economies of scale

Examples of economies of scale in the following topics:

• Consolidation Strategy

  • The logic driving consolidation is the creation of economies of scale, economies of scope, new locations, new technology, or some other form of increased competitive capacity.
  • This kind of action is more precisely referred to as a "merger of equals."
  • The classic example of consolidation is the merger of Bell Atlantic with GTE, out of which resulted Verizon Communications.
  • The following motives are considered to improve financial performance: economy of scale, economy of scope, increased revenue or market share, cross-selling, synergy, taxation, geographical or other diversification, resource transfer, vertical integration, and hiring.
  • "Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators."

• Considering Company Size

  • The size and operational scale of a company is important to consider when identifying the ideal organization structure.
  • This structure works well for large organizations pursuing economies of scale, usually through production of a large quantity of homogeneous goods at the lowest possible cost and highest possible speed.
  • A divisional structure is also a framework best leveraged by larger companies; instead of economies of scale, however, they are in pursuit of economies of scope.
  • Economies of scope simply means a high variance in product or service.
  • Larger companies, on the other hand, achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).

• Differences Between Strategic Planning at Small Versus Large Firms

  • The effectiveness of a strategy is heavily dependent upon the size of the organization.
  • Strategic management can depend on the size of an organization and the proclivity of change in its business environment.
  • From a strategic point of view, this involves creating a system of quality control, reporting, and localization that maintains the competitive advantage of scale economies and strong branding.
  • Large firms such as McDonald's often achieve better scale economies and thus can pursue low-cost strategies.
  • In most cases, low-cost strategies require substantial economies of scale.

• The Challenge of Competition

  • Low-cost suppliers often benefit largely from economies of scale.
  • An example of differentiation might be cereal.
  • There are hundreds of different kinds of cereals.
  • An example of internal competition is PepsiCo.
  • Starting up a car manufacturing business to compete with Hyundai in the low-cost market is extremely difficult, as Hyundai has economies of scale in place that will almost always beat smaller competition on a low-cost strategy.

• Speed of Innovation

  • Robert Reich observes that profits in the old economy came from economies of scale, i.e., long runs of almost identical products.
  • Therefore, while the big winners in the old economy were big corporations, today's big winners are often small, highly flexible groups that devise great ideas, develop trustworthy branding for themselves and their products, and market these effectively.
  • A high rate of change can be seen in the shortening of product life cycles, increased technological change, increased speed of innovation, and increased speed of diffusion of innovations.
  • These are key challenges for organizations, as the profit generation of new ideas must fit into a slimmer chronological window—thus underlining the great value of being a first-mover.
  • Innovation involves continuous improvement throughout phases of a development program.

• Porter's Competitive Strategies

  • Michael Porter described a category scheme consisting of three general types of strategies commonly used by businesses to achieve and maintain competitive advantage.
  • He originally ranked each of the three dimensions (level of differentiation, relative product cost, and scope of target market) as either low, medium, or high and juxtaposed them in a three-dimensional matrix.
  • Cost leadership pertains to a firm's ability to create economies of scale though extremely efficient operations that produce a large volume.
  • Firms in the middle are less profitable because of the lack of a viable generic strategy.
  • Discuss the value of using Porter's competitive strategies of cost leadership, differentiation, and market segmentation

• Global Strategy

  • By expanding to a broader consumer base, these firms can take advantage of scale economies (cost advantages that an enterprise obtains due to expansion) and learning-curve effects because they are able to mass-produce a standard product that can be exported (providing that demand is greater than the costs involved).
  • Differentiation strategies also enable economies of scope, either fulfilling different needs in different markets with a similar series of products, or developing new products based upon the needs and consumption habits of a new market.
  • For example, Coca Cola tastes different depending on the country where it is bought because of differences in local preferences.
  • Starbucks sources coffee beans from all over the world, as climate dramatically affects the type and quality of the bean.
  • Explain the concept of global strategy within the context of international business and a globalized economy

• The Importance of Fringe Benefits

  • A combination of wages and benefits such as health insurance, vacation time, and retirement plans have become an expected form of compensation for today's employees.
  • This is to say, organizations can capture lower health insurance costs per employee due to scale economies, allowing organizations an important bargaining chip in the hiring process.
  • The above chart underlines the struggle in the United States to pay for health care: U.S. healthcare costs exceed those of other countries relative to the size of the economy (GDP).
  • Health care, due to poor management of the industry, is a leading cause of poverty in the U.S. and is a crucial benefit companies can offer employees.
  • Identify the critical importance of providing strong benefits packages, particularly in light of current external factors (e.g., health care costs)

• Technology as a Driver and Enabler of Innovation

  • Technology is a powerful driver of both the evolution and proliferation of innovation.
  • The proliferation of innovation pertains to two important factors of technology driving innovation: the creation of geographic hubs for technology and empowerment of knowledge exchange through communication and transportation.
  • Collaboration on a global scale as a result of technological progress has allowed for exponential levels of innovation.
  • These technological innovations generated are hypothesized to be a central driving force in the steady economic expansion of the U.S., allowing it to maintain it's place as the world's largest economy.
  • Examine the role of technology as a driver of competitive advantage and innovation in the business framework

• The Challenge of Globalization

  • Though only a simplified and small analysis of a complicated issue, this oversight in corporate management saw each echelon of leadership ignore the core responsibility of ensuring ethical standards in lieu of capital gains.
  • Understanding the basic overview of the global economy underlines highly relevant managerial and business level applications that provide useful insights to modern-day managers.
  • This has resulted in large scale interdependence between countries, as specialization (arguably the root cause of globalization) allows for specific regions to leverage their natural resources and abilities to efficiently produce specific products/services with which to trade for another country's specialization.
  • This has led to the existence of many multinational enterprises (MNEs), who argue that survival in the newly globalized economy requires sourcing of raw materials, services, production, and labor.
  • A global economy is, in many ways, enforcing a global culture.