Discuss the relative advantages and disadvantages of large and small companies in terms of economies of scale and scope, as well as diseconomies of scale. Give examples.

Question

What will be an ideal response?

Answer 1

Answer: Student answers and examples will vary but should demonstrate an accurate knowledge of economies of scale and scope, diseconomies of scale, and the relative advantages and disadvantages of large and small companies in terms of these concepts. Size creates scale economies—that is, lower costs per unit of production. Size can offer specific advantages such as lower operating costs, greater purchasing power, and easier access to capital. Size also creates economies of scope, which is when materials and processes employed in one product can be used to make related products. With such advantages, huge companies with lots of money may be the best at taking on large foreign rivals in huge global markets. On the other hand, big companies suffer (and small companies benefit) from diseconomies of scale, or the costs of being too big. Nimble, small firms frequently outmaneuver big bureaucracies. Smaller companies can move fast, provide quality goods and services to targeted market niches, and inspire greater involvement from their people. They introduce new and better products, and they steal market share. The premium now is on flexibility and responsiveness—the unique potential strengths of the small firm.