Define
Economies of Scale
•Economies of scale is when average costs of production decrease as the organization increases the size of its operations.
Technical Economies of Scale
•Large firms can use sophisticated machinery to mass produce
•High fixed costs of their equipment are spread over the large scale of output.
•This results in the reduction of average costs of production.
A business wants to grow
•Economies of scale
•Lower prices
•Brand recognition & reputation
•Customer loyalty
•Market power; prices & suppliers
•Sources of finance
•Diversification
•However, can be criticized for being too vague and/or just PR exercises
•Being unquantifiable - not concerned with quantifiable goals but simply outline the aspirational purpose of an organization’s existence.
vision
•This is an outline of an organization’s aspirations in the very long-term.
Financial economies
•Large firms can borrow large sums of money at lower rates of interest.
•Seen as less risky to financiers.
•This results in the reduction of the costs of borrowing finance.
A business wants to stay small
•Retain control
•Lifestyle business
•Government aid
•Local monopoly power
•Personalised services
•Flexibility
•Niche market
Avoid diseconomies of scale
ethical business practices
•Higher costs
•Higher prices
•Lower profits (in short term?)
•Stakeholder vs shareholder conflict
•The subjective nature of business ethics
Diseconomies of Scale
•Diseconomies of scale is when an organization becomes too large, causing productive inefficiencies that result in an increase in average costs of production
Specialisation economies
•Results from division of labour of the workforce.
•These specialists are responsible for a single part of the production process.
•This results in the fall of average costs due to higher productivity.
Diseconomies of scale happen
being a sole trader
•Unlimited liability
•Limited sources of finance
•High risks
•High workload and stress
•Limited economies of scale
strategies
•Plans of action to achieve the aims of an organisation.
•They are:
medium term goals
Purchasing Economies
•Large firms benefit from buying resources in bulk.
•Discounts are usually given to bulk purchases.
•Bigger the bulk purchase, bigger the discount
External diseconomies of scale
higher rent, congestion, ...
Being a private limited company
•Potential communication problems
•Added legal & procedural complexities
•Compliance costs
•Disclosure of information – accounts have to be publicly available (for both private & public LLCs)
•Dilution of control for original owners
tactics
•The methods used to enact strategies of an organisation.
•They are short-term and (should be) frequently re-evaluated and re-generated.
Risk Bearing Economies
•Conglomerates can spread fixed costs across a wide range of business operations.
•Unfavourable trading conditions for some products can be offset by more favourable trading conditions in markets.
ethical business practices
•Improved corporate image
•Increased customer loyalty
•Increased sales revenues
•Improved staff motivation & loyalty
•Improved profits (in the long term?)
•Attract ethical investors
being a cooperative
•Limited sources of finance
•Slower decision-making