I started to read the Scale Economies section in the case library. One interesting thing I’d note is the idea of amortization of some fixed cost is mentioned as a scale economy. Some try to differentiate this as operating leverage.
For example, Michael Mauboussin says:
“A company enjoys economies of scale when it can perform key activities at a lower cost per unit as its volume increases. These tasks include purchasing, production, marketing, sales, and distribution. Economies of scale lead to greater efficiency as volume increases. This is distinct from operating leverage, where margin improvement is the result of spreading preproduction costs over larger volumes. Mistaking operating leverage for economies of scale may lead to the incorrect conclusion that unit costs will decline even as the company expands to meet new demand.”
This is likely an interesting nuance to be aware of.
This is something we really grappled with in the early iterations of the case library! I talk a bit about some of this here:
Specifically, I’m referring to the bit where I worried about the different definitions or names for variations of scale economies.
When I asked him, Spiro basically said “eh, scale economies is made up — it’s made up by people who study it and want to label it as a bucket in order to talk about it. No, pay attention to the cases, because it’s the details of the cases that will matter to you when you’re doing business.”
This is a very odd line for a professor to take — he’s basically saying that … definitions don’t matter? Words don’t matter? I buy that the details of the cases matter more to a practitioner than a debate over nomenclature, but then what does that mean for those of us who are dealing with a case library?
This comes up a lot in my line of work, so I’ll tell you what it brings to my mind that might help.
Some clients I talk to have a mindset that if they can name something, they understand it and therefore they don’t have to really think about it any more. “Oh, this is an X, it goes in Y box, so put it there and let’s get on with the day.” This can work if you are taking an exam, but it doesn’t work well in understanding reality. It gets really bad when people insist on a label before they will move on with the discussion. At that point, I usually think (and often say) some version of “I don’t care about what label you put on the box, I just care about the box and what’s actually in the box.”
Spiro’s admonition is that details matter, and labeling as a substitute for understanding does not work. Instead of trying to figure out which box to put a concept in, the goal is to grok the environment well enough to take effective action.