Competitive Advantage  137
insurer with the highest market share in a local market will be in a position 
to negotiate the lowest prices, regardless of its national market share. In other 
words, it’s better to have the number-one market share in ten states than to be 
number one nationwide but number four in every state.
Another aspect of scale economies is that a company derives benefit only if 
competitors cannot easily achieve similar scale. Sometimes the required invest-
ments are large enough to deter competitors. Anyone who wants to compete 
with United Parcel Service (UPS), for instance, must first pay the enormous 
fixed expense of installing an international network and then operate at a 
loss for quite some time while drawing customers away from the incumbent. 
Even though UPS continually must add new costs for planes, trucks, and driv-
ers, these costs are variable—in contrast to the fixed cost of building the inter-
national network—and are incurred in stepwise fashion. That does not mean 
the industry is completely safe from competition. Over the past few years, 
Amazon has been building its own shipping network. Scale is less effective as 
a barrier to entry for Amazon: the company can rapidly reach sufficient scale 
thanks to its internal demand, and it has shown itself prepared and able to 
incur significant upfront investments.
Scalable Product or Process  Having products or processes that are scalable 
means the cost of supplying or serving additional customers is very low at 
almost any level of scale. Businesses with this advantage usually deliver their 
products and services using information technology (IT). Consider a company 
that provides standardized software (in other words, a product that requires 
little customization). Once the software is developed, it can be sold to many 
customers with no incremental development costs. So the gross margin on 
incremental sales could be as high as 100 percent. As sales rise the only costs 
that increase are typically for selling, marketing, and administration.
For scalable software businesses, the upfront investments are not the only 
hurdle that competitors must deal with. Customers face costs of switching to 
other software providers, so competitors cannot easily achieve a similar scale 
as the incumbent player. That does not mean such competitive advantages 
last indefinitely, however; ongoing technological innovations in IT create op-
portunities for new competitors. For example, in financial and payments ser-
vices, new entrants such as PayPal or Ayden have secured leading positions 
by starting new business models built on innovative technology platforms. 
Incumbent players, strapped with heritage organizations, systems, and pro-
cesses, have found it difficult to copy the innovations.
Other examples of scalable businesses include media companies that make 
and distribute movies or TV shows. Making the movie or show requires an 
initial outlay for the crew, sets, actors, and so on. But those costs are fixed re-
gardless of how many people end up viewing and paying for the show. There 
may be some incremental advertising costs and very small costs associated