The Little Book That Builds Wealth by Pat Dorsey

Author:Pat Dorsey
Language: eng
Format: epub, azw3
Publisher: Wiley
Published: 2010-12-24T05:00:00+00:00

Bigger Can Be Better

Cost advantages can also stem from manufacturing scale. The classic example of this is a factory with an assembly line. The closer the factory is to 100 percent capacity, the more profitable it is, and the larger the factory, the easier it is to spread fixed costs like rent and utilities over a larger volume of production. Also, the larger the factory, the easier it is to specialize by individual tasks or to mechanize production. Arguably, the prevalence of this type of cost advantage has diminished somewhat in the recent past as enormous low-cost pools of labor in China and Eastern Europe have become integrated into the global economy, causing some manufacturing to shift away from Europe and North America. Still, it’s a very real advantage for some companies.

Perhaps the best example is Exxon Mobil Corporation, which has lower operating costs than any of the other supermajor integrated oil companies by virtue of achieving scale economies in many of its operating segments. Although the scale advantage is less apparent in the company’s upstream operations that explore for and extract oil and natural gas, it’s very apparent in the firm’s refining and chemical operations, which have returns on capital that dwarf those of competitors like Valero and BASF Corporation.

Manufacturing scale needn’t be limited to owning a larger production facility than the competition. If we think about scale simply in terms of spreading fixed costs over a larger sales base, we can see that nonmanufacturing companies can also benefit from economies of scale. Video-game giant Electronic Arts, for example, has an easier time creating fantastic video games than smaller companies because the cost of bringing a video game to market—currently around $25 million—is essentially fixed, and Electronic Arts can spread the massive development costs of its video games over a larger overall sales base.

Across the pond in the United Kingdom, we see a similar dynamic at BskyB, the largest provider of pay-television services in that country. Sky can afford to pay far more for content than rivals because it can spread the cost over a larger number of subscribers—it has about three times more subscribers than Virgin Media, its closest competitor. So, Sky can purchase more Premier League football matches, more first-run movies, and more hit U.S. television shows, which attracts more subscribers, which in turn gives Sky the financial muscle to keep beefing up its content offerings. Absent a new market entrant outbidding Sky for a significant chunk of this content and being willing to suffer large financial losses as it tried to poach subscribers, it looks like Sky has a pretty wide economic moat.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.