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Evan Davis on... the right size

Updated Thursday, 18th June 2009

Economies of scale are well known - but for The Bottom Line presenter Evan Davis, sometimes small can be the right size.

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It’s taken as given that companies like to grow. The bigger you are the bigger the volume on which you’re making your margin so the bigger the profits you’re handing over to investors, it is thought.

Economists talk about this too. They use the phrase ‘economies of scale’ to describe the fact that if you double the size of a company it gets more efficient so the costs go down, again the profits are bigger.

They can drive a harder bargain to their suppliers, they can build bigger, more efficient factories, more mass production. But is it true there are diseconomies of scale too?

There are economies to being small; you can keep things in the family, you don’t need mega systems to know who’s doing what, you can manage the operation, you can be nimble, you can change direction far more quickly.

The funny thing is, in my view, that companies are always very aware of the economies of scale, they can see the economies of scale that are often technical. They also suit, incidentally, the testosterone-driven ambitions of the executives of those companies. They can see the advantages but the diseconomies of scale are often organisational, they’re the nebulous things that are quite hard to pin down. My view is there's a tendency for companies to grow beyond the scale at which they’re most efficiently managed. They get this wrong because the advantages are all too visible, the disadvantages are hidden. We only see them once companies have expanded.

Well that's my opinion. You can join the debate with The Open University.

 

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