Operational Strategies: Scale and Resource Mix-Chapter 12

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  • Operational Strategies:Scale and Resource Mix-Chapter 12
    • Economies of Scale
      • The advantages a business gains due to its increase in size. These occur when the cost per unit falls as output expands. This is an a result of an increase in productive efficiency
      • Technical Economies
        • Modern equipment- improve efficiency-lower unit costs, improve quality and reliability of product and service
        • Mass production techniques- Improve productivity
        • Highly trained technicians-improve reliability of production process
        • Large-scale transportation reduces distribution costs per unit
        • Purchase of computer systems-improve efficiency in both production and administration
        • Improvements in communication systems using new technology can enhance customer service and the working environment, improving the company's operations an its reputation
      • Specialist Economies
        • Large firms can afford to employ specialists with particular skills. In smaller firms, staff take on a wider variety of tasks and specialist skills are bought from the outside
        • Production techniques can be adapted to encourage division of labour in large firms
        • A small firm is unlikely to be able to pay a high enough salary to attract the best staff, so larger firms should be more efficient.Training to improve specialist skills is also easier in large firms
        • If staff are able to specialise, they are likely to become even more skilled in their role, again increasing the efficiency of the firm
      • Purchasing Economies
        • Large firms can buy in bulk. Reduces costs-suppliers can produce  in large quantities and lower their costs
        • Suppliers may offer greater discounts in order to guarantee a contract with a large customer
      • Marketing Economies
        • Large firms can use more expensive media that reach customers in a more persuasive way.
        • Increase the effectiveness of the advertising and reduce unit costs.
        • Large firms can also carry out more extensive market research, so they understand markets more than smaller firms
      • Financial Economies
        • Because the are considered to be safe, larger companies should be able to get loans more easily and at lower rates of interest. They will find it easier to access funds through other sources, such as retained profit
      • R&D economies
        • Large economies can afford to devote more money to innovation and research and development. The expenditure should enable a business to discover new products or to find easier ways to produce goods
      • Social and Welfare economies
        • Larger companies are able to provide social and welfare facilities which may improve conditions for staff
        • These benefits will make it easier to recruit workers and should improve morale among existing staff-highly motivated workforce with lower levels of absenteeismand labour turnover
    • Diseconomies of Scale
      • The disadvantages that an organisation experiences due to an increase in size. These cause an increase in the average cost of productiion
      • Coordination Diseconomies
        • Loss of control by management as organisation becomes more complex
        • Organisation becomes more geographically spread and management experiences increased workload
        • Individuals are less likely to follow organisational policies of the level of control is reduced
        • Large firms often have more rigid and inflexible policies-imposed to limit the loss of control described above to reduce the ability to respond quickly to changing customer needs
      • Communication Diseconomies
        • Too many levels of hierarchy in a business can reduce effective communication-messages can be distorted and possible that communications don't reach everyone
        • Difficulties also occur as spans of control widen. It becomes much more difficult for managers to meet with subordinates
        • In large firms, inappropriate methods of communication are likely to be used, as standardised, large-scale approaches are more common
        • Employees who do not receive, or are not involved in, communications may feel unvalued and demotivated
      • Motivation Diseconomies
        • It is difficult to assess the needs of many individuals. Even more motivational methods are used
        • In large firms there maybe less time for recognition and reward
        • Large hierarchies create feelings of distance between makers and employees
      • Other diseconomies of scale
        • Technical diseconomies-production on a very scale can become difficult to organise
        • Excessive bureaucracy- As organisations grow, the number of levels of management increases and this may slow down decision-making
        • Staff problems-Industrial relations problems and higher staff turnover and absences may result from the factors described above
        • Less flexibility- This means that firms may not continue to meet the changing needs to the customer
    • Capital and Labour Intensive methods
      • Capital Intensive
        • This implies the use of technology, equipment and machinery as a means of production
        • E.g. Fully automated factory, Nuclear power station
        • Benefits: Can be quicker, much more efficient- higher productivity, lower costs and higher quantity consistancy
        • Drawbacks: Social issues, demotivation of staff, machines may break down, value depreciation rapidly, initial costs can be expensive
      • Labour Intensive
        • Businesses that rely more heavily upon labour i.e. the workforce rather then capital equipment
        • Examples: Retailing, restaurants, hairdressers
        • Benefits: Better for customer services- people prefer to talk to humans rather than machines and more flexible to customer needs and changes
        • Drawbacks: Human Error risks and lower productivity
    • Choosing the optimal mix of resources: capital and labour intensity
      • Method of production
        • Requires capital equipment machinery can produce more quickly and consistently than a human being-large scale production usually means that a firm will choose capital intensive production methods
        • In contrast, if products are specifically designed for a consumer, then labour intensive are likely to be used
      • Skills and efficiency of the factors of production
        • A business that depends on the skills of its workers is more likely to use labour intensive methods.
        • However, if machinery or other forms of capital can greatly lower unit costs or produce more consistent high-quality product, then capital intensive methods will be employed
      • The relative costs of labour and capital
        • Labour is expensive in western Europe compared to other parts of the world-firms will benefit from replacing labour with capital equipment
        • In other parts of the world, labour is much cheaper to use and so production lines are more labour intensive . Another consideration is the reliability of labour and capital
      • The size and financial position of a business
        • Capital equipment is expensive to buy. It may not be possible for small businesses or firms with cash-flow difficulties to purchase the equipment needed for capital intensive methods. As a consequence, these firms will choose labour intensive production
      • The product or service
        • The more standardised a product, the greater are the advantages of capital-intensive production because machinery can produce vast quantities at lower unit costs
      • The Customer
        • If customers want personal contact, this may limit the scope for capital intensity. The banking industry has lowered its costs by automating many of its processes  but many of its customers prefer the more sociable nature of the branch

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