пятница, 23 сентября 2022 г.

Digital marketing strategy

 

How to structure a digital marketing strategy?

We believe that an omnichannel marketing strategy is essential for marketers to take advantage of the growing digital marketing opportunities for acquiring and retaining customers - so you can win more sales. Our digital marketing framework for growth, the RACE growth system, helps you structure your digital marketing plan around your customers.

Your 5 step digital marketing plan

We recommend using the RACE Framework to structure your marketing strategy, integrated across Plan, Reach, Act, Convert and Engage.

As you can see via the marketing funnel below, building an effective digital marketing strategy requires these 5 steps which nurture the customer through their experiences of your business while influencing their decision-making process and lifetime value.

The RACE Framework is a streamlined, practical, marketing framework that can be scaled up or down according to your business goals. If you're still not convinced, or need help getting buy-in from your team, check out 10 reasons why you need a digital marketing strategy.

The benefit of our digital marketing framework is you can start to see results from your marketing activities instantly, and you can use data and insights to adapt your plan to meet your objectives as you can see below.


5 stages of planning a digital marketing strategy with examples.

The 5 stages of strategic digital marketing planning include plan, reach, act, convert and engage. In this section, we will summarise the key success factors for each stage of your digital marketing strategy, with examples, integrated across the Smart Insights RACE Framework.

1. Plan

Every successful digital marketing strategy starts with a plan! We recommend you use a data-driven approach, review your current digital marketing effectiveness, and plan to improve from there.

Omnichannel planning opportunities include customizing analytics, setting up KPI dashboards and setting SMART objectives to create a strategy of prioritized improvements to how you deploy digital marketing media, technology, and data to increase leads and sales.

To ensure your digital marketing strategy is working efficiently and effectively, we recommend taking a digitally-focused approach to strategy and planning. Our RACE Framework is designed for marketers and managers to create a fully integrated, data-driven, practical digital marketing funnel to support their business' overall vision.

Our 5-step digital marketing plan guides you through reaching new audiences, to nurturing interaction, converting customers, and encouraging engagement and advocacy. That's why we call it the R-A-C-E Framework.

Digital marketing strategy structure example: 5 minute how-to video

Our digital marketing strategy framework gives you 5 steps to practical strategic business growth.

Here's a clip from our recent Digital Marketing Summit, during which Amelia took 5 minutes to outline our RACE Framework and why it's an increasingly popular strategy tool for marketers today.

Visit our website and sign up for free to catch up her full webinar 'Be adaptable: Optimize your business strategy for growth in a challenging market'.


2. Reach

Strengthen your marketing funnel by reaching more customers and building awareness. Inform your digital marketing strategy with the latest key online marketing techniques to drive visits to your site.

Smart Insights members can keep up to date with the latest marketing techniques across each stage of the RACE Framework. For example, find three steps below to improve your organic search in 2022, taken from our digital marketing trends.

3. Act

Encourage interactions on your website or social media to help you generate leads for the future. Having reached your audience, it's crucial you influence their next steps to move down the funnel towards a purchase decision.

Content marketing

Here, strategic content marketing comes into play. Use content marketing to entertain, inspire, educate and convince potential converters during their customer lifecycle.


User experience (UX/CX)

To influence customer behavior on your site or social media platforms, you should also look into the current wide range of innovations in interaction design, proven to boost engagement with your content. Taff has published this useful summary, with examples, of what they see as the latest interaction design trends which we can see continuing into 2022.

4. Convert

The pinnacle of your structured digital marketing strategy is, of course, to convert more customers. Use retargeting, nurturing and conversion rate optimization to remind and persuade your audience to buy online or offline if phone and face-to-face channels if these are important to you.

Our digital marketing trends highlight three tips for increasing your conversions

  • Consider your use of structured always-on optimization. The options for testing are one of the biggest strengths of digital marketing, yet there are still many businesses that don't take advantage of these opportunities.
  • Review the sophistication of your website personalization. According to a SmarterHQ report, 91% of consumers say they are more likely to shop with brands that provide personalized content.
  • Don't underestimate social commerce. North American e-commerce agency Absolunet has identified the following key signs of the popularity of social commerce:
    • 87% of e-commerce shoppers believe social media helps them make a shopping decision.
    • 1 in 4 business owners are selling through Facebook.
    • 40% of merchants use social media to generate sales.
    • 30% of consumers say they would make purchases directly through social media platforms.

5. Engage

Finally, after you're worked so hard to get them, did you know you can increase sales from existing customers by keeping them engaged after their first purchase? Improve your personalized communications using web, email, and social media marketing using the data you already have about them to create hyper-personalized marketing campaigns.

Customer engagement research and testing options for digital marketers today include:

  • A/B testing
  • Customer personas
  • Customer journey and content mapping
  • Voice of customer surveys
  • Path analysis
  • Website customer intent surveys
  • Usability studies of digital experiences
  • Multivariate testing

Moreover, machine learning enables unprecedented insights into consumer behavior. For example, predictive analytics can be used to identify:

  • Best send times to engage an individual (can be based when they originally bought or subscribed, but this can be refined through time)
  • Best timing and offer for follow-up communications based on analysis of latency (average interval of response)
  • Best product or category combinations from cluster-based segmentation

Digital marketing channels play a key role in your customers' experiences of your brand. But in today's demanding digital landscape where customers' expectations are outpacing martech developments, failure to plan your omnichannel journeys can lead to a disconnect. Our RACE Framework can help you structure your plan.

Here, you can see how paid, owned, and earned media, alongside digital experience, take roles in reaching new audiences, nurturing interaction, converting more customers, and encouraging engagement and advocacy.

Get started today using our tried and tested step-by-step process. Apply the Smart Insights RACE Framework to optimize your marketing and win more customers.


Our recent Managing Digital marketing research report showed that almost half (45%) of companies don't yet have a planned strategy:


Why do you need a digital marketing strategy?

Our blog, 10 reasons you need a digital marketing strategy sets out the 10 most common problems that in our experience arise if you don't have a strategy. This can help you hone the scope and purpose of your digital marketing strategy, and make the case for investment in digital marketing. Examples include:

You don't have a powerful online value proposition

A clearly defined digital value proposition tailored to your different target customer personas will help you differentiate your online service encouraging existing and new customers to engage initially and stay loyal. Savvy marketers tailor their marketing techniques to attract B2B, B2C of D2C sales and leads effectively.

Developing an omnichannel marketing strategy is key to this for many organizations, since the content is what engages your audiences through different channels like search, social, email marketing, and on your blog.

You're not integrated ("disintegrated")

It's all too common for digital marketing activities to be completed in silos whether that's a specialist digital marketer, sitting in IT, or a separate digital agency. It's easier that way to package 'digital' into a convenient chunk. But of course, it's less effective. Everyone agrees that paid, owned and earned digital media work best when integrated with traditional media and response channels.

That's why we recommend developing an integrated digital marketing strategy, so your digital marketing works hard for you! With your integrated plan in place, digital will become part of your marketing activity and part of business as usual. Find out more.

You're wasting money and time through duplication

Even if you do have sufficient resources, they may be wasted. This is particularly the case in larger companies where you see different parts of the marketing organization purchasing different tools or using different agencies for performing similar online marketing tasks.

That's why you need to invest in a marketing strategy that works for you and your team, to plan, manage and optimize your digital channels and platforms. Drive the marketing results you need to achieve your business objectives, and boost your marketing ROI.

RACE ahead of inflation with a proven digital marketing strategy

Digital marketing strategy quick guide

Digital marketing strategy success factors

An effective digital marketing strategy will help you take the right decisions to make a company successful.  A strategy process model provides a framework that gives a logical sequence to follow to ensure the inclusion of all key activities of strategy development and implementation.

A marketing strategy should involve a review to check that all of your capabilities are in place to help your organization manage all of the digital touchpoints. But which capabilities are important, which do you need to review?

A successful strategy should be built on reviewing 7 core capabilities which are:

  • Strategic approach
  • Performance improvement process
  • Management buy-in
  • Resourcing and structure
  • Data and infrastructure
  • Integrated customer communications
  • Customer experience

In our Business Tranformation Learning Path for Business Professional members we show these in our capability visual:


Digital marketing strategy definition

Marketing strategy

First, a marketing strategy is a proactive, data-driven approach to marketing and communication activity across all channels and touchpoints. The marketing strategy informs all marketing activity taking place for the business since all marketing plans stem from this overarching structure and vision. Once the strategy is set and communicated, marketers use tactics to put into place their actions that drive to the result.

Digital marketing strategy

A digital marketing strategy is a channel strategy stemming from a marketing strategy. The digital marketing strategy must...

  • Be informed by research into customer channel behaviour and marketplace activity = intermediaries, publishers and competitors
  • Based on objectives for future online and offline channel contribution %
  • Define and communicate the differentials of the channel to encourage customers to use it,
  • BUT, need to manage channel integration

So put another way, digital marketing strategy defines how companies should:

  • Hit our channel leads & sales targets
  • Budgets for Acquisition, Conversion, Retention & Growth, Service
  • Communicate benefits of using this channel to enhance brand
  • Prioritize audiences targeted through the channel
  • Prioritize products available through the channel
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понедельник, 19 сентября 2022 г.

The 25 Largest Private Equity Firms in One Chart

 


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Frequent the business section of your favorite newspaper long enough, and you’ll see mentions of private equity (PE).

Maybe it’s because a struggling company got bought out and taken private, just as Toys “R” Us did in 2005 for $6.6 billion.

Otherwise, it’s likely a mention of a major investment (or payout) that a PE firm scored through venture or growth capital. For example, after Airbnb had to postpone its original plans for a 2020 initial public offering (IPO) in light of the pandemic, the company raised more than $1 billion in PE funding to plan for a new listing later this year.

Yet many people don’t fully understand the size and scope of private equity. To demonstrate the impact of PE, we break down the funds raised by the top 25 firms over the last five years.

How Private Equity Firms Operate

First, we need to differentiate between private equity and other forms of investment.

A PE firm makes investments and provides financial backing to startups and non-public companies (or public companies that are being taken private).

Each firm raises a PE fund by pooling capital from investors, which it then uses to carry out transactions such as leveraged buyouts, venture and growth capital, distressed investments, and mezzanine capital.

Unlike other investment firms such as hedge funds, private equity firms take a direct role in managing their assets. In order to maximize value, that can mean asset stripping, lay-offs, and other significant restructuring.

Traditionally, PE investments are held on a longer-term basis, with the goal of maximizing the target company’s value through an IPO, merger, recapitalization, or sale.

The List: The Most PE Funds Raised in Five Years

So which names should you know in private equity?

Here are the largest 25 private equity firms by their five-year PE fundraising total over the last five years, with data on funds and investments from respective firms and Private Equity International.

They include well-known private equity houses like The Blackstone Group and KKR (Kohlberg Kravis Roberts), as well as investment managers with private equity divisions like BlackRock.

Most of the world’s top PE firms, including TPG Capital (which invested in Ducati Motorcycles, J. Crew, and Del Monte Foods) and Advent International (an early investor in Lululemon Athletica) are headquartered in the U.S.

In fact, of the largest 25 private equity firms in the last five years, just four are headquartered in Europe (CVC, EQT, Cinven, and Permira) and one in Asia (Hillhouse).

Another name that might be recognizable is Bain Capital, which was co-founded by Utah Senator and former Republican Presidential nominee Mitt Romney and found success with investments in AMC Theatres, Domino’s Pizza, and iHeartMedia.

Famous Private Equity Investments

One of the most surprising things investors discover about private equity is how many large organizations have been funded through the PE world.

More well-known investments include KKR’s $31.1 billion takeover of food and tobacco conglomerate RJR Nabisco in 1989, and Blackstone’s $26 billion buyout of Hilton Hotels Corporation in 2007.

But other well-known companies have been funded, saved, or restructured through private equity. That list includes grocery chain Safeway, fast food chain Burger King, international racing operator Formula One Group, and hotel and casino company Caesars Entertainment (then called Harrah’s Entertainment).

Many other notable investments could soon pay off for private equity. With IPOs back in season, tech companies like Airbnb and Epic Games are ripe for payouts. At the same time, restructuring companies like J. Crew and Chuck E Cheese’s always offers a chance to recapitalize.

With the COVID-19 economic downturn resulting in newly distressed companies and potential takeover targets, expect the private equity world to be very active in the foreseeable future.

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ТРИЗ: как адаптировать классическую теорию к бизнес-реалиям

 


Константин Куликов


Как максимально быстро решать производственные и управленческие проблемы, взяв на вооружение некоторые наработки теории решения изобретательских задач?

В общем развитии организаций или в решении конкретных управленческо-производственных проблем владельцы и генеральные директора бизнесов неизбежно обращаются к лучшим мировым практикам. Чаще к западным известным подходам: «Шесть Сигм», «Бережливое производство», «Теория ограничений», различные системы тайм-менеджмента, Agile-методологии, «Дизайн-мышление», «Дизайн-Спринт»…

Новые импортные «панацеи» появляются постоянно. Список кажется бесконечным. Уже описано несколько сотен разных и по-своему эффективных методов развития и менеджмента качества – от частных до общих и комплексных, а варианты и гибриды вовсе бесчисленны. Одних разновидностей «Мозгового штурма» десятки, если не сотни тысяч!

Увы, в этой «дурной бесконечности» теряются совершенно незаслуженно забытые уникальные отечественные методики, вроде научной организации труда (НОТ), функционально-стоимостного анализа (ФСА) и ТРИЗ – Теория Решения Изобретательских Задач.

Ключевые недостатки классической ТРИЗ

Последняя теория заслуживает особого разговора. В момент своего рождения и расцвета (СССР, 1956-1980) главная мысль ТРИЗ об управляемости сильного (изобретательского) «творчества по заказу» была революционной во всем мире! Не всем очевидна она и сейчас, но…

С годами оригинальные инструменты ТРИЗ постепенно «растаскивались» по западным методикам. Что хуже – часто без должного понимания. Например, пресловутая теория ограничений Элияху Голдратта (ТОС) – всего лишь фрагментарно заимствованная и прескверно понятая ТРИЗ.

Однако вместе с очевидными преимуществами становились все очевиднее и ключевые недостатки классической ТРИЗ:

  1. Исходная сугубо техническая ориентированность. До сих пор большинство управленческих ТРИЗ-семинаров ведется мастерами теории на технических примерах. Под естественное недоумение менеджеров, вынужденных самостоятельно «переводить» аналогии на язык бизнеса.
  2. Громоздкость и медлительность решательного аппарата. Даже разовый «прогон» задачи по АРИЗ-85В требует нескольких часов, а то и дней. Не говоря уже о том, что без явных противоречий, например, в исследовательских задачах он просто не работает. Для своего времени и такой темп был прорывом! Но современные бизнес-задачи требуют оперативности, в идеале – решений задач со скоростью их постановки.
  3. Сложность и длительность обучения. Стандартные ТРИЗ-методики предполагают неспешное, академическое обучение в объеме 186 учебных часов лишь на первый уровень! А краткосрочные, 24-36-часовые курсы глубоких результатов не дают, максимум «обозревают» перспективы дальнейшего «погружения». Между тем в корпорации оторвать от дела ключевых специалистов даже на день – это огромные потери. Требуется иной подход – без отрыва от производства.
  4. Марксистский догматизм и скрытый идеализм представлений о творчестве. Например, до сих пор в теории бытует догма о главенстве в развитии техники некой «движущей силы противоречий». Между тем очевидно, что противоречия – вовсе не движущий, а сдерживающий фактор развития. Движущими же являются человеческие потребности и проецирующаяся на технику внутривидовая конкуренция. Да в СССР Альтшуллер такого не смог бы и представить. Но что мешает отказаться от замшелых догм? До сих пор не выявлена в теории и сама природа противоречия. Не ясно даже, чем, собственно, является сама ТРИЗ.
  5. Архаика языка и подачи. Это уже частность. Но громоздкие тексты Альтшуллера с черно-белой графикой и рисованными «веселыми человечками» могли считаться «занимательными» разве что в эпоху советского канцелярита. Современные методики требуют иной «упаковки»: лаконичного языка, визуально-мультимедийного оформления, интерактивного подхода. Но большинство ТРИЗ-трудов буквально «кричат» каждой страницей: «ТРИЗ – это сложно!».

Все вышеперечисленное популярности ТРИЗ явно не способствовало. В результате некогда популярная советская теория на рубеже 1990-2000-х годов испытала сильнейший методологический кризис и длительное забвение. Что и позволило некоторым одиозным авторам писать провокационные книжки в стиле «ТРИЗ умер». На деле же «невидимое» развитие теории продолжается – различными частными компаниями и исследовательскими группами.

ТРИЗ умер»? Да здравствует GB-ТРИЗ!

Разбор ключевых недостатков классической теории можно продолжать. Но уже сказанное показывает: компаниям нужна иная система творчества: универсальная, производительная, простая и легкая в освоении, а главное – высокотехнологичная, позволяющая строить и обучать отделы инноваций и R&D-подразделения быстро, практически без отрыва от производства.

Одним из подходов могло бы стать упрощение – заимствование из классической теории не всего аппарата, а лишь его «решательного ядра». Действительно, так ли уж нужны для эффективного решения задач все эти «ТРИЗ-веполи», или, скажем, «маленькие человечки»? Можно ли обойтись меньшим инструментарием? Но если брать не все, а лишь то, что необходимо и достаточно для решения творческих задач, то что именно заимствовать?

Попытки упрощать отдельные элементы ТРИЗ, в частности АРИЗ-85В и изобретательские приемы, предпринимались давно. Известны, например, «Пятиходовка» Алексея Подкатилина и другие упрощения, вплоть до примитивных SIT-подобных систем (ASIT Рони Горовица, USIT Эда Сикафуса всего из пяти-шести элементарных комбинаторных приемов).

Но самая удачная попытка минимизации ТРИЗ была предпринята коллективом бывших советских тризовцев, выехавших в 1991 в США. К 2008 году ими была создана система Guided Brainstorming (GB или GB-ТРИЗ), включившая в себя как инструменты следующие ТРИЗ-подходы:

  1. Системно-функциональный подход. Позволяет точно выбирать и формулировать задачи.
  2. Идеальность с ее производными: ИКР (Идеальный Конечный Результат), Формула идеальности. Помогает четко выбирать направления решения задач.
  3. Унифицированные изобретательские приемы. Модифицированная система из 30 универсальных изобретательских приемов (с отбросом чисто-технических и органичным включением ресурсного подхода) дает возможность быстро генерировать нестандартные идеи.
  4. Изобретательские концепции – комплексные идеи. Усовершенствованный подход к приоритизации, отбору идей и синтезу комплексных решений с последующим «бесшовным» внедрением, обеспечиваемым рядом организационных мер, в частности составом групп.

Соответственно, процедура решения задачи (управленческой, инновационной, изобретательской, траблшутерской) сократилась с девяти сложных частей АРИЗ-85В до четырех относительно простых этапов: цель, направления, идеи, концепции. Комплекса этих четырех этапов оказалось достаточно для решения практических задач как в одиночку, так и группами.

Внимание: сходство с групповым «Мозговым штурмом» (МШ) – чисто внешнее! Более того, полученная система, несмотря на видимую простоту, дала неожиданные синергетические эффекты. Скорость генерации идей изобретательского уровня возросла даже у начинающих со считанных единиц в МШ до 150-300 «сырых» идей в час. А простота и компьютерная поддержка резко сократила и облегчила обучение, вплоть до возможности обучаться после краткого введения самостоятельно и без отрыва от производства – в ходе решения производственных и бизнес-задач.

Как будут дальше развиваться ТРИЗ-подходы

Развитие тризоподобных методов турбогенерации идей продолжается, в том числе, в России. За счет очередной переработки системы приемов удвоена скорость генерации (до 600 идей в час – теоретический предел), наметились пути подключения нейросетей и в перспективе полноценного искусственного интеллекта. Исследуется процесс формирования креативных групп на основе совмещения методик генерации с «бирюзовыми» практиками управления.

Полученная итоговая система позволяет решать большинство практических задач в реальном времени, почти со скоростью постановки. Готовится поточный запуск стартапов на ее основе и промышленное внедрение технологии – но это дело хоть и ближайшего, но будущего.

В завершение хочется призвать читателей: хотите быстрее проникнуться духом ТРИЗ? Изучайте изобретательские ТРИЗ-приемы, хотя бы старые, по открытым источникам, и переносите их по аналогии из технической сферы на вашу практику. Это позволит резко повысить скорость и качество креатива и тем самым облегчить и ускорить совершенствование бизнесов в R&D-подразделениях и менеджменте всех уровней.

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воскресенье, 18 сентября 2022 г.

Economies of scale

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Definition of economies of scale


Economies of scale occur when increasing output leads to lower long-run average costs. It means that as firms increase in size, they become more efficient.

Diagram of economies of scale


Increasing output from Q1 to Q2, we see a decrease in long-run average costs from P1 to P2.

Economies of scale are important because they mean that as firms increase in size, they can become more efficient. For certain industries, with significant economies of scale, e.g aeroplane manufacture, it is important to be a large firm; otherwise they will be inefficient.

Examples of economies of scale


1. Specialization and division of labour

In large scale operations workers can do more specific tasks. With little training they can become very proficient in their task, this enables greater efficiency. A good example is an assembly line with many different jobs.

2. Technical

Some production processes require high fixed costs e.g. building a large factory. If a car factory was then only used on a small scale, it would be very inefficient to run. By using the factory to full capacity, average costs will be lower.

3. Bulk buying If you buy a large quantity, then the average costs will be lower. This is because of lower transport costs and less packaging. This is why supermarkets get lower prices from suppliers than local corner shops.

4. Spreading overheads If a firm merged, it could rationalise its operational centres. E.g. it could have one head office rather than two.

5. Risk-bearing economies Some investments are very expensive and perhaps risky. Therefore only a large firm will be able and willing to undertake the necessary investment. E.g. pharmaceutical industry needs to take risks in developing new drugs

6. Marketing economies of scale There is little point a small firm advertising on a national TV campaign because the return will not cover the high sunk costs

7. The container principle To increase capacity eight-fold, it is necessary to increase surface area only fourfold.

8. Financial economies A bigger firm can get a better rate of interest than small firms

9. External economies of scale This occurs when firms benefit from the whole industry getting bigger. E.g. firms will benefit from better infrastructure, access to specialised labour and good supply networks. E.g. microchip producers often set up in Silicon Valley. See more on external economies of scale.

Internal economies of scale

Most of the above economies of scale are internal. It means the economies benefit the firm when it grows in size

Studies in economies of scale

Studies in economies of scale suggest that, in the automobile industry, to attain the lowest point on the long run average costs the minimum number of cars to be produced in 1 year is 400,000.

Diagram shows that as firms increase output from Q1 to Q2, average costs fall from P1 to P2. There are many different types and examples of how firms can benefit from economies of scale – including specialisation, bulk buying and the use of assembly lines.

Examples of economies of scale include

Tap Water – High fixed costs of a national network

To produce tap water, water companies had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, since they distribute water to over 25 million households, it brings the average cost down. However, would it be worth another water company building another network of water pipes to compete with the existing company? No, because if they only got a small share of the market, the average cost would be very high and they would go out of business. This is an example of a natural monopoly – where the most efficient number of firms is one.

Specialisation – car production


Examples of economies of scale in modern transport

Another economy of scale is in the production of a complex item such as a motor car. The production process involves many different complex stages. Therefore to produce a car you should split up the process and have workers specialise in producing a certain part. e.g. a worker may become highly specialised in the design of a car; another in testing e.t.c. Specialisation requires less training of workers and a more efficient production process. However, if you have several distinct production processes, it is most efficient to have a large output.

Bulk Buying – Supermarkets

Supermarkets can benefit from economies of scale because they can buy food in bulk and get lower average costs. If you had a delivery of just 100 cartons of milk the average cost is quite high. The marginal cost of delivering 10,000 cartons is quite low. You still need to pay only one driver; the fuel costs will be similar. True, you may need a bigger van, but the average cost of transporting 10,000 is going to be a lot less than transporting 100.

Marketing Economies

If you spend £100 on a national tv advertising campaign, it is only worthwhile if you are a big national company like Starbucks or Coca-Cola. If your output is small, the average cost of the advertising is much higher.

Risk Bearing

To develop new drugs to treat illness takes considerable degrees of investment and research with no guarantee of success. Therefore this can only be undertaken by pharmaceutical companies with significant resources. Major pharmaceuticals companies, such as Novartis, Pfizer Inc and GlaxoSmithKline Plc all undertake significant research in developing new drugs.

Container Principle

More efficient transport and packaging with bigger containers. If the surface area of a container increases by 100%, the volume it can carry will increase by 200%. Therefore, transporting larger quantities leads to lower average costs.

Financial economies

A bigger firm gets a lower rate of interest on borrowing.

Spreading overheads

If two different companies merged, e.g. AOL and Time Warner. They could still see some economies of scale from having one head office rather than two.

Economies of scope.

Economies of scope are different to economies of scale – though there is the same principle of larger firms benefiting from lower average costs. Economies of scope occur when a large firm uses its existing resources to diversify into related markets. For example, once a firm is producing soft drinks, it can use its marketing and distribution network to start producing alcoholic drinks.

Diseconomies of Scale


Diseconomies of scale occur when long-run average costs start to rise with increased output.

Economies of scale occur up to Q1. After output Q1, long-run average costs start to rise.

Reasons for dis-economies of scale

  1. Poor communication in a large firm. It can be hard to communicate ideas and new working practices.
  2. Alienation: Working in a highly specialized assembly line can be very boring if workers become de-motivated. In a large firm, there is an increased gap between top and bottom e.g. call centres
  3. Lack of control: when there is a large number of workers it is easier to escape with not working very hard because it is more difficult for managers to notice shirking.

Overcoming Diseconomies of scale

Firms may attempt to overcome diseconomies of scale by splitting up the firm into more manageable sections. For example, a large multinational may be split up into local geographical areas, with local managers facing incentives to maximise efficiency.

Minimum Efficient Scale


This is the minimum point of output necessary to achieve the lowest A.C. on the LRAC. In the above diagram, the MEC is at Q1.

  • This has implications for the optimal number of firms in the industry
  • If the MES was 10,000 cars a week and the total industry demand was 40,000. This would mean that the optimal number of firms would be four, if there were more firms in the industry then average costs would be significantly higher.
  • In a natural monopoly the optimal number of firms is one, therefore the MES would be equal to the total industry demand. E.g. Water or Electricity networks

The minimum efficient scale will be determined by factors such as:

  • i) Degree of fixed costs
  • ii) Scope for specialisation

Decreasing Returns to scale

Returns to scale relates to how a firms production is affected by increasing all the inputs.

Decreasing returns to scale implies that increasing the inputs by 50%, would increase the actual output by less than 50% (e.g. 40%)

Relationship with economies of scale

If a firm faces constant input costs, then decreasing returns to scale imply rising long run average costs and diseconomies of scale.

However, it is possible that if the firm gains purchasing economies then increasing the factor inputs by 50% may not actually increase costs by 50%. Therefore, it is possible to have decreasing returns to scale, but not necessarily diseconomies of scale. But, if we assume a constant input price, decreasing returns will cause diseconomies of scale.

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