26.2 Scale of operations

Factors influencing scale of operations

1. Business objectives: some owners might want to keep the business small
2. Capital available: smaller firms tend to lack finance in order to increase output etc.
3. Competition: if there are many rivals in the market, increasing scale of operations will be difficult
4. Size of the market: a very small market will not require large scale production
5. Scope for scale of economies

Internal economies of scale

1. Purchasing economies: bulk buying can bring in discounts from suppliers
2. Technical economies: flow-production lines and increase productivity and lower costs per unit
3. Financial economies: banks are more likely to lend a big business with a proven track record and a diversified range of products. Interest rates charged to these firms may be lower.
4. Marketing economies: costs can be spread over a higher level of sales for a big business and this offers a substantial economy of scale.
5. Managerial economies: Business expansion provides finance to be able to employ specialist functional managers who should operate more efficiently than general managers.

Internal diseconomies of scale

1. Communication problems: this includes poor feedback, distortion of messages, communication overload and an extensive use of non-personal communication media
2. Alienated workforce: lack of purpose, significance and remoteness can decrease motivation
3. Poor coordination: more complex organizational structure, with more departments, divisions and products leads to difficulties in coordination with all these separate divisions. One 'mistake' in one department can influence the whole business

Ways businesses combat diseconomies of scale

1. Management by objectives: giving each division and department agreed objectives
2. Decentralization: divisions a considerable degree of autonomy and independence. Problem: decentralized business units must avoid pursuing conflicting objectives as this results in poor coordination
3. Reduce diversification: a less diversified business that concentrates on core activities may help to reduce coordination problems

External economies of scale

1. Pool of qualified labor
2. increase the supply of suitable employees
3. network of suppliers = lower component costs.
4. easier to arrange cooperation and joint ventures when the businesses are located close to each other.