When Large Size Is a Disadvantage

If economies of scale are substantial, larger firms are able to achieve lower costs of production or distribution than their smaller rivals. These cost advantages can translate into higher and more stable profits, and a significant competitive advantage for larger firms. Diseconomies of large-scale organizations work in the opposite direction. When diseconomies of scale are operative, larger firms suffer a cost disadvantage when compared to smaller rivals. Smaller firms are then able to translate the benefits of small size into a distinct competitive advantage. Rather than losing profits and sales opportunities to larger rivals, smaller firms can enjoy higher profit rates and gain market share over time.

Industries dominated by large firms tend to be those in which there are significant economies of scale, important advantages to vertical integration, and a prevalence of mass marketing. As a result, large organizations with sprawling plants emphasize large quantities of output at low production costs. Use of national media, especially TV advertising, is common. Industries in which "small is beautiful" tend to be characterized by diseconomies of scale, "just in time" assembly and manufacturing, and niche marketing that emphasizes the use of highly skilled individuals adept at personal selling. Small factories with flexible production schedules are common. Rather than emphasize long production runs, many smaller companies focus on product quality. Instead of the sometimes slow-to-respond hierarchical organizations of large

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