Economy of Scale

‘Economies of scale’ is a concept that indicates a firm’s efficiency through reducing or minimizing its average costs while at the same time increasing production (Carbaugh, 2006). Economies of scale are considered to be an important source of competitive advantage to firms and are predominantly employed by organizations which seek a cost-leadership strategy. In this paper, the concept of economies of scale is explored through the analysis of the case of one of the most successful airline carriers operating in the low-budget, no-frill airline market. The company that has been selected for demonstration of the application of economies of scale is Ryanair; the areas that serve as a paradigm in Ryanair’s accomplishment of scale economies are purchasing, marketing, management, technology and point of service.

Economies of scale are described by Hanlon (1999) as the reductions of the average cost per unit of production as the production output increases. This occurs because the fixed costs are spread over larger quantities of production, while at the same time the per unit costs decrease. Achieving economies of scale implies achieving efficiency which allows the generation of lower costs and the increase in the profit margins (Carbaugh, 2006) The importance in economies of scale is that on one hand they provide competitive advantage to the firms and on the other hand they constitute entry barriers to the industry (they allow the competition to become more concentrated as new entrants are unable to purse scale economies and compete effectively with the existing firms).

Ryanair has managed to achieve economies of scale through a number of different management functions and activities which are discussed below. The economies of scale of Ryanair are evidenced in four major areas: purchasing, marketing, managerial, technology and point of service.

Ryanair achieves lower per unit cost in the case of purchasing on two important premises: on the one hand it...