4 THE ROLE OF ECONOMIES OF

SCALE IN INTERNATIONAL
MARKETING
Vern Terpstra

The best strategy is always to be very strong, first generally, then at the
decisive point . .. there is no more imperative and no simpler law for
strategy than to keep the forces concentrated.
-Karl von Clausewitz

Clausewitz is proclaiming here a classic military strategy that has a parallel in

economics-and international marketing. We find, for example, two
McKinsey people discovering that "Critical Mass is the Key to Export
Profits."l The idea that critical mass or economies of scale are important in
economics is at least as old as Adam Smith. He declared that specialization
and the division of labor are the source of the wealth of nations and that
specialization is limited by the size of the market.
More recently we have learned that economies of scale are a source of
comparative advantage for nations in international trade and a factor in the
rise of large oligopolistic enterprises, including multinational firms. Perhaps
the newest and most sophisticated manifestation of the idea of economies of
scale is the development of the experience curve phenomenon, which has
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G. M. Hampton et al. (eds.), Marketing Aspects of International Business

© Kluwer-Nijhoff Publishing 1984
60 MARKETING ASPECTS OF INTERNATIONAL BUSINESS

been particularly applied to explain the success of Japanese firms. The

internalization theory of foreign direct investment is also related to this idea.
Economies of scale is the general expression to describe the phenomenon
we are considering. 'There are, however, other terms with similar connota-
tion, i.e., critical mass, the experience curve, synergy, leverage, entry
barriers, and breakeven point. What do we mean by economies of scale?
There is no standard dictionary definition we can draw on, but the concept is
generally understood by both economists and business people. Put most
simply, it is the idea that in some situations, increasing output leads to
decreasing costs per unit.
Some of the sources of economies of scale have been identified as: (1)
in divisibilities of various factor inputs, (2) economies from specialization
and the division of labor (as noted by Adam Smith), and (3) the learning or
experience effect. These factors have been recognized and discussed in the
literature but almost entirely in the context of production economies as
opposed to other aspects of the firm's activities. Thus we have the example
of Henry Ford's wonderful assembly line bringing down the price of
automobiles. Or the illustration of the experience curve to explain the
success of Japanese companies in world markets. In this chapter we will
show that the logic and necessity of economies of scale can be as important in
the firm's international marketing as it is in its production operations.

Economies of Scale in International Marketing

Economies of scale have been briefly defined above. International market-

ing can be defined as the activities undertaken by the firm to relate to its
foreign markets. The major activities usually included are: (1) market
research, (2) product development and management, (3) pricing, (4) distri-
bution, and (5) promotion. Our approach will be to take these marketing
activities one by one (except for pricing) and show how important
economies of scale can be in their performance. We begin with international
market intelligence.

International Market Intelligence

Knowledge of the market is a prerequisite to successful marketing. Unfortu-

nately, knowledge is not a free good equally distributed to all producers.
Therefore, firms invest significant sums to study their domestic markets.
Market knowledge is equally essential for marketing internationally, but it