Competition Sutra #4: The Economics of Scale

This is the fourth part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”

1. A 1000 pound gorilla can dominate an alley better than a highway.

When a firm has scale built into it, it would like to have its market as a niche market and not a globalised open for all turkey shoot. In that way, it can preempt any attempt by any other firm to undercut its market.

2. Local advantages, Global learnings: Go Local!

When a firm is trying to scale up, it should concentrate on local business, local markets and local demands. In a globalised world, it is seductive to think big, but when in doubt remember rule #1. Wal-Mart’s example might help as well(Competition Sutra #5).

3. An expanding market poses significant risks to firms built on economics of scale

Remember the 1000 pound gorilla on the narrow alley? Now imagine that alley growing fast to turn into a street, then a national highway and then 40 lane international cargo lanes. The gorilla will be outsized by the market it has to dominate. Thus allowing any other competitor to come in and steal market share.

With a fall in market share, the fixed costs to sales decline for the incumbent and the difference in the economies of scale of the two firms thus shrink.

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