Economies of scale

Certainly! Economies of scale is indeed a key concept in business and refers to the cost advantages gained by increasing the scale of production or operation. When a company produces goods or services on a larger scale, it often experiences lower average costs per unit due to various factors such as spreading fixed costs over a greater volume, improved bargaining power with suppliers, and more efficient utilization of resources.

In a case interview, understanding economies of scale is crucial as it can have significant implications for a company's profitability and competitiveness. When analyzing a business situation, you should consider how economies of scale can impact costs, pricing strategies, market dynamics, and overall profitability. It's important to be able to identify opportunities for cost reduction or revenue enhancement that arise from economies of scale.

Regarding your question about business jargon, it's perfectly acceptable to describe the concepts without using specific terms if you're not familiar with them. What matters most is your ability to demonstrate a deep understanding of the underlying principles and their implications for the business situation at hand. Focus on explaining the concept in simple and concise terms, using relevant examples or illustrations to showcase your analytical skills and business acumen.

As a nontraditional applicant, your ability to think critically, apply business principles, and solve complex problems is highly valued. It's more important to showcase your understanding of the underlying factors and your ability to apply them effectively rather than relying on specific terminology. Remember, clarity and effective communication are key, so use your own words to articulate your ideas and insights.

By demonstrating a solid understanding of the factors driving economies of scale and how they impact business performance, you will showcase your ability to think analytically and contribute valuable insights in a case interview.

• Economies of scale: You can buy 2 apples for $1 each. You can also buy 2,000 apples for probably $0.5 each or less. Buying in larger quantities can demand lower price because suppliers will still get a sizeable absolute value of profit. Producing in larger quantities will lower the cost per unit because fixed production costs will be spread out over larger number of units and material cost per unit will also be lower by the suppliers as shown above.
• Implications in a case interview: Acquiring a factory could lower production costs since the company could now acquire more material in a bunch at a lower price and the admin/fixed costs could be shared across the acquired factory as well (e.g. you don't need a separate finance department for the extra factory)
• Synergies: If company A acquires company B, they could share some resources between them that could effectively either lower their total cost of procurement, and/or also lead to increased production and revenue. A refinery that produces methane as a by-product, could share it with another refinery to be acquired that actually needs methane as an input material. This will lower waste-methane-disposal costs and methane-purchase costs.
• If you don't know these jargon: That is a thin line. Economics of scale and synergies are considered fairly common knowledge and basic elements of consulting toolkit post-MBA. If you don't know them, I suggest to prepare for them. PrepLounge, YouTube, Investopedia etc.
• Should I know how to consider this factor: If you find the right resources to learn, then you can understand these jargon at a nice intuitive level since at the back of it these are somewhat common-sense ideas.

If you have a bunch of topics and doubts - feel free to approach me for a coaching session where we can learn and understand all of them along with practical implications for case interviews.

Hi there, 

It's great that you're making an effort to become more familiar with these terms. But practically, something like economies of scale doesn't pop up this often. 

Here's the definition for economies of scale and the associate term, economies of scope:

Economies of scale occur when the average cost per unit decreases as production volume increases. 

Economies of scope refer to cost savings achieved by producing a variety of products using shared resources.

In terms of how to learn these terms, I recommend organic learning to most candidates. It consists of doing nothing aside from practising cases. 

Whenever a new term shows up, look it up, write it down and make sure you understand it. As you continue practising, you will soon realise that the terms start repeating themselves. After the first 20-30 cases you practice, you will have already come across 80% of the most common terms. This saves you time from proactively looking up terms you might never need and helps you learn faster through contextualization.

Best,
Cristian

Hi there,

Definitely do not throw out jargon just for the sake of it. No no no. It's really obvious when a candidate does!

By the way, this includes saying “I want to look at revenues and costs” for profitability or “I want to look at the market”. If you don't know what you're saying or why you're saying it…don't say it!

Economics of scale is basically saying the more you do something the better you get at it. Which means, the cheaper you produce it.

Tesla for years was trying to hit a point where it could produce cars cheaply. A team building an electric vehicle will costs millions of $ for that 1 car. A multi-billion $ factory however, that churns out 500k cars a year, can make a single car for $20k.