Small vs Big: Companies Size Matters, but When?

economies of scale and scopeWhy are some industries dominated by huge firm with few, but powerful rivals and others have many small (or average) firms?

Could not the small firms join up through a series of expansions, acquisitions, joint ventures or strategic alliances and create one powerhouse that would dominate their market?

Lets look at examples:

In industries, such as microprocessors and airframe manufacturing, the market is dominated by few big players, while in other industries, such as apparel design and management consulting, there to be a small firm is almost a norm.

Still there are other industries, such as beer and computer software, where there are both large market leaders (Anheuser-Busch, Microsoft) and small niche players.

 

The logic of being big or small lies in economies of scale and scope.

Economies of Scale: Achieving lower costs by means of greater production (horizontal expansion).

If there is a possibility of achieving big economies of scale, an industry will be dominated by few large firms. In contrast, if only the small economies of scale are achievable, many small players will exist.

Economies of Scope: Achieving synergies by means of having bigger portfolio of products (vertical expansion).

Thus, if a firm can combine its products to reduce its costs or increase its benefits, than larger companies with more products will exist in the market. Oppositely, in a industry where synergies between products are rare, more specialized players will exist.

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