Economies of Scale
Economies of scale – are ways in which long run increases in output this can reduce costs per unit and increases efficiency.
Internal economies – are long run reductions in costs per unit resulting from expansion of a single business.
Technical economies – arise when larger and more efficient capital items can be used because their high costs can be spread across a larger quantity of output.
Marketing economies – occur when high cost advertising and promotion activities are possible. The costs are covered if they can secure high and rising sales.
Managerial economies – become possible when output is high enough to justify hiring specialists to perform specific management tasks e.g. for marketing and HRM.
Economies of Scale
Bulk buying economies – occur when businesses are purchasing large enough quantities to be charged a lower price per unit, either because unit supplier’s costs are reduced or because the buyer has market power.
Financial economies – are possible when lenders offer big businesses lower interest rates because they look less risky.
Risk bearing economies –when a business has a single product, a single market or perhaps has a single new product, it is highly vulnerable if that product fails. Businesses with many products or markets are diversified and can spread risk by offsetting loses is one area against profits elsewhere.
Diseconomies of scale – are increases in unit cost that occur as a business grows larger, often associated with communications issues or costs of co-ordination.
External economies – these are reductions in unit costs that occur as long-run output rises and are shared by a whole industry rather than limited to a single firm. External economies are very common when similar firms are concentrated in one location.
Minimum efficient scale – is the lowest level of output at which average or unit costs can be minimised.
Oligopoly - An oligopoly is a market structure with just a few sellers/suppliers dominating the market or an oligopoly market is one which has a three firm concentration ratio of over 40% of the market share. Oligopolies have high barriers to entry such as start-up costs. Firms with an oligopoly produce branded products as advertising and marketing is an important feature of competition within such markets. There may be price wars, a firm might drive out rivals to strengthen the market position, and entails predatory pricing when firms charge low prices to make it hard for rivals to compete and driving them out of the market. Oligopolists can be described as price leaders which are leading firms in the industry with sufficient market power to decide between restricting output and charging higher prices, or reducing prices in order to increase sales. E.g. BP is a price leader when it increases prices they all follow and when it decreases prices they all follow.
Example of oligopoly markets will be Fuel, Gas high start-up costs and not many firms dominating the market.
Decentralisation – occurs when decision making powers are given to local branches or individual divisions within the business, rather than deciding everything at the head office. Businesses who use a decentralised structure are Morrison’s and Tesco’s.
- Decision made closer to customer
- Better able to respond to local circumstances
- Consistent with aiming for a flatter hierarchy
- Good way of training and developing junior management
- Improves staff motivation seem more involved and valued for if being heard and given authority.
- Decision making is not strategic
- Customers may prefer consistency from location to location.
Lean production - focuses on cutting out waste, whilst ensuring quality. Cutting wastes leads to a reduction in costs.
Just in time production (JIT) – means carefully scheduling the arrival of materials and components to the production process in small quantities as they are required. This reduces the cost of stock holding and the space required.
Cell production – involves splitting a production process into sizeable steps, each of which becomes the responsibility of team of employees when producing a product.
Kaizen (Continuous improvement) – drawing ideas from everyone for small improvements and constantly looking at better ways to do things.
Total Quality Management (TQM) - It describes ways to managing people and business processes to ensure complete customer satisfaction at every stage. TQM is often associated with the phrase - "doing the right things right, first time".
Time based management – focuses on time as a business resource, emphasising speed and rapid delivery.
E-tailing - is the sale of goods and services through the Internet
Advantages of on-line growth:
- With the help of electronic commerce, even small enterprises can access the global market for selling and purchasing products and services.
- There has been an increase in number of people using the internet meaning a large market to target
- Businesses can diversify as selling a number of different product and advertising costs are usually lower
- There are little advertisement costs
- Not that many staff are needed
Disadvantages of on-line growth:
- There are large companies like e-bay and Amazon with a 15.6 million audience a month who sell a range of products and dominate the market so it will be hard to enter the market
- It is hard to enter the market as consumers buying over the internet are sensitive to what they buy due to the fraud, so investment in security is vital which could lead to costs