Lead:

Only by forming a scale can we exert great power. Economically, this involves the issue of "pay-for-scale" in terms of the size of an organization. It refers to the change in output brought about when various factors of production within an enterprise change in the same proportion under the condition that other things remain unchanged. However, countless facts have long proved that more people are indeed powerful, but they may not necessarily be more efficient.

As the saying goes, "there is strength in numbers" and "the flame is high when everyone gathers firewood", these familiar slogans can always make people think of the enthusiasm and enthusiasm for construction. It illustrates a truth: only by forming a scale can we exert great power. Economically, this involves the issue of "pay-for-scale" in terms of the size of an organization. It refers to the change in output brought about when various factors of production within an enterprise change in the same proportion under the condition that other things remain unchanged.

It is true that a chopstick is easy to break, and a chopstick is constantly broken, but "one monk carries water to drink, two monks carry water to drink, and three monks have no water to drink" is also a famous story. Countless facts have long proved that more people are indeed powerful, but they are not necessarily more efficient.

In economics, the change of scale returns can be divided into three situations: increasing returns to scale, constant returns to scale, and decreasing returns to scale.

Suppose a large brewery produces 50,000 tons of beer per month, consumes 50 units of capital and 50 units of labor. Now that the scale of production has been expanded, using 100 units of capital and 100 units of labor (doubling the scale of production), the resulting changes in income may be in the following three ways:

(1) If the output is greater than 10 tons, the proportion of the increase in output is greater than the ratio of the increase in production factors, which is called the increase in scale returns.

(2) The output is equal to 10 tons, and the proportion of the increase in output is equal to the proportion of the increase in the factors of production, which is called the constant return to scale.

(3) If the output is less than 10 tons, the proportion of the increase in output is less than the proportion of the increase in production factors, which is called diminishing returns to scale.

As the scale of production changes, so does the company's return to scale. So, what is the reason for the change in the return to scale? In economics, this reason is called "economies of scale" and "diseconomies of scale". The former refers to the reduction of the average cost of products due to the expansion of output level or the expansion of production scale; However, if the average cost of the product increases due to the increase in the level of output or the expansion of the scale of production, it is called "diseconomies of scale".

― Managers of course hope that as their enterprises increase in scale, the returns to scale will increase in production, because this often means the realization of "economies of scale". In actual production, we also see that most companies are striving to expand their production scale. So, why is it very likely that there will be an increase in the return to scale? There are several reasons for this.

(1) Large-scale production helps to better realize "specialized division of labor and cooperation". Adam Smith, the father of economics in the 18th century, used the pin industry as an example in The Wealth of Nations. A professionally trained person can only make one pin a day, but if the production is divided into 18 processes, and each person only undertakes one process, the average daily output of pins can reach 4,800. This is already a vivid illustration of the significant economies of scale.

(2) It can realize the unification and standardization of product specifications. Today's companies produce a very large number of products, such as a large car manufacturer, which can produce hundreds of thousands of vehicles a year. It is very troublesome to produce each car independently, but it is very easy to produce parts with uniform specifications and assemble them into a car. At the same time, some vehicles will have different problems in the use of the process, as long as the bad parts are replaced with new ones during maintenance, which saves a lot of costs.

(3) Through the purchase of a large number of raw materials, the unit purchase cost is reduced. Enterprises need to purchase raw materials in production, once the enterprise implements large-scale production, it needs to purchase a large number of raw materials, so that the enterprise will be in an advantageous position when purchasing raw materials, and the price will naturally be reduced, so that the production cost will be reduced a lot.

(4) It is conducive to the development of new products. In large-scale production, the individual departments are no longer responsible for the entire product, they may only be responsible for a small part of it, which makes them more specialized and gives them a better understanding of the components to better improve and innovate.

(5) Strong competitiveness. After the economies of scale are reached, the company has its own R&D, design, production and sales team, which makes the company's products have various advantages in the market, makes the company's products attract more people's attention, and invisibly enhances the competitiveness of the enterprise.

However, we also know that "three monks have no water to drink", and enterprises blindly pursue large-scale, which may not be able to achieve high efficiency. This is because:

(1) When the scale of production reaches a certain level, "diseconomies of scale" often occur, and the production of enterprises becomes unreasonable.

Specialization can certainly improve efficiency, but it cannot be subdivided indefinitely, otherwise it will have side effects. The specialized division of labor often makes the work become a mechanized movement, and the worker becomes like a machine, and over time, the worker will become bored, passive and slack, leading to a decrease in efficiency. The diameter of the oil pipeline should not be expanded indefinitely, otherwise the laying will inevitably increase greatly. The farther the power is transmitted from a power plant, the more power losses will increase rapidly due to the increasing distance. These examples show that if economies of scale are pursued blindly, they will lead to an increase in unit costs and become "diseconomies of scale".

(2) From the perspective of management, large-scale production will inevitably affect the efficiency of enterprises. For any enterprise, the larger the production scale, the more layers of management, the more difficult it is to coordinate and control within the enterprise, the longer it takes to make the right decisions and implement them, and the effectiveness of the implementation is difficult to guarantee. Such management limitations inevitably lead to diminishing returns to scale.

The law of economies of scale has profound implications for Chinese enterprises and entrepreneurs. Enterprises are in a hurry to become bigger, which is almost a common problem for Chinese enterprises and entrepreneurs. Blind expansion, rather than focusing on being solid and stronger, increased costs and wasted resources, resulting in frequent "diseconomies of scale", and finally the entire army was wiped out. There is nothing wrong with the goal of entrepreneurs pursuing expansion, but it must be carried out on the basis of making the core business solid and strong. Only when all the conditions are in place can the scale of the enterprise become larger and the long-term economies of scale can be achieved.

Therefore, more and more power is recognized by everyone, but sometimes it is not necessarily the case. The relationship between economies of scale is not, simply proportional. Efficiency is determined by many factors, and ignoring the grasp of the internal law between scale and efficiency will often achieve half the result, or even backfire.