1.6 Growth & Evolution
Scale of Business
Most output that can be made with available resources
Scale of Business can be increased by increasing inputs
Producing more ≠ Increasing Scale of Business
Only refers to max output not efficiency of production
Economies of Scale
Improves efficiency of production, marketing and development
Cost per unit = (total variable costs + total fixed cost) / units produced
Cost per unit decreased
Total fixed cost spreads over an increased units produced
Total variable costs may increase disproportionally less than units produced
Lowers price or increases profit
Customers become happier
increased Market share
Increased profit
Shareholders become happier
Increased budget for R&D, marketing, etc.
Diseconomies of scale
Average unit costs rise as the business grows larger
Diseconomies of scale tend to occur because it is more difficult to manage a large business than a small one
Large businesses may experience issues such as high supply and low demand leading to higher overhead costs or supply chain issues
Smaller businesses are more likely to be able to handle and balance supply and demand issues better due to their smaller scale
Internal Economies of Scale
Purchasing
Whole sale discounts
Examples:
In 6 pack of coke, each individual coke costs less
Technical
Larger businesses have a large workforce
Workers may have new skills to bring to the business
Businesses has access to a wide variety of skills
Financial
Banks are more likely to give loans
Providers more likely to allow for debt
Business likely has more capital to expend
Marketing
Advertising products becomes more efficient due to larger volume
Managerial
Larger firms are more likely to be able to hire more managers
Risk Bearing
Larger businesses have a larger amount of cash to fall back on even if a product fails
Despite this massive failure, Samsung was able to relaunch the Note 7 and even after it failed a SECOND TIME they did not suffer significantly in the long run.
External Economies of Scale
1. Technological Processes:
Increases the productivity within the industry
E.g internet has allowed e-commerce
2. Improved Transportation Networks:
Helps to ensure prompt deliveries.
Employees who are late to work due to poor transportation links cost the business money.
3. Access to Skilled Workforce:
Can easily recruit other workers trained by other firms in the same industry
4. Ancillary Firms:
Can be located nearby large firms to provide them with service/equipment they require
Internal Diseconomies of Scale
Becoming too large of a business
As a firm becomes larger, managers may lack control and coordination as the span of control is likely to increase which causes communication problems
Workers of larger organizations feel alienated which can harm staff morale