| Line | Manufacturers have to do more than build large |
| manufacturing plants to realize economies of scale. | |
| It is true that as the capacity of a manufacturing | |
| operation rises, costs per unit of output fall as plant | |
| (5) | size approaches minimum efficient scale, where the |
| cost per unit of output reaches a minimum, | |
| determined roughly by the state of existing technology | |
| and size of the potential market. However, minimum | |
| efficient scale cannot be fully realized unless a steady | |
| (10) | throughput (the flow of materials through a plant) is |
| attained. The throughput needed to maintain the | |
| optimal scale of production requires careful | |
| coordination not only of the flow of goods through the | |
| production process, but also of the flow of input from | |
| (15) | suppliers and the flow of output to wholesalers and |
| final consumers. If throughput falls below a critical | |
| point, unit costs rise sharply and profits disappear. A | |
| manufacturers fixed costs and sunk costs (original | |
| capital investment in the physical plant) do not | |
| (20) | decrease when production declines due to inadequate |
| supplies of raw materials, problems on the factory | |
| floor, or inefficient sales networks. Consequently, | |
| potential economies of scale are based on the | |
| physical and engineering characteristics of the | |
| (25) | production facilities—that is, on tangible capital—but |
| realized economies of scale are operational and | |
| organizational, and depend on knowledge, skills, | |
| experience, and teamwork—that is, on organized | |
| human capabilities, or intangible capital. | |
| (30) | The importance of investing in intangible capital |
| becomes obvious when one looks at what happens in | |
| new capital-intensive manufacturing industries. Such | |
| industries are quickly dominated, not by the first firms | |
| to acquire technologically sophisticated plants of | |
| (35) | theoretically optimal size, but rather by the first to |
| exploit the full potential of such plants. Once some | |
| firms achieve this, a market becomes extremely hard | |
| to enter. Challengers must construct comparable | |
| plants and do so after the first movers have already | |
| (40) | worked out problems with suppliers or with new |
| production processes. Challengers must create | |
| distribution networks and marketing systems in | |
| markets where first movers have all the contacts and | |
| know-how. And challengers must recruit management | |
| (45) | teams to compete with those that have already |
| mastered these functional and strategic activities. |