Internal Economies of Scale

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  • Created by: Natasha
  • Created on: 17-12-12 13:58

Types of Internal Economies of Scale

- Purchasing

- Technical

- Managerial

- Specialisation

- Marketing

- Financial

- Risk Bearing

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Purchasing

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.
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Technical

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.

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Managerial

- 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.

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Specialisation

- 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.

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Marketing

- 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.

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Financial

- 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.

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Risk Bearing

- 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.

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Evaluation

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.

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