Size can provide enormous competitive advantage through economies of scale, scope and network effects, provided companies are smart enough to leverage and exploit it.
Wal-Mart, Microsoft, General Electric (GE), Tatas, Reliance, Sony, Amazon, and eBay are some of the behemoths in their respective industry in their countries. For example, Wal-Mart is the undisputed leader in the retail industry; Microsoft controls more than 80% of the PC software market; GE has generated superior returns for decades; Sony, the first name that comes to the mind in consumer electronics good is a Japanese electronics behemoth; Amazon, one of the few surviving companies of the Internet boom era, has become the undisputed king in e-tailing; eBay, the other giant from the Internet boom era, has been the most successful e-commerce venture among the New Economy companies; Tatas is one of India's largest conglomerates; and Reliance a petrochemical behemoth wants to become the same in the Indian telecom sector. For all these companies though size has been one of the key drivers of growth. But each of them has leveraged size where it matters most.
Large organizations can benefit by amortizing the fixed costs over greater volumes, such that the marginal cost for producing an extra item decreases. Henry Ford's success did not merely came only from manufacturing cars more quickly, but also from economies of scale. His "integrated" industrial firm could find economies of scale in everything from purchasing to advertising. The strategy of doing every activity under one roof makes sense in the 1920s, because transaction costs involved in manufacturing were very high. The transaction costs, which include search costs, costs incurred in signing contracts and procurement and delivery of goods were high because of poor transport and communication infrastructure. Today an automobile company can no longer leverage scale by being an "integrated" firm because the transaction costs have vastly decreased. Instead, they reap benefits from economies of scale by building cars of different models on same platforms and using more and more of the same components in different models. |
