Chapter 26 : Location and scale
Topic:26.2 Scale of operations
Pre assessment
1. What is the primary reason large businesses receive purchasing economies of scale?
A) They produce higher-quality goods
B) They receive discounts for bulk buying
C) They have fewer competitors
D) They avoid advertising costs
2. Which of the following is an example of a technical economy of scale?
A) Hiring more employees to improve efficiency
B) Using advanced machinery to reduce unit costs
C) Expanding into new international markets
D) Spending more on advertising campaigns
3. Why do large businesses often get financial economies of scale?
A) Banks charge them higher interest rates
B) They have lower fixed costs
C) They can raise funds more easily at lower costs
D) They avoid financial regulations
4. Which of the following is a cause of internal diseconomies of scale?
A) Improved worker motivation
B) Poor communication due to company size
C) Increased economies of scale
D) Bulk purchasing discounts
5. How can businesses reduce the impact of diseconomies of scale?
A) Avoid hiring specialist managers
B) Use a decentralized management structure
C) Increase the number of management layers
D) Expand into as many industries as possible
Answers
1. B
2. B
3. C
4. B
5.B
Introduction
•The scale of operations varies greatly between businesses.
•Small businesses may be run by a single person.
•Large multinational corporations have sales exceeding the GDP of some countries.
Factors Influencing Scale of Operations
•Owners’ Objectives: Preference for a small, manageable business.
•Capital Available: Limited capital restricts growth.
•Market Size: A small market limits production scale.
•Competition: High competition reduces individual firm market share.
•Economies of Scale: Industries with large economies of scale tend to have bigger firms
Increasing the Scale of Operations
Increasing the Scale of Operations
•Expansion requires investment in land, buildings, equipment, and labor.
•This is a long-term strategic decision with significant costs.
•The process is called an increase in the scale of production.
Internal Economies of Scale
•Cost benefits that arise due to business expansion.
•Essential in industries like oil refining and soft drinks production.
Purchasing Economies
Technical Economies
Financial Economies
Marketing Economies
Managerial Economies
Types of Economies
Purchasing Economies (Bulk Technical Economies
Buying)
•Large businesses can afford advanced production
•Large firms receive technology.
substantial discounts for bulk
orders. •Flow production lines reduce unit costs.
•Suppliers prefer dealing with •High fixed costs spread over a large output lower unit
large customers. fixed costs.
•Specialist buyers help secure
the best prices. •Indivisibility of equipment: some machinery cannot be
bought in smaller, cheaper versions
•B2B e-commerce facilitates
cost-effective bulk purchases
Financial Economies
•Large businesses have better access to
finance. Types of Economies
•Banks offer lower interest rates due to
reduced risk.
•Public limited companies (PLCs) can raise Managerial Economies
funds through share issues.
•Larger businesses can afford specialist managers.
•The cost of issuing shares is lower per unit for
large-scale issues. •Small businesses rely on general managers
Marketing Economies handling multiple functions.
•Marketing costs increase but at a lower rate
than sales. •Specialization leads to efficiency and fewer
mistakes.
•Small businesses still need a sales force and
promotional campaigns. •Example: Sole traders vs. large firms with HR,
•Costs can be spread over a larger sales finance, and operations managers.
volume.
Internal Diseconomies of Scale
As businesses grow too large, they may face inefficiencies and rising costs.
•Communication Problems:
• Poor communication of feedback from workers.
• Overuse of non-personal communication.
• Message distortion due to long chains of command.
•Alienation of Workforce:
• Workers feel insignificant and demotivated.
• Flow production methods may lead to dissatisfaction.
• Job enrichment techniques can help mitigate this.
•Poor Coordination:
• Complex structures create difficulties in management.
• Ethical inconsistencies across divisions can damage reputation.
• Duplication of research leads to inefficiencies.
How Ethical Inconsistencies Can Occur:
How Ethical Inconsistencies Can Occur:
•Fair Lending Practices (Retail Division): One division may follow strict ethical guidelines,
ensuring fair loan approvals for customers.
•Fraud Scandal (Investment Division): Another division may engage in unethical practices,
such as insider trading or misleading investors.
Duplication of research occurs when multiple teams, departments, or organizations conduct
similar or identical research without coordination. This redundancy leads to wasted
resources, delays, and missed opportunities for innovation. Two tech companies
unknowingly develop similar battery technologies, but neither benefits from each other’s
breakthroughs, delaying industry-wide improvements.
Solutions to Diseconomies of Scale
•Management by Objectives:
• Setting clear goals for each division ensures alignment.
•Decentralisation:
• Gives autonomy to business units, reducing complexity.
• Only strategic decisions are centralized.
•Reduce Diversification:
• Focusing on core activities minimizes coordination challenges.
• Demergers can help improve efficiency.
External Economies and Diseconomies of Scale
•External Economies of Scale: refer to cost savings that benefit all businesses within an
industry due to external factors, such as industry growth or geographic clustering. These
cost advantages arise from factors outside an individual firm’s control.
• Industries clustering in regions benefit from shared labor and suppliers.
• Example: Silicon Valley (USA) and Bengaluru (India) for IT firms.
•External Diseconomies of Scale:
• Growth in one location increases demand for resources.
• Higher property prices and labor costs raise unit costs.
The impact of other business strategies on ratio results
Calculation of Inventory turnover
