Strategy
Economies of scale
Cost per unit falls as volume rises.
Facts checked against sources onWhat does Economies of scale mean?
Economies of scale mean the average cost per unit falls as a business produces more, because fixed costs are spread over more units, larger buyers get better prices, and work can be more specialized. They have limits: past some size, coordination costs can make average cost rise again (diseconomies of scale).
Where does it come up in case interview prep?
- Cost structures, margins and capital intensity across industriesLesson in How industries work: the toolkit
- Procurement and sourcing: where the money goesLesson in Sourcing, trade and supply risk
- China and Japan for case solversLesson in Regions for case solvers: the big markets of the world
- Industry primers: retail, consumer goods, banking, telecomLesson in Business basics for non-business learners
- Scale and scope: when being bigger lowers costLesson in Why some businesses win: competitive advantage and the economics of strategy
- Using it in a case: is the advantage real?Lesson in Why some businesses win: competitive advantage and the economics of strategy
- Organisation design: spans, layers, and central or localLesson in People, rules and responsibility: organisation, regulation and sustainability
- Revenue models, cost structure, unit economics and operationsLesson in Pharma, biotech and medical devices
Related terms
- Economies of scopeCost falls when related products share resources.
- Fixed costA cost that stays the same when volume changes, within a normal range.
- Barriers to entryWhat makes it hard for new competitors to enter a market.
- Switching costsThe cost or effort for a customer to change supplier.
- Network effectsA product becomes more valuable as more people use it.
- Competitive advantageWhat lets a firm earn more than its rivals over time.
- Vertical integrationOwning more stages of your own supply chain.
- Horizontal integrationCombining with firms at the same stage, often competitors.
Learn it in context
See Economies of scale at work in a lesson from How industries work: the toolkit, with checks as you go.
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