Economies of Scale and Learning

By expanding the number of markets in which they compete, firms may be able to enjoy economies of scale, particularly in manufacturing operations. More broadly, firms able to make continual process improvements enhance their ability to reduce costs while, hopefully, increasing the value their products create for customers. For example, rivals Airbus SAS and Boeing have multiple manufacturing facilities and outsource some activities to firms located throughout the world, partly for developing economies of scale as a source of being able to create value for customers.

Economies of scale are critical in a number of settings in addition to the airline manufacturing industry. For example, economies of scale are a critical component of Costco’s business model. Costco is a subscription business that sells a service to its customers. The service it provides is buying goods in large quantities at low costs (because of its economies of scale), thus allowing the firm to sell the goods to consumers at lower prices, passing on the savings provided by Costco’s purchases. In fact, Costco is so popular that it is experiencing some of the diseconomies of scale in that some people prefer not to shop in crowded stores. This causes Costco to continue to expand the number of its stores. Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units and network partners across country borders. By sharing resources and knowledge in this manner, firms can learn how to create synergy, which in turn can help each firm learn how to deliver higher quality products at a lower cost.

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Operating in multiple international markets also provides firms with new learning opportunities, perhaps even in terms of research and development (R&D) activities. Increasing the firm’s R&D ability can contribute to its efforts to enhance innovation, which is critical to both short- and long-term success. However, research results suggest that to take advantage of international R&D investments, firms need to have a strong R&D system already in place to absorb knowledge resulting from effective R&D activities.

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