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Chapter 14: Problem 9

Alfred Chandler, who was a professor at the Harvard Business School, once observed, "Imagine the diseconomies of scale- the great increase in unit costs- that would result from placing close to one-fourth of the world's production of shoes, or textiles, or lumber into three factories or mills!" The shoe, textile, and lumber industries are very competitive, with many firms producing each of these products. Briefly explain how Chandler's observation helps explain why these industries are competitive.

Short Answer

Expert verified
Alfred Chandler's observation explains that if only a few factories were responsible for a significant portion of the world's production, it would lead to diseconomies of scale, thereby raising unit costs significantly. This inefficiency in turn leads to low profitability and high prices. The shoe, textile, and lumber industries, however, avoid this situation by having many companies involved in production, which promotes competition. This competition ensures companies operate at an efficient scale, thereby maintaining lower unit costs and promoting industry competitiveness.

Step by step solution

01

Understand the Concept of Diseconomies of Scale

In economic theory, diseconomies of scale refers to a situation when a company increases its production to a point that causes the per unit costs to increase. This shows an inefficiency in production and happens because the company's resources are over-stretched in their attempt to increase the scale of production. This causes a rise in production cost, and the loss in cost advantage that came with increasing returns to scale.
02

Apply Chandler's Observation to the Industries Mentioned

As per Chandler's observation, concentrating a large proportion of global production for shoes, textiles, or lumber into just three factories or mills would give rise to significant diseconomies of scale. This would be due to issues such as increased complexities in managing such a large-scale operation, greater likelihood of waste, and bigger potential losses in case of any production flaws. This is not efficient and would result in a large increase in production costs per unit.
03

Relate the Diseconomies of Scale to the Competitiveness in these Industries

The diseconomies of scale play a key role in explaining the competitiveness in these industries. The presence of many firms producing these products does not only distribute the production more evenly and reduce the strain and inefficiency of producing on such a large scale, but also increases competitiveness which in turn can lead to enhanced efficiencies and lower costs. In the face of such competition, each firm would need to keep its costs low to maintain profitability, thereby ensuring that they operate at an efficient scale.
04

Summarize the Explanation

In summary, Chandler's observation illustrates how avoiding diseconomies of scale leads to lower production costs per unit, which in turn attracts more firms to the industry, thus making the industry more competitive.

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