- Traditional economic theory tells us that companies can get too big to function
- But do these rules still hold for knowledge companies?
Many people will be familiar with the idea of economies of scale. The idea has a very intuitive appeal: when companies get bigger, they can benefit from cost savings. Bulk buying, advertising discounts, lower borrowing costs and the ability to spread fixed costs (like rent) across more units produced can all help bigger companies to reduce their average costs over the long run.
But should companies get too large, diseconomies of scale can set in. Perhaps production processes for different components can’t scale up at the same speed, communications get lost in translation or workers start to feel less motivated. The theory implies that as businesses grow, they eventually hit limitations. This should mean that no company can grow large enough to corner the market. At least, that’s what we used to think.