More on Economies of Scale

Let us make an example to better explain economies of scale. Let’s say that a company that is well run that makes one million one million units a month will in most cases have a lower cost of production for every unit than a company that produces only 100,000 units in the same amount of time. The difference between the costs for every unit of the two distinct companies, one of which is ten times larger than the other one, can change quite a bit from one line of business to the other. In others that might not be hardly any difference at all. Besides this, not to forget that in any industry the bigger company is going to have the most advantage only in the case that it is extraordinarily well managed and run. Keep in mind also that the bigger a company is, the more difficult it is to run effectively. In many cases the intrinsic advantages of scale are completely balanced or even more than even-handed by the inefficiencies caused by a great number of bossy coatings of middle management, resulting in delays when it comes to making decisions and in some cases from what it seems to be the lack of ability of top executives in the bigger companies to realize quickly what requires remedial consideration in several subdivision of the extreme complexes. 

Then again, when a company perceptibly turns into the leader in its field, not only in its dollar amount but in its profitability, it usually does not get knocked off from this place as long as the management of the company remains to be very competent. This type of management needs to be able to hold on to the ability of changing corporate methods in order to go along with the constantly changing external environment. There is a school of investment thinking that promotes getting shares in the second or third company in a field since these companies are still able to rise up to becoming the number one, while the present number one company might go down. There are some industries where the biggest company simply does not have an apparent position of leadership, however in the companies where this position of leadership can be seen, it would not be a good idea to go along with this point of view. There are many larger number one companies that have not been overtaken by others so this is one factor you will need to look into very well.

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