When more units of a good or a service can be produced on a larger scale, with less input costs per unit of output produced, economies of scale (ES) are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. Extending this logic to macro level we can say that, economic growth may be achieved when economies of scale are realized.
A firm has to expand the scale of output in order to achieve itsobjectives like minimization of cost, efficient use of resources etc. Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average or per unit costs of production.
Economies of scale can affect all aspects of a business, not just purchasing power. McDonald’s 14,098 locations dwarf the next closest hamburger chain Wendy’s 5,876 locations. Assuming each chain spends the same amount per location on advertising, McDonald’s spends triple the amount Wendy’s does promoting its burgers. This marketing economy of scale serves McDonald’s in several ways.
Altria is taking initiatives to reduce the cost base of its e-vapor products to boost the profit margins, but economies of scale are no way near as more automated production is still under process. In my opinion, strategic partnership with Philip Morris International (NYSE:) is perhaps the reason Altria is not rushing into e-vapor products. Altria's licensing bet on iQOS makes a lot of sense. iQOS heats tobacco instead of some nicotine-laced e-liquid, which is a big attraction for the consumer. Moreover, iQOS uses Marlboro branded HeatSticks, which is a huge advantage over almost every brand in e-cigarette market. And lastly, the production process and raw material are almost the same for HeatSticks, which can produce significant cost advantage.
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