Economies of Scale - Operations Management (P1)

The lower costs then allow a business to lower its selling price for consumers, which increases competition...or,

It can maximise its profits and thus benefitting shareholders.

are diseconomies inevitable?

diseconomies are a common problem for large firms, but can be minimised with careful planning ahead.

stakeholders and economies

economies of scale can affect more than just the business itself.

Motivational diseconomies

as a result of a combination of poor coordination and communication, employees can quickly become de-motivated.

There are five types of internal economy of scale:

-Bulk Buying -financial -technical -Managerial -Marketing

reasons for SME survival.....

-Greater flexibility to change to meet customer demands -Quality product and service so they can charge premium prices -Some markets are too small to be of interest to larger businesses.

the three main examples of diseconomies are:

-coordination -communication -motivation

it might result in:

-improved road networks -better rail and port links -faster broadband services -improved telecommunications

Educational economies

-local colleges and unis assist with the development of a skilled labour force for the industry -colleges offer relevant skills based courses and development research capabilities are improved at the unis

Supplier economies

-suppliers will look to relocate themselves closer to the relevant industry to reduce transport costs and improve responsiveness -since the supplier is in close proximity the industry is able to exploit stock management and other cost benefits from JIT systems.

Infrastructure economies

-the concentration of an industry and suppliers within a certain geographical area will also encourage the development of the local infrastructure

Financial economies

As a businesss grows in scale, so do its assets

communication diseconomies

SMEs can easily speak with other members of staff on a regular basis

The automation of production lines offers cost savings as more can be produced with less waste and greater efficiency than using human capital.

The drawbacks of this approach include job losses, lower staff motivation and the high initial cost of the equipment.

Managerial Economies

as a sole trader, a business owner would have to do all the tasks in the business by themselves

External economies of scale

the benefits that a firm can gain as a result of the growth of an industry, usually associated with a particular geographical area

an INTERNAL ECONOMY of scale is a benefit that a company receives from an increase in their size leading to a reduction in their average cost per unit

An EXTERNAL ECONOMY of scale is one that benefits the entire industry and not just an individual business.

Economies of scale are the reduction in average costs per unit that a business benefits from after expanding their business.

Large firms gain advantages that smaller ones do not. this gives the larger firms a competitive advantage.

-customers benefit from cost savings, and lower prices -competitors have an increased ability to take over weaker rivals in the market -larger customers are able to put pressure on suppliers -shareholders benefit from increased profits due to lower average costs, thus better dividends.

SMEs do not benefit in the same way as their larger rivals. - they are less efficient and have higher costs

Technical Economies

To enable growth, a business is more likely to increase levels of production and productivity by making greater use of capital equipment.

Marketing Economies

When a business grows it needs more marketing and promotional campaigns.

coordination diseconomies

as a business grows different working practices are used and people are now spread around different locations, sometimes globally

this makes it increasingly difficult for management to monitor all activities of the business and to ensure that corporate objectives are being followed

as mistakes start to occur, so costs of reworking and corrective action increase and this leads to a rise in the LRACs.

they would be involved in marketing, sales, production, hr and logistics all at the same time

as the business grows, more specialised staff will be employed to take on the jobs for them.

Diseconomies of Scale

eventually as a business continues to increase their scale of operations their LRAC curve will start to show a rise in costs. -these increases in average costs are known as diseconomies of scale and occur as a result of growing inefficiencies brought about because of a difficulty in controlling the large size of a business.

The three aspects of this are Education, Supplier and Infrastructure

external economies are one reason why firms in the same industry tend to cluster together such as aeronautical engineering industries in the south west of england

communication can be improved with an intranet, newsletters, weekly briefings...

motivation can be improved through team building activites

Also known as purchasing economy of scale, bulk buying is the benefit that a business receives from purchasing large volumes of a good.

the seller is incentivised to offer a discount seeing that the scale of purchase is so substantial.

as a business grows, so does the level of hierarchy. this means there are more and more staff and it is much harder for messages to get sent effectively and sometimes the messages can get lost.

this can lead to staff not understanding their role properly or following different objectives to what the firm actually wants.