Case Interviews
Are buyer power and economies of scale the same acquisition synergy?
When I look for cost synergies in an acquisition, I sometimes list greater buyer power and economies of scale separately. Am I double-counting the same thing, or are they actually different?
Ian’s Answer
They are different :)
Economies of scale
Economies of scale is an overarching concept. It means “as I get bigger, my unit costs get smaller”
You can see this when making gadgets (Henry Ford and the Model T) or when providing services (The Internet giants).
It tends to happen when Fixed/Upfront Costs are a large share of total costs
Buyer Power
Buyer power is basically “As I get bigger, I can squeeze my suppliers”. It means I can negotiate lower costs because those suppliers “need” me. Economies of scale and buyer power both tend to materialize as you get bigger. Buyer power can also contribute to economies of scale. However, they both involve different dynamics/nuances and multiple things affect economies of scale.
Make sense?