5 Things People Get Wrong About Scale Advantages, Economies Of Scale And Moats (251) The Tech Strategy podcast

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5 Things People Get Wrong about Scale Advantages, Economies of Scale and Moats (251)

2d ago 46:46

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This week’s podcast is about scale advantages. Which are different than economies of scale.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

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5 Things People Get Wrong about Scale Advantages, Economies of Scale and Moats

There are lots of absolute (not relative) scale advantage. Growth is the default business strategy.
Scale advantages are bigger (and more vague) than economies of scale
Scale advantages can cascade
Scale disadvantages (diseconomies of scale, big company disease) are under-rated and under-measured
You need to separate barriers from competitive advantages. And measure each specifically.

I want to know 3 things:

Barriers to entry against new entrants.
1. What specific CRAS to reproduce?
2. What is the cost, difficulty and timing to enter?
Competitive advantage against rivals
1. Which CAs specifically? With measurements.
The incumbent or rival response

Barriers List from Michael Porter (my interpretation, not exhaustive).

Economies of scale. Need to get big to enter. Indivisibility of production capacity and purchasing power matters. Being a multi-business can help incumbent and entrant. Both can share the costs. Both can share the brand. Both can be vertically integrated.
Brand loyalty. Must spend to overcome loyalty and habit. Also must overcome trust question.
Capital requirements. Especially if the move is risky and costs are not recoverable (marketing and R&D spent is gone).
Switching costs.
Access to distribution channels. You need to convince retailers. This is not on my list.
Cost advantages not related to scale. Similar to my CA list.
Proprietary product technology / know how / patents / secrecy are hard to replicate.
Favorable access to raw materials.
Favorable locations (at low cost)
Government subsidies
Learning or experience curves
Government policy. Licenses. Compliance costs.

My interpretation of Michael Mauboussin's list Competitive Advantages (not exhaustive):

Customer Switching Costs: When customers face significant costs (financial, time, or effort) to switch to a competitor, companies can retain market share and maintain pricing power. Examples include software platforms with entrenched user data or services requiring retraining.
Network Effects: A product or service becomes more valuable as more people use it, creating a self-reinforcing cycle that deters competitors. Social media platforms or payment networks like Visa are classic examples.
Economies of Scale: Companies with large-scale operations can spread fixed costs over greater output, reducing per-unit costs and enabling lower prices or higher margins. This is common in industries like manufacturing or retail (e.g., Walmart).
Intangible Assets: These include patents, trademarks, brand reputation, or proprietary technology that competitors cannot easily replicate. Strong brands like Coca-Cola or patented drugs in pharmaceuticals illustrate this advantage.

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