operational strategies - scale and resource mix

The size of an organisation will directly influence to operate efficiently. A firms optimum output is when it is working to its highest level of efficiency and the average cost of production will be at its lowest.

Before reaching optimum, a firm will be benefiting from economies of scale as it grows. Once it has reached its optimum and further growth takes place, diseconomies of scale is likely to take place.

Economies of scale are the benefits to a firm of operating on a large scale, resulting in the fall of average costs. Economies of scale present large businesses with a competitive advantage and can act as a barrier to small firms who cannot compete or achieve sufficiently low average costs. 

Purchasing Economies refers to the ability of large firms to buy in bulk and negotiate better terms with their suppliers. Suppliers will be keen to secure large orders and consequently offer better payment terms and larger discounts, the result being a fall in the variable cost per unit and hence average cost.

Technical Economies refer to the ability of firms to invest in the most up to date and technologically advanced equipment.  Because the cost of the equipment is spread over a large number of products, the average cost is lower. By investing in such equipment, the firm can operate more efficiently and the possibility of a more advanced and better quality product. Technical economies of scale may also lead to further saving as the new machinery may reduce the number of workers required.

Specialisation refers to the ability to employ specialists as a firm grows. Large businesses will have their own specialists, for example, or an IT specialist who will be an integral part of the business. They will know more about the actual needs of the business and will be cheaper than buying in the help of a consultant.

Specialisation can also refer to the ability to adopt greater division of labour. As the number of employees grows they can focus on one particular task and become more efficient at task due to specialisation. 

Diseconomies of Scale are the problems encountered by a business when it goes beyond its optimum level of output level and hence average costs start to rise. Diseconomies of scale are often qualitative in nature and it can therefore be difficult to measure their exact impact. A firm suffering from diseconomies will have to look at what actions they can take to minimise their harmful effects and restore the business to a more efficient situation.

Communication diseconomy – communication becomes increasingly difficult as an organisation grows in size and not only does the efficiency of communication start to fall but the cost of it starts to rise.  Effective communication is crucial to the smooth running of an organisation so, rather than allow failures in communication, the business will normally opt to invest in more sophisticated channels of communication. Another problem is that if the business grows it takes on a multinational dimension. This can lead to language barriers, cultural differences and time zones.

Coordination Diseconomy – Coordination becomes difficult as the number of employees and resources within an organisation grow. It becomes difficult to ensure all employees are working towards the same objectives and jobs are being done efficiently. Managers may find it difficult to motivate workers or to delegate responsibility to them. This can be a major factor for the failure or success of takeovers and mergers. After a takeover or merge, rationalisation is often needed to reduce duplication of job roles. 

A mix of resources can drastically improve a business’s performance if they have an understanding of the costs of their operation. These costs could be people, equipment, data and facilities. Performance can be optimised by improving and altering the resource mix in order to increase the return. Firms can combine capital equipment and labour in order to achieve the optimum resource mix. 

A capital intensive industry is one where the weighting of resources used within operations management is biased towards capital equipment as opposed to labour. This is historically used in manufacturing industries used for mass production. 

A labour intensive industry is one where the weighting of resources used within operations management is biased towards labour rather than capital equipment. Labour-intensive industries are often found in the service sector where customer interaction with employees is important. However, the growth of the internet has swayed the businesses to become more capital intensive.

The benefits of operating in a capital intensive industry are that there is reduction in human error, which can results in lowered costs for the business. Also, there is a greater speed of output as machines usually work faster than humans, and therefore a greater amount of production can be completed in a shorter period of time. Furthermore, there is an ease on workforce planning as the business does not have to spend time and money organising the workforce. It may also be said that there is a greater scope for economies of scale as the business has lowered its average cost as it is producing more efficiently. 

On the other hand, the drawbacks of operating a capital intensive industry are that there is a high initial cost to the business. This may affect businesses with cash flow problems and cause serious initial worries for the business. Another drawback is that they are prone to fluctuations of interest rates, as industries financed by loans are susceptible to a changing interest rate. It may also be argued that there is a lack of initiative in such businesses and also a lack of flexibility in responding to a fall in demand. 

The benefits of operating in a labour intensive industry are that it provides greater flexibility, especially if the staffs are multi skilled. Also, labour is good for the economy as it creates employment and gives a personal response to the consumer, which may improve customer service. Furthermore, a labour intensive business can cater for the needs of the customer as they can make as tailor made goods for niche markets. This combined offers an opportunity for continuous improvement of the business.

One the other hand, the business can be prone to labour related problems, such as industrial action and problems with unions. There may also be a possible shortage of workers, which could pose a major problem for the business as well as high human resources costs.