Activity Four:
Manage the Company's cost structure to create Economies of Scale while offering good value to Core customers.

Step 28: Evaluate Economies of Scale in each functional cost department.


Measure the Economies of Scale (i.e., Productivity, Inputs/Outputs, over time) the Company is creating with its employees (Inputs). The Company tracks the Economies of Scale, measured by numbers of employees per unit of Output, in each organizational unit of the Company over a period of years. The Company may expand this analysis to do similar Economies of Scale estimates for the other two Input Building Block costs, Purchases, and Capital.


In the majority of industries, People are the most important of the Company's Building Block costs in the measurement of Economies of Scale. The Company would be more likely to achieve its optimal Economies of Scale by having the capability and will to measure the Productivity of its functional cost departments regularly.

What to Watch For:

  • In most cases, a period of three years is sufficient to measure the development of Economies of Scale.

  • Each functional cost department should be creating Economies of Scale unless the Company is significantly changing what it is doing or investing heavily for the future.

  • Neither Super-economies nor Diseconomies of Scale are sustainable over the long term. Super-economies are usually short term phenomena brought about by new technology. Diseconomies are more common and can be longer lasting, if not addressed.

  • In most industries, the industry market share leader does not lead the industry in Returns on Investment. In order to create effective Economies of Scale, a company must set aggressive targets for increases in Productivity.


Use Productivity measures to set cost targets for each functional cost organization. Then use these measures to improve the Economies of Scale the Company's sales volume growth creates.

More Information on Evaluating Economies of Scale in Each Functional Cost Organization on the Advanced Site

For helpful context on this step:



Symptoms and Implications:

Guide Index Next: Basic Strategy Guide Step 29