MINIMUM EFFICIENT SIZE OF A NEW COMPANY
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The concept of "Minimum Efficient Size" (MES) refers to the minimum volume of output or level of activity that a company must achieve to operate efficiently. In other words, is the point at which the company can take full advantage of economies of scale, minimise unit costs and justify its investment in fixed assets such as machinery, premises and so on.
Factors to consider:
- Business Model: Does your company produce goods or offer services? This will affect the type of investments needed.
- Industry: efficient sizing standards vary widely from industry to industry.
- Fixed and Variable Costs: you need to understand how much it costs to keep your business operational regardless of sales volume, and how those costs change as your business scales.
- Resource Requirements: personnel, space, equipment, and supplies needed to operate efficiently.
- Market Demand: you must be able to estimate with some accuracy the demand for your products or services to avoid overinvestment or supply shortages.
- Competence: Knowing the size and capacity of your competitors can help you determine an efficient size for your company.
The number of customers you need to overcome to make your investment viable
Ex: it will not pay to buy, i.e. invest in a machine, if you cannot guarantee a usage in hours or customers or products higher than ..... In that case it is better to subcontract or rent.
The minimum efficient size of a company depends on a number of factors, such as business model, industry, fixed costs, cost structure, resource requirements, etc. In general, Economic scale and growth can help a company increase efficiency and reduce unit costs, but it can also increase complexity and administrative costs. Therefore, Finding the minimum efficient size requires careful assessment of these factors and strategic planning.
How to calculate it
In more quantitative terms, The MSR can be determined by performing a cost analysis in which total costs (fixed and variable) are calculated at different levels of production or activity. Then, you identify the level at which unit costs are minimal, provided that you can sell the production at that level. ¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡¡.Not to be confused with the break-even point (+)!
It is crucial not to confuse the MSD with the break-even point. The break-even point is the level of production or sales at which total revenue equals total costs, i.e. the point at which the firm is neither profitable nor loss-making. The TME is more of a strategic objective which considers not only financial viability but also operational efficiency.
Imagine you have a small shoe factory. It might not be cost-effective to buy a high-capacity leather cutting machine if you only plan to produce 100 pairs of shoes per month. The costs of the machine, its maintenance and the additional space required could outweigh any savings you make by reducing the leather cutting time. In this case, you might find it more efficient to outsource that process or rent the machine only when needed.
In short, the MSD is a key concept for any company seeking to maximise efficiency and profitability. It requires a detailed assessment of various factors and careful strategic planning.
It is difficult to obtain accurate minimum efficient size (MES) data from well-known companies because this information is often part of their internal data and competitive strategies.
HOWEVER, SOME GENERAL OBSERVATIONS CAN BE MADE BASED ON KNOWN CASE STUDIES AND BUSINESS MODELS:
- Amazon: When it started, Amazon was an online bookstore operating out of Jeff Bezos' garage. However, with the goal of becoming the "everything shop", it needed a significant TME to justify and maintain its extremely efficient logistics, data centres and inventory system.
- McDonald's: A single McDonald's shop may not justify a large-scale meat supply chain. But with thousands of shops, McDonald's can invest in systems that allow it to purchase, store and transport meat extremely efficiently, achieving a TME that justifies its large investments in logistics.
- Tesla: The Gigafactory is an example of large-scale TME. Efficiency and cost reduction in battery production can only be achieved with a certain volume of production that justifies the multi-million dollar investment in the factory.
- Netflix: To justify the high cost of content acquisition and production of original series and films, Netflix needs a large number of subscribers. Here, the TME is not measured in terms of physical production, but in terms of subscriber base.
- Walmart: With its business model based on "everyday low prices", it needs a large volume of sales to maintain its narrow margins. Its TME is therefore much larger than that of a typical retail shop.
- Software as a Service (SaaS) such as Slack or Zoom: These companies have relatively high fixed costs for software development and server infrastructure, but very low variable costs. The TME will be the minimum number of paid users that justifies these high fixed costs.
I hope these examples will help you to better understand the concept of Minimum Efficient Size in different types of industries and business models.
The artificial intelligence (+) can be a valuable tool for an entrepreneur seeking to calculate the minimum efficient size (MES) of his company. But it is not a replacement for professional financial advice or in-depth business data analysis.
HERE ARE SOME WAYS IN WHICH ARTIFICIAL INTELLIGENCE COULD HELP:
- Awareness and Education: can provide a detailed explanation of what the MSR is, how it is calculated and why it is important for a company.
- Key Elements to Consider: can list the various factors that an entrepreneur must take into account when calculating the MSR, such as fixed costs, variable costs, market demand, production capacity, etc.
- Formulas and Calculations: although it cannot perform real-time calculations, it can provide general formulas and examples of how to calculate the MSD based on different variables.
- Targeted Questions: can ask questions that guide the entrepreneur to think critically about his or her business model, cost structure and sales projections. This may help to gather the necessary information for a more accurate calculation.
- Scaling-up strategies: can offer general strategies to achieve the MSD more efficiently, such as product diversification, supply chain optimisation, or pricing tactics.
- Validation of Ideas: by analysing the entrepreneur's responses, can help validate or challenge underlying assumptions in the calculation of the MSD.
- Case studies: can provide examples of companies that have successfully calculated and optimised their MSD to give a practical perspective.
- Additional Resources: can recommend books, online courses, software tools or consultants who can provide more detailed and customised analysis.
- Decision-Making Tips: can help weigh the pros and cons of different options for achieving the MSD, which can be valuable for strategic decision-making.
- Checklist: Finally, you could create a checklist that the entrepreneur can use as a guide to ensure that he/she has considered all relevant factors in his/her MSD calculation.
In summary, while artificial intelligence cannot replace detailed financial analysis, it can be a useful educational and support tool in the process of understanding and calculating the MER.
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CASE STUDY: XYZ COMPANY IN THE MENTORDAY ACCELERATION PROGRAMME
The company XYZ develops an online learning platform specialising in programming skills. It joined mentorDay's accelerator programme to scale its business and improve its operational efficiency. One of its main objectives was to determine and reach its minimum efficient size (MES).
PHASE 1: CALCULATION OF THE TME
- Cost Analysis: studied their fixed costs (salaries, rent, software) and variable costs (advertising, server maintenance).
- Demand Estimation: conducted surveys and market analysis to understand the demand for their service.
- Production Capacity: evaluated how many courses they could produce and how many users they could handle simultaneously.
- Formulation and Calculation: used the TME formula based on these factors to determine that they would need at least 10,000 monthly active users to operate efficiently.
PHASE 2: ACTION PLAN TO ACHIEVE THE EME TME
- Objective: reach 10,000 monthly active users in one year.
- Product Development: enhance the platform with more attractive features and a better user experience.
- Marketing and Advertising: invest in targeted advertising campaigns on social media and Google search.
- Strategic Alliances: collaborate with universities and schools to offer their courses as part of the curriculum.
- Cost Optimisation: renegotiate contracts with suppliers and look for cheaper alternatives.
PHASE 3: IMPLEMENTATION AND MONITORING
- Trimester 1: New product launch and first advertising campaign. Active users reach 3,000.
- Trimester 2: first strategic alliances established. Active users grow to 6,000.
- Trimester 3: second round of cost optimisation and advertising. Active users reach 8,500.
- Trimester 4: International partnerships and referral campaign launched. Active users reach 12,000.
PHASE 4: REVIEW AND ADJUSTMENT
- After reaching its MSR, XYZ reviewed its cost structure and strategies, adjusting its business model to maintain its long-term strategic position.
One year after implementing its action plan, XYZ not only met but exceeded its MSR, positioning itself as a leader in its industry.
Thus, through participation in the mentorDay acceleration programme, XYZ was able to calculate its TME, develop a sound action plan and successfully execute it to achieve a strong strategic position.
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