Operational Strategies: scale and resource mix

Operational Strategies: scale and resource mix

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Scale of operation

The size of an organisation will directly influence its ability to operate efficiently.

Most efficient post is optimum output, at this point average cost of production will be at its lowest.

Before a firm reaches optimum output it will be benefiting from economies of scale.

Once optimum output is reached and then exceeded, further growth will start to cause diseconomies of scale.

 Economies of scale: the benefits enjoyed by a firm as a result of operation on a large scale, leading to a fall in   average costs.

 Economies of scale present businesses with a competitive advantage and , can act as a barrier to entry of smaller firms who cannot manage to compete or achieve sufficiently low average costs.

Diseconomies of scale: the disadvantages experienced by a firm as a result of operating beyond optimum output, leading to a rise in average costs.

often qualitative in nature and therefore be difficult to measure their exact impact. 

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Purchasing & Technical Economies

Purchasing economies: benefit of buying on a large scale leading to lower average costs from 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 costs.

Technical economies: ability of larger firms to buy technically advanced equipment and spread the cost over a larger number of units.

Because the cost is spread over a larger number of units, the average cost is lower.

Ability to invest in such equipment allows the firm to operate more efficiently and possibly provide a more advanced and better quality product.

May also lead to a further saving as new machinery may reduce the number of workers required

This will affect the resource mix. 

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Specialisation

Specialisation: the ability to employ specialists, e.g. accountants, and for staff to focus on one particular area or function.

They will know more about the actual needs of the business and will by cheaper than having to buy in the help of a consultant or services of an external professional

Can also refer to the ability to adopt greater divisions of labour.

As the number of employees grows they can focus on one particular task and become more efficient at that task due to specialisation.

In smaller organisations workers may have to take on several roles and fail to become a specialist in any of them.   

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Communication diseconomy

Communication diseconomy: the breakdown in effective communication resulting from an increase in size of operations.

Effective communication is crucial to the smooth running of an organisation so, rather than allow for failure in communications, businesses will normally opt to invest in more sophisticated channels of communication.

An additional problem with communication may occur if the business takes on a multinational dimension.

Leads to issues with language barriers, cultural differences and time zones.


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Coordination diseconomy

Co-ordination diseconomy: the breakdown in effective coordination resulting from an increase in size of operations.

Difficult to ensure that all workers are working towards the same objectives and that jobs are being carried out efficiently.

Managers may find it difficult to motivate or delegate responsibility to them.

May be a major factor contributing to the success or failure of mergers and takeovers.

Often, after a merger has taken pace, a period of rationalisation is needed in order to reduce duplication of job roles and focus all employees on the new structure, work practises and objectives. 

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Mix of resources

Resource mix: the combination of capital and human resources utilised within a business to achieve the required output.  

Resources include the people, equipment, data and facilities used to meet the quality and delivery requirement of the customer.

Performance can be improved by optimising the value obtained from the mix of these resources or by altering the resource mix in order to optimise return.

Optimum resource mix: the combination of capital and human resources which allows for the greatest efficiency.

Will have to be achieved within the constraints of a budget. 

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Capital intensive

Capital intensive: businesses that rely more heavily upon capital equipment, e.g machinery and computers rather than labour.  

Benefits and drawbacks of operating a capital intensive industry:

Benefits

Drawbacks

·         Reduction in human error

·         Greater speed and uniformity of output

·         Ease of workforce planning

·         Greater scope for economies of scale

·         High initial capital outlay

·         Prone to fluctuations in interest rates (if financed by loans)

·         Lack of initiative, i.e. Introducing Kaizen ideas

·         Less flexibility in responding to a fall in demand.

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Labour intensive

Labour intensive: businesses that rely more heavily upon labour, ie. The workforce rather than capital equipment.

Often found where customer interaction with employees is ey to the service being provided. E.g. hotels and retail

Benefits and drawbacks of operating a labour intensive industry

Benefits

Drawbacks

·         Provide greater flexibility, especially if staff are multi skilled

·         Creates employment in the economy

·         More personal response to customer needs

·         Can offer tailor made goods or services to meet individual consumer needs

·         Opportunity for continuous improvement

·         Can be probe to labour relation problems, e.g. union action

·         Possible workforce shortages

·         High HRM costs.

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