Economies & Diseconomies of Scale
The U-Shaped Paradox: Why getting bigger makes you cheaper... until it makes you costlier
The Boardroom Brief
Internal Economies of Scale
As output increases, cost per unit FALLS because:
Purchasing
Bulk buying discounts (e.g., 10,000 units = 20% off)
Technical
Afford expensive machinery (£5M robot vs manual labor)
Financial
Lower interest rates (2% vs 8% for SMEs)
Managerial
Hire specialists (Supply Chain Director, CFO)
External Economies
When the WHOLE INDUSTRY grows, everyone benefits:
"Silicon Valley Effect: Universities train engineers, suppliers cluster nearby, skilled labour pool expands → All tech firms benefit, not just one."
Diseconomies of Scale
But get TOO BIG, and cost per unit RISES because:
Communication Breakdown
"Chinese Whispers" - Message distorted across 9 layers
Coordination Chaos
Managing 125,000 employees across 47 countries
Motivation Loss (Alienation)
Staff feel like "Employee #47,823" - not valued
The Strategic Question
Where is the Minimum Efficient Scale (MES)?
The output level where Average Cost is LOWEST - the sweet spot at the bottom of the U-curve.
Real Example: Amazon's fulfilment centres operate at ~1M sq ft - any smaller and costs rise (can't afford robots), any bigger and coordination complexity kills efficiency.
Cambridge 9609 AS & A Level Business | Topic 9.1.2: Economies & Diseconomies of Scale
Key Takeaway: Growth is strategic until it becomes structural burden. Know your MES.
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