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... To read the complete article, login or sign-up using the form below.
Become a premium subscriber today to read this and all MIT Sloan Managmeent Review articles.
Buy this article. Purchase one or more copies of this article in PDF form.
Become a premium subscriber today to read this article and the entire archive of MIT SMR articles.
Upgrade your existing subscription to premium
Sign in if you are a premium subscriber.
Do you subscribe the MIT Sloan Management Review in print? Enter the email address and password you used when ordering. Don't remember? Lookup your subscription account information
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription give you access to the entire archive of articles.
