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Economies of ScaleKnowledge Center |
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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
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.
Compare also: Competitive Advantage | Sustainable Competitive Advantage | Value Chain | Synergy | Working Capital | Shared Value | Globalization | Price Setting | Glocalization |
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