Types of Internal Economies of Scale
- Risk Bearing
Large scale producers should be able to bulk buy raw materials or product for resale in larger quantities.
- they may be able to cut out wholesalers by buying direct from producers and transport costs per unit may also be reduced.
- the firm might also be buying in large enough quantities to make very specific demands about product quality, specifications, service and so on, so that supplies exactly match their needs.
It may be cost effective to invest in more advanced production machinery, IT and software when operating ona larger scale.
- Learning economies eg. learning by doing: Unit costs of production typiclly decline in real terms as a result of production experience as businesses improve their production methods and cut waste. Evidence across a wide range of industris into so-called "progress ratios", or "experience curves", indicate that unit manufacturing costs typically fall by between 70% and 90% with each doubling of cumulative output.
- expensive specialist capital machinery eg. robotic technology in the production of vehicles.
- specialisation of the workforce to boost factor productivity - division of labour.
- Larger firms can afford to have specialist managers for different functions within a business - such as Marketing, Finance and Human Resources.
- They may be able to pay the higher salaries required to attract the best people, leading to better planning and decision making.
- With a larger workforce, the firm may be better able to divide up the work and recruit people whose skills very closely match the requirements of the job.
- more options available for larger firms such as television and other national media, which would not be cost-effective for smaller producers.
- the marketing cost for selling 50 million items might be no greater than to sell 5 million items.
- larger firms might find it easier to gain publicity for new launches simply because of their existing reputation.
- there is a wider range of finance options available to larger firms such as the stock market (plc), corporate bands and large icons.
- a larger firm is likely to be perceived by banks as a lower risk and the cost of borrowing (the interest rate) is likely to be lower.
- a larger firm can be safer from the risk of failure if it has a more diversified product range.
- a larger firm may have greater resiliance in the case of a downturn in its market because of larger reserves and greater scope to make cutbacks.
Economies of scale and barriers to entry; large scale businesses that have exploited internal economies of scale may have a significant cost advantage over new rival suppliers.
Just because scale economies are so evident, this does not preclude smaler businesses from surviving and prospering in markets:
1. they may focus on selling to niche markets where demand is inelastic and profit margins are tougher.
2. they may emphasise non-price competition (innovation especially important) even if they cannot compete purely on grounds of cost per unit.