Economies of Scale
Doing things cheaper by doing them bigger.
You run a factory. There's a certain cost just for turning on the machines and bringing people into work. Once everyone is working and the machines are humming, the added costs of each additional item becomes lower.
Example: your factory makes clown noses. It costs $100,000 a week to run the factory. You can make 30,000 clown noses a week. So each nose costs about $3.33 to make.
You decide to add an extra shift. That's going to cost an additional $50,000 a week. You already have the machines, and much of the basic costs of your business were priced into that initial $100,000 that you were spending on the first shift. So for the second shift, there's only the additional labor cost.
With the new shift added, the total cost to run your factory is $150,000 a week. But the second shift allows you to double your output. Now you're making 60,000 clown noses a week. The total cost of each nose has dropped to $2.50 per nose. By making your company bigger, you made your output cheaper per unit.
Walmart is probably the company most famous for relying on economies of scale as a business plan. Because it's the biggest retailer in the world, Walmart can put pressure on suppliers, can afford to have its own transportation system (so it isn't paying trucking companies a margin to haul stuff all over the country), and can take advantage of a ton of incremental advantages that come with being huge...thus turning an essentially low-margin business into a massive money maker.
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Finance: What does it mean to "scale"?57 Views
Finance allah shmoop What does it mean to scale Well
here's a squid eyeball from space fifty miles away and
here's a squid eyeball from our boat the pesca squid
alia's from a mile away and here's a squid eyeball
from the view of our iphone we just dropped in
the water when the squids when right beneath the boat
scaring the crap out of us literally at one scale
we could barely see the ocean At another scale We
saw way too much eye ball scale and business has
the same kind of dramatic effect as operations come into
play That is it's One thing to serve lemonade drinks
to one hundred people a week It takes one stand
a permit grocery store visits worth of supplies it's completely
Another thing Toe serve a million drinks a week for
the latter You need infrastructure trucks storage and armies of
servers to you know serve Yeah that's what they do
someone's gotta get lemonades to the people So when a
company scales it means that they have gone from a
modest few million dollars of sales to sales of maybe
one hundred million and then a billion Some like that
The skill set for the former is a vastly different
set than for the ladder and some people are able
to do both Howard schultz founder and ceo of starbucks
We're looking at you well starbucks started off is just
one store in seattle in like five minutes later there
were a gazillion of them all over the world thinking
of coffee in any language So yeah that's How a
company scales from you little toe Big big Incidentally you'll
want to stay off the scale if you consume venti
caramel frappe with whip on a daily basis but on 00:01:44.897 --> [endTime] there so good