Page 3: Economies of scale
One of the basic facts of business life which relates to large scale production is that if you can gain the greatest share of a market, you will be able to produce at lower unit cost than rival producers of similar products. It is not hard to see why. The company which sells most is best placed to:
- take advantage of the latest advances in technology
- spread marketing and advertising costs over a wider output
- buy components and ingredients in bulk
- distribute products at lower unit costs etc.
These advantages are usually described as economies of scale. In competitive markets, therefore, it makes sense to win market share from rivals either through internal growth of the business or by acquiring complementary producers (i.e. former rivals). Once a company acquires competitive advantage as the lowest cost producer, it is likely to be able to sustain and build on this advantage.
One of Project Millennia’s aims for Heinz has been consolidation in order to become the lowest cost food producer in Europe. Heinz was already a lowest cost producer in the UK and the lowest cost producer in Europe in many of its favoured product categories. However, as Charles Handy’s sigmoid curve indicates, companies must go forward, develop and constantly improve.
At Heinz, there is no clear end point to any business operation - it is a process of continuous improvement. Once a lead has been built up, it is necessary to consider ways of building on that lead. This may involve developing new markets, such as Heinz’s successful drive into Eastern Europe, or developing innovative new products such as Heinz’s recent baked bean pizza line. This has been an outstanding success - the pizza achieved an 8% share of the UK frozen pizza market even before the advertising support began.