Economies of Scale Scope
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r r r r r r r r r r r r r r r r r r r r r r r r r rr
ECONOMIES AND SCOPE
OF
SCALE
2
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ew concepts in microeconomics, if any, are more fundamental to business strategy than economies of scale and the closely related economies of scope. Economies of scale allow some firms to achieve a cost advantage over their rivals. Economies of scale are a key determinant of market structure and entry. Even the internal organization of a firm can be affected by the importance of realizing scale economies. We mostly think about economies of scale as a key determinant of a firm’s horizontal boundaries, which identify the quantities and varieties of products and services that it produces. The extent of horizontal boundaries varies across industries, along with the importance of scale economies. In some industries, such as microprocessors and airframe manufacturing, economies of scale are huge and a few large firms dominate. In other industries, such as apparel design and management consulting, scale economies are minimal and small firms are the norm. Some industries, such as beer and computer software, have large market leaders (Anheuser-Busch, Microsoft), yet small firms (Boston Beer Company, Blizzard Entertainment) fill niches where scale economies are less important. An understanding of the sources of economies of scale and scope is clearly critical for formulating and assessing competitive strategy. This chapter identifies the key sources of economies of scale and scope and provides approaches for assessing their importance.
F
WHERE DO ECONOMIES
OF
SCALE COME FROM?
r r r r r
Informally, when there are economies of scale and scope, “bigger is better.” To facilitate identification and measurement, it is useful to define economies of scale and scope more precisely.
41
82476
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42 • Chapter 2 • Economies of Scale and
c02.3d
GGS
3/17/09
15:15
r r r r r r r r r r r r r r r r r r r r r r r r r rr
ECONOMIES AND SCOPE
OF
SCALE
2
r r r r r r r r r r r r r r r r r r r r r r r r r rr
ew concepts in microeconomics, if any, are more fundamental to business strategy than economies of scale and the closely related economies of scope. Economies of scale allow some firms to achieve a cost advantage over their rivals. Economies of scale are a key determinant of market structure and entry. Even the internal organization of a firm can be affected by the importance of realizing scale economies. We mostly think about economies of scale as a key determinant of a firm’s horizontal boundaries, which identify the quantities and varieties of products and services that it produces. The extent of horizontal boundaries varies across industries, along with the importance of scale economies. In some industries, such as microprocessors and airframe manufacturing, economies of scale are huge and a few large firms dominate. In other industries, such as apparel design and management consulting, scale economies are minimal and small firms are the norm. Some industries, such as beer and computer software, have large market leaders (Anheuser-Busch, Microsoft), yet small firms (Boston Beer Company, Blizzard Entertainment) fill niches where scale economies are less important. An understanding of the sources of economies of scale and scope is clearly critical for formulating and assessing competitive strategy. This chapter identifies the key sources of economies of scale and scope and provides approaches for assessing their importance.
F
WHERE DO ECONOMIES
OF
SCALE COME FROM?
r r r r r
Informally, when there are economies of scale and scope, “bigger is better.” To facilitate identification and measurement, it is useful to define economies of scale and scope more precisely.
41
82476
c02.3d
GGS
3/17/09
15:15
42 • Chapter 2 • Economies of Scale and