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Why Is The Ability To Exploit Economies Of Scale So Important In Mature Industries?

2009 words - 8 pages

Mature IndustriesMature industries can range from insurance to food distribution and although they're heterogeneric they can present several similarities from a strategic perspective. Mature industries occur when there is increasing market saturation and slowing growth with new demand being substituted by replacement demand as mature industries operate on a mass market level with their customers repeat buying.Although mature industries may not be as glamorous and receive as much press coverage as their technology based counterparts, companies such as Coca Cola and Gillette have achieved higher profitability and growth than many technology based companies ever could. With other companies such as Nike footwear and MBNA banking having established strong positions in their industries through innovative strategies and have proven that maturity does not always mean little opportunity.Companies within mature industries usually have reduced opportunities to achieve competitive advantage with these opportunities shifting from differentiation- based factors to cost-based factors.With increasing competition the pricing policies are likely to become more aggressive as businesses try and hold their market share. Which means that to try and gain competitive advantage companies focus on reducing costs and then reducing the price consumers pay rather than trying to differentiate it's self from its competitors. This is because there is reduced scope for differentiation due to the increase in consumer knowledge and the availability of product information, partly due to the introduction of the Internet.There is also more product innovation due to the standardisation of goods with companies competing by breathing new life into old products and introducing new features especially if there is increasing competition from new types of product. Another way businesses fight back against the introduction of new products is to introduce and establish their individual brand names.Cost advantages gained through the spread of technology and introduction of more advanced capital equipment methods can be difficult to obtain and sustain with the most successful businesses in mature industries aiming to achieve operational efficiency by improving their customer service and introducing new products.Economies of ScaleEconomies of scale are important methods when achieving inner firm cost differences especially in capital intensive industries or where advertising, distribution, or new product development are important parts of total cost.Economies of scale are closely linked with the concept of increasing returns to scale and are present when the output of a specific good increases with the cost per unit or average cost falling. Although the most common economy of scale is to spread the fixed costs over a greater volume of output.This can only happen if the cost of the last unit produced or marginal cost is less than the overall average cost.Fixed costs are often associated with the...

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