returns to Scale Explained
Return to scale is a long existing economic concept. Diminishing returns to scale occur if at least one factor is fixed. This means that diminishing returns are typically a short run problem. It measu...
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The Role of AI in Economies of Scale
Do you think Artificial Intelligence (big data, self-learning software, digital networks, algorithms) represents an entirely new type of economies of scale? Will AI change the need for economies of sc...
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Capacity Planning for Goods and Services

Capacity Planning, Services, Goods, Demand Management, Capacity Management
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Compare also: Competitive Advantage  |  Sustainable Competitive Advantage  |  Value Chain  |  Synergy  |  Working Capital  |  Shared Value  |  Globalization  |  Price Setting  |  Glocalization

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