Economies of Scale

1. Economies of Scale

2. Mind Map of Economies of Scale

4. Economies of Scale Otherwise known as Procurement can take the form of: • Technical • Specialisation • Purchasing

5. Economies of Scale • The advantages of large scale production that result in lower unit (average) costs (cost per unit) • Economies of Scale – spreads total costs over a greater range of output

6. Economies of Scale • Internal: Technical • Specialisation – large organisations can employ specialised labour • Indivisibility of plant – machines can’t be broken down to do smaller jobs! • Principle of multiples – firms using more than one machine of different capacities more efficient • Increased dimensions – bigger containers can reduce average cost

7. Economies of Scale • Principle of Multiples: • Some production processes need more than one machine • Different capacities • May need more than one machine to be fully efficient

8. Economies of Scale • Financial • Large firms able to negotiate cheaper finance deals • Large firms able to be more flexible about finance – share options, rights issues, etc. • Large firms able to utilise skills of merchant banks to arrange finance

9. Economies of Scale • Commercial • Large firms can negotiate favourable prices as a result of buying in bulk • Large firms may have advantages in keeping prices higher because of their market power

10. Kingsbrook Economies of Scale • Technical – video conferencing, sub contract to local colleges, combine classes from SWAN Network, regional IT technician, shared Heads/leadership group • Specialisation – each college in SWAN focus on a specific course – i.e. business at Kingsbrook, students move around to seek specialist topics/themes. Appoint OFSTED leaders for Mngt, Regional coaches and specialist to help with subjects. • Purchasing – IT, IT equipment, stationary, buildings, software, uniforms, (role of LEA but failed)!

11. Diseconomies of Scale • The disadvantages of large scale production that can lead to increasing average costs • Problems of management • Maintaining effective communication • Co-ordinating activities – often across the globe! • De-motivation and alienation of staff • Divorce of ownership and control

12. Diseconomies of Scale • Communication • Messages to the right people at the right time. • Emails/mobiles have helped this!

13. Diseconomies of Scale • Coordination • Coordinating activities to ensure that everyone is working towards the same goals. • Easy for different functional areas to ‘detach’ themselves from the overall firm. • Bigger the organisation = difficult to manage.

14. Diseconomies of Scale • Motivation • Bigger organisation = difficult for everyone to feel involved. • Small businesses – team environment • Can become isolated and demotivated.

15. Difference between the two? • Typically, economies of scale are quantifiable i.e. you can calculate the amount saved. • Diseconomies of scale – more discrete in that they are submerged beneath the organisation, therefore qualitative!