Operational Strategies: Scale and Resource Mix

Section 3.4

Chaper 12

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Scale of operation

Size of the organisation will directly inlfuence its ability to operate efficiently, when operating at its most efficient it is known as its optimum output.
Before a firm reaches its optimum output it will be benefitting from economies of scale as it grows, but once optimum output is reached and exceeded into further growth it will start to cause problems: diseconomies of scale.

Economies of scale: the benefits enjoyed by a firm as a result of operating on a large scale, leading to a fall in average costs. It gives the business competitive advantage which can act as a barrier to smaller firms who cannot manage to compete

  • Purchasing economies: benefit of buying on a large scale leading to lower average costs from suppliers. Refers to the ability of the business to buy in bulkand negotiate better terms with suppliers
  • Technical economies: ability of larger firms to buy technically advanced equipment and spread the cost over a large number of pruducts so that the average cost is lower. The ability to invest in such equipment will let them operate more efficiently
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  • Specialisation: ability to employ specialists and for staff to focus on one particular area or function. In smaller organisations, workers may take on several roles and fail to become a specialist in any of them

Diseconomies of scale: the disadvantages experienced by a firm as a result of operating beyond optimum output, leading to a rise in average costs. Firms suffering from diseconomies will have to look at actions to take to minimise their harmful effectsand restore the business to a more efficient situation

  • Communication diseconomy: the breakdown in effective communication resulting from an increase in the size of operations. Effective communication is crucial to the smooth running of a business so rather than allow for failures in communication, businesses often opt to invest in more sophisticated channels of communication
  • Coordination diseconomy: the breakdown of effective coordination resulting from an increase in size of operations. As the number of employees grows in a business it becomes difficult to ensure all workers are working towards the same objectives and that jobs are being doen efficiently
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Mix of resources

Resource mix: the combination of captial and human resources utilised within a business to achieve a required output
Optimum resource mix: the combination of capital and human resources which allows for the greatest efficiency
  

Capital intensive: businesses that rely more heavily upon cap equipment, such as machinery and computers rather than labour
A capital intensive industry is one where the weighting of resources used within operations management is biased towards capital equipment, not labour.

  • Usually typical of manufacturing industries
  • Becoming more so in many service industries nowadays due to development in technology (banks, insurance providers) 

 

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Benefits:

  • Reduction in human error
  • Greater speed and uniformity of output
  • Ease of workforce planning
  • Greater scope for economies of scale

Drawbacks:

  • High initial capital outlay
  • Prone to fluctuations in interest rates (if financed by loans)
  • Lack of initiative 
  • Less flexibility in responding to fall in demand
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Labour intensive: businesses that rely more upon labour/the workforce rather than capital equipment 
A labour intensive industry is one where the weighting of resources used within operations is biased towards labour not capital equipment. 

  • Often found in the service sector where customer interaction with employees is key to the service being provided
  • As a result in the growth of e-retail there has been some sway more towards capital intensive businesses
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Benefits:

  • Provide greater flexibility, especially when staff are multi-skilled
  • Creates employment in the economy
  • More personal response to customer needs
  • Can offer tailor made goods/services to meet individual consumer needs
  • Opportunity for continuous improvement

Drawbacks:

  • Can be prone to labour relation problems such as union action
  • Possible workforce shortages
  • High HRM costs
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