Exploring Scale: The Advantages of Thinking Small

When it comes to thinking about scale, the assumption held by corporate leaders since Henry Ford’s day has been that bigger is better. The advantages of large-scale operations are clear: Fewer managers are needed; plant, equipment and labor are used more efficiently; logistics are less complicated and so on. In many industries, executives subscribe to the concept of “minimum efficient scale,” a theory suggesting that operations smaller than a certain size cannot be cost-effective and hence are not commercially viable. The minimum output thought to be efficient varies by industry, from 200,000 vehicles for an automotive factory to 5 million tons of steel for an integrated steel mill to 8 million barrels of beer for a global brewery.

In recent years, the notion that scale economies are the main driver of competitiveness has led to mergers in such service businesses as banking, cable television and even funeral homes. The logic of minimum efficient scale was also a factor in the dot-com boom, as managers strove to “scale up” rapidly in the hope that their companies’ size would sink competitors and serve as a barrier to entry by potential newcomers.

But a single-minded focus on increasing scale doesn’t always bring happy returns. Large, centralized operations can have the effect of limiting the opportunities for innovation, impeding customer responsiveness, stunting employee development, and numbing sensitivity to industry and environmental changes. Many companies in the airline and steel industries, to take just two prominent examples, have suffered from the single-minded pursuit of large scale.

In our research, we have found that small-scale operations provide significant advantages in four areas.1 They allow companies to locate hot spots and tap into local knowledge networks; make it possible to respond more rapidly to customer needs and to trends in regional demand; enable companies to monitor potentially disruptive technologies; and help hold down labor costs while developing managerial talent. Although these topics have been discussed individually in recent years, they have never been pulled together to illustrate the hidden benefits of small-scale approaches to corporate needs.

The point is not that companies should abandon traditional thinking about scale; in many situations, bigger is indeed better because of the cost efficiencies that size provides. But sometimes efficiencies can mask opportunities. Executives who develop a deeper understanding of scale and learn when it is better to “think small” can have a potentially huge impact on their companies’ long-term success.<

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References

1. In addition to extensive global survey work in the auto industry, we have interviewed executives and industry specialists in a range of industries, including airlines, aircraft producers, biotechnology and consumer goods.

2. A.J. Scott, “The Roepke Lecture on Economic Geography: The Collective Order of Flexible Production Agglomerations: Lessons for Local Economic Development Policy and Strategic Choice,” Economic Geography 68 (July 1992): 219–233.

3. Figures according to the Federal Aviation Administration; see http://www.faa.gov/education/documents/salary.htm.

4. J. Cox, “Bush Slaps Tariffs on Steel Imports,” USA Today, Wednesday, Mar. 6, 2002, sec. B, p. 1.

5. Gas-turbine specialist Williams International has developed the engines for these air taxis. Airframe producers include startups like Eclipse Aviation and Farnborough Aircraft.

6. The Eclipse 500 twin jet, which made its maiden flight on Aug 29, 2002, has a base weight of 2,700 pounds — similar to that of a Volkswagen Golf and less than half the curb weight of a Lincoln Navigator.

7. See, for example, P. Wells and P. Nieuwenhuis, “Why Big Business Should Think Small,” Automotive World, July–August 2000, 32–38.

Acknowledgments

The authors gratefully acknowledge the support of the Sloan Foundation and the International Motor Vehicle Program. We would also like to thank Brigitta Tadmor, Richard Noble, John Paul MacDuffie, Peter Hines and Nico Vermeulen for comments and insights on earlier versions of this article.