Sunday, May 6, 2012
The Little Book That Builds Wealth: Chapter 7
Posted by Saj Karsan
This chapter is about the powerful scale advantage. When considering this advantage, it's important to evaluate a firm's size relative to the competition. Scale advantages occur most when fixed costs (vs variable costs) form a larger part of an industry's cost structure.
To illustrate this advantage, Dorsey describes the trucking industry. The cost of trucks and the salaries of drivers and the fuel required for a particular trip can be seen as fixed costs. The company that has more customers along the route, however, can spread these large fixed costs across higher revenues, thus benefiting from a competitive advantage.
A number of examples are described to illustrate this advantage in action. Darden supplies 650 restaurants with fresh seafood at lower costs because of the number of locations it services; Stericycle collects and disposes of medical waste, and is 15 times larger than its nearest competitor; Sysco, Fastenal, Coke, Pepsi and Diageo all benefit from strong distributor networks that lower costs.