Our first trend represents nothing less than a complete reversal of a belief that managers have taken for granted for a century and a half. In the days of Henry Ford or Andrew Carnegie, it was enormously important to a company's business strategy to build economies of scale. This made sense because larger plants made it possible to lower costs on commodity products with long lifecycles.

But today, the situation is much more complex — and making simplistic assumptions about "minimum efficient scale" can have devastating consequences. That's why, in certain situations, bigger is no longer better — it's worse.

Let's examine the facts behind this trend, as well as its implications.

The advantages of large-scale operations are clear: Fewer managers are needed; plant, equipment and labor are used more efficiently; logistics are less complicated; and so on.

That's why, in many industries, executives subscribe to the concept of minimum efficient scale. This doctrine suggests that operations smaller than a certain size cannot be cost-effective and hence are not commercially viable. The minimum annual output thought to be "efficient" varies by industry. For an automotive assembly plant, it's 200,000 vehicles. For an integrated steel mill, it's 5 million tons of steel. And for a global brewery, it's 8 million barrels of beer.

This thinking has grown beyond manufacturing to service businesses. In recent years, the notion that scale economies are the main driver of competitive-ness has led to mergers in banking, cable television, and even funeral homes. The logic of minimum efficient scale was also a factor in the dot-com boom, as managers strove to "scale up" rapidly in the hope that their size would sink competitors and serve as a barrier-to- entry, blocking potential newcomers.

This simplistic thinking often led to disastrous business decisions. Here's why:

In the excitement of addressing a new opportunity, business leaders failed to think clearly about the economics of the situation. For example they confused "shared costs" with "economies of scale."

A great example of a shared cost is the development of a software package. That cost does not change whether you can sell one copy or a million. This simply involves taking a one-time cost and dividing it across more units of output. We'll discuss...