What are Economies of Scale?

Economies of scale refer to the cost advantage experienced by a firm when it increases
its level of output.
The advantage arises due to the inverse relationship between per-unit fixed cost and
the quantity produced. The greater the quantity of output produced, the lower the per-
unit fixed cost. Economies of scale also result in a fall in average variable costs
(average non-fixed costs) with an increase in output. This is brought about by
operational efficiencies and synergies as a result of an increase in the scale of
production.
Economies of scale can be realized by a firm at any stage of the production process. In
this case, production refers to the economic concept of production and involves all
activities related to the commodity, not involving the final buyer. Thus, a business can
decide to implement economies of scale in its marketing division by hiring a large
number of marketing professionals. A business can also adopt the same in its input
sourcing division by moving from human labor to machine labor.
Diseconomies of Scale?
Consider the graph shown above. Any increase in output beyond Q2 leads to a rise in
average costs. This is an example of diseconomies of scale – a rise in average costs
due to an increase in the scale of production.
As firms get larger, they grow in complexity. Such firms need to balance the economies
of scale against the diseconomies of scale. For instance, a firm might be able to
implement certain economies of scale in its marketing division if it increased output.
However, increasing output might result in diseconomies of scale in the firm’s
management division.
Frederick Herzberg, a distinguished professor of management, suggested a reason why
companies should not blindly target economies of scale:
“Numbers numb our feelings for what is being counted and lead to adoration of the
economies of scale. Passion is in feeling the quality of experience, not in trying to
measure it.”
Focused Factories
A focused factory is a factory that its creators have organized around a very specific set
of resources. The focus of this type of factory is very narrow, it provides a narrow range
of operations. The vast majority of focused factories are mass production facilities.
The creators of a focused factory wanted it to make a very narrow range of products at
minimal costs. They designed the production facility so that it would have a high rate of
throughput.
A typical focused factory has a significant fixed asset base. It also produces at
extremely high volume, it mass-produces things. If its owner doesn’t have it producing
a lot, it will be running at a loss. This is because this type of factory has relatively large
fixed costs. Therefore, it needs a relatively high production rate just to break even.

“A focused factory is a highly efficient manufacturing facility that is designed to create a

limited set of products at minimal cost and a high rate of throughput.”
Subcontractor Networks
Subcontractor Network is the Small Business Administration’s (SBA) Subcontracting
Network System that bridges the gap between businesses seeking small business (SB)
subcontractors and SB seeking subcontracting opportunities by facilitating the matching
of SB with subcontracting opportunities. SubNet allows all who has solicitations; notices
of sources sought and outreach events for SB participation to post it for maximum
exposure.
There are several reasons why subcontracting is carried out. Subcontracting is very
useful in situations where the range of required capabilities for a project is too diverse to
be carried out by a single general contractor. In such cases, subcontracting parts of the
project that do not form the general contractor's core competencies may assist in
keeping costs under control and mitigate overall project risk. It may even grant some
defense in a vis major situation. Also, some large government contracts or contracts
that impact local community development may require the primary contractor to hire a
certain number of subcontracting entities from the community as part of the contract.
Additionally, a business may decide to subcontract some mundane but necessary jobs
to free up time and resources to attend to other profitable undertakings.