first_imgAmazon.com dominates the online retail industry, Walmart Stores Inc being at the top in revenue, P&G controlling the market for ages. All of the above rank highest in revenue. Are they on the path of success because they are large or large because they succeed?Size does matter, economy of scale proves the same with much elegance. However, only if the concept is well understood and that knowledge can be used to create a competitive advantage.The theory of scale economies coming back from the 20th century identified by economists like Adam Smith states that when more units of a good or service can be produced on a large scale, the input cost decreases on average. It is the idea that, as the company grows, the more units of products are being produced, leading to the average cost of making each product then failing; profit rises. It can be easily seen when a retail shop buys many items, resulting in getting some discount from the wholesaler. The shop can sell the products at a lower cost from the rivals, increasing its sales. It is the same as Wal-Mart’s. It uses its volume to reduce its cost of purchase from vendors as much as possible. Later passing on the discount to its customers. It is often seen that they change their price every day, depending on how their vendor is charging them.The big tech giants like Microsoft, Google, and AWS can leverage the benefits of economies of scale and then pass it on to their customers as well. This is because these companies are having higher fixed costs than marginal costs. As a result, the cost of manufacturing more software programs is minimal. Once the fixed cost for developing this software or platforms is paid off, the additional cost is minimal to nothing with mass production. Hence, this type of tech economy of scale is the primary reason for the market’s tech monopoly phenomenon.The Economy of scale is not just seen in the firms producing goods and services; it’s a broad concept applicable to many practical scenarios.  Sales promotion is also an excellent example of Economy of scales. Let us take the example of the Sales marketing of automobiles, it is quite similar to producing and selling automobiles. Advertising is conducted to reach the masses, so as its sales increases, its efficiency increases, and the advertising cost per unit of output declines. There is a behavioural aspect of Automobile buyers; they tend to invest their large amount of money on those brands who have a dependable dealership and, at the same time, are popular. Here drives in the scale of Economy in Automobile firms and as well as in their sale promotions.Having spoken about the previous examples, there is a classic case of Economy of scale which cannot be missed; that is the Airline industry. This industry cannot merely survive on a minimal scale. Imagine a company having just 4-5 aeroplanes; its cost incurred would be higher than revenue.Now, let us flip the coin around, pursuing Size having in mind that it will undoubtedly lead to business profit is not a good idea. In cases where a steep slope for revenue is possible, scale advantages are of no use. There are instances like General Motors, the largest producer of automobiles in the world or revenues, but rank 8th in profit among vehicle producers. Hence Size may provide advantages, but Size without profitability is of limited value.Scale economy is indeed an essential concept for any business, and we have seen it has worked magically for many firms. Firms lower their cost either by technological development, by increasing purchasing power, by improving the management structure, or by specialization. However, sometimes, when firms grow to a certain extent, their average cost increases rather than decreasing. Such firms have to balance their Economy of scale with a diseconomy of scale.Frederick Herzberg, professor of management, has quoted.“Numbers numb our feelings for what is being counted and lead to adoration of the economies of scale. Passion is in feeling the quality of experience, not in trying to measure it”.So, Size certainly offers benefits to the companies that understand and exploit it. However, balance is key.last_img read more