| 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. |