Much of human economic activity suffers from diminishing returns
. For example, in farming, the farmer will first farm the most
fertile land with the most valuable crops. To expand the farm's
business, the farmer will have to cultivate progressively less
fertile land and will have to grow less valuable crops (once the
demand for the most valuable crop has been met). In general, the
bigger a business gets, the less optimal its last venture.
Assuming that a manager is good at picking the most promising
business opportunities to do first, it would seem that
diminishing returns are a fundamental law of doing business: the
first few deals skim the cream and subsequent ones have
progressively less value. Despite the general prevalence of
diminishing returns, some industries behave differently. In
particular, the software industry seems to work under a
principle of increasing returns where getting bigger results in
better deals than if you stay small. Software manufacturing
(floppies or CDs) is very cheap relative t