Is economies of scale a synergy effect?

Economies of Scale Synergies
Recent activity on Oct 12, 2018
4 Answers
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Anonymous A asked on Oct 12, 2018

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Vlad
Expert
replied on Oct 12, 2018
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

Yes, definitely. It will be part of the cost synergies.

For Synergies Calculation you can use the following structure:

  1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
  2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
  3. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
  4. Total synergies potential in $, adjusted by risk (probability of failure)

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Benjamin
Expert
replied on Oct 12, 2018
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework

Hi,
Yes definitely. Usually you look for synergie when mergin two companies.
In this case there might be opportunities to consolidate volumes (e.g procurement) of both companies. In this case you may have higher bargaining power, which is litteraly called 'economy of scale"

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Benjamin

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Anonymous replied on Oct 12, 2018

Economies of scale, by definition, are a reduction in average costs per unit as a company grows in size.

In practice, when two companies merge (and thus form 1, larger company) the economies of scale are reflected as cost synergies? They will be larger in size, so will be able to save on a number of costs - Physical locations, employee reduction, etc.

So, in short yes - economies of scale are effectively the same as cost synergies in a merger case.

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Anonymous replied on Oct 12, 2018

Hi Anonymous,

yes, if the scale is resulting from a merger, I'd put it in the synergy bucket.

Cheers

Elias

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Vlad gave the best answer

Vlad

McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School
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