2 Content Economies of scale: Diseconomies of scale Capacity utilisation Internal economiesExternal economiesDiseconomies of scaleCapacity utilisationCapital vs labour intensityResearch and developmentCritical Path Analysis
3 Economies of ScaleThese occur when mass producing a good results in lower average cost.Average costs fall per unit – Average costs per unit = total costs / quantity producedEconomies of scale occur within an firm (internal) or within an industry (external).
4 Internal and External Economies Internal Economies of ScaleAs a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more cheaply.External Economies of ScaleAre those shared by a number of businesses in the same industry in a particular area.
5 Types of internal economy of scale Example Production / Technical EconomiesLarger firms can use computers / technology to replace workers on a production lineMass production lowers cost per unitLarge scale producers can employ techniques that are unable to be used by a small scale producer.Able to transport bulk materials.Purchasing / Marketing EconomiesAdvertising costs can be spread across productsLarge businesses can employ specialist staffBulk buying – if you buy more unit cost fallsFinancial EconomiesLarger firms have better lending terms and lower rates of interestEasier for large firms to raise capital.Risk is spread over more products.Greater potential finance from retained profits.Administration costs can be divided amongst more productsManagerial EconomiesMore specialised management can be employed, this increases the efficiency of the business decreasing the costsRisk-bearing Economieslarge firms are more likely to take risks with new products as they have more products to spread the risk over
6 External Economies of Scale These are advantages gained for the whole industry, not just for individual businesses.
7 Examples of External Economies As businesses grow within an area, specialist skills begin to develop.Skilled labour in the area – local colleges may begin to run specialist courses.Being close to other similar businesses who can work together with each other.Having specialist supplies and support services nearby.
8 Diseconomies of Scale Occur when firms become too large or inefficient Average costs per unit start to rise
9 Diseconomies of Scale Types of diseconomy of scale Example CommunicationWhen firms grow there can be problems with communicationAs the number of people in the firm increases it is hard to get the messages to the right people at the right timeIn larger businesses it is often difficult for all staff to know what is happeningCoordination and control problemsAs a business grows control of activities gets harderAs the firm gets bigger and new parts of the business are set up it is increasingly likely people will be working in different ways and this leads to problems with monitoringMotivationAs businesses grow it is harder to make everyone feel as though they belongLess contact between senior managers and employees so employees can feel less involvedSmaller businesses often have a better team environment which is lost when they grow
10 Capacity UtilisationThis looks at the amount a firm is producing compared with how much it could be producing given existing resourcesTo increase capacity utilisation can increase production levelsNeed to ensure there is demand for the excess production
11 Capacity utilisation If produce more need to increase demand by: Increased promotionAltering elements of the marketing mix to increase demandProducing products for other firms (sub contracting)
12 RationalisationWhere firms are producing under capacity however don’t foresee an increase in demand they will reduce production to cut costs
13 Capital Vs labour intensity Capital intensive businesses are where there is a high level of capital equipment compared to labour input in the production processLabour intensive businesses are where there is a high level of labour input compared to capital equipment in the production process
14 Research and Development All activities that look at identifying new products / services and new ways of producingNeed to be able to turn the ideas into products that can be soldInnovation – where new ideas are turned into products
15 Research and Development - Aims To develop new products which have USPs allowing for product differentiationIncreasing the quality of products to increase customer satisfactionTo develop more effective ways of producing to decrease costs per unitThese can all increase the profitability of the business
16 Research and development process The research and development process:Idea generationScreening of ideasDevelopment of ideasPrototype and testingLaunch
17 How to protect innovations If a business is successful with innovation needs to protect them from competitionA patent gives the holder sole use of a process / sole manufacture of a product for the next 20 yearsCopyright protects the work of artists / writers and musicians
18 Research and development and the PLC Research and development happens before the introduction phase of the product life cycleResearch and development is very expensive so can often cause cash flow problems prior to the launch of productsAfter launching a product businesses need to do more research and development to modify the product or bring out a new product to increase demand and profit
19 Research and Development If research and development is good then it considers design issuesIn addition it needs to look at :Customer needsUse of product / serviceCompetitors productsEase of manufactureCosts / quality / profit targets
20 Research and Development and Risk All research and development contains an element of riskTherefore businesses need to ensure that research and development minimizes risk to get required resultsCant guarantee the success of innovations however firms can try and encourage and support research and development
21 Why use CPA?Critical Path Analysis is a planning and management tool with the following advantages:Allows a business to plan ahead- efficiencyIs time related giving an accurate planEnables resources to be planned aheadAllows for good managementHelps with cash flow managementReduces waste
22 Critical Path Analysis May be used as part of the decision making process to allow a business to plan and monitor operationsTime related – identifies the maximum time for an operation to be completedIdentify potential problems in implementing operationIdentifies where and when resources (including human ones) are needed
23 Critical Path Analysis AdvantagesMaximise efficiency in the use of timeImprove efficiency and generate cost saving in the use of resourcesBeneficial to monitoring cash flowDisadvantagesUsefulness may be limited in complex and large scale operationsNecessity of having clear and reliable informationSkilled management and team philosophy is essential
24 CPA – the ProcessIdentify and prioritise the activities and how long each task will take to doIdentify which activities MUST be done before othersEST – identify earliest start timeLFT – identify latest finish timeIdentify the FLOAT – tasks which can be completed outside the critical pathIdentify the critical path – points connecting ESTs and LFTs (where these are the same)
25 Critical Path Analysis Earliest Start Time (EST)Arrows indicate the order of the tasks, the letter above shows the order, the time period below the arrowNode numbers showing order of activities in the left hand semi-circle of each node.12A5B355The Critical PathLatest Finish Time (LFT)Nodes: Show the start and finish of a task
26 SummaryEconomies of scale are were costs per unit decrease as a firm grows in sizeInternal economies are specific to one firm as it grows in size e.g. technical, purchasing, marketingExternal economies involve a number of firmsDiseconomies of scale occur when the firm experiences a rise in unit costs as the firm grows e.g. communicationCapacity utilisation measures how much of the production capacity is used by the organisationCapital intensity is where production is most reliant on capitalLabour intensity is where production is most reliant on labourResearch and development is where businesses come up with new ideas for products and processesCritical Path Analysis is a planning and management tool