Operational Strategies - Scale & Resource Mix Operational Strategies - Scale & Resource Mix How do companies choose the right ‘scale’ of production?

Economies of scale By the end of this lesson you should be able to… Describe what is meant by economies of scale Explain 3 different examples of economies of scale Discuss why companies can also experience diseconomies of scale

How to do calculate an average? Batting average Goals scored Cost of a haircut in Dorking If the next number is higher / lower what will it do to the average?

1. Economies of scale Arise when unit costs fall as output increases

Economies of scale By the end of this lesson you should be able to… Describe what is meant by economies of scale Explain 3 different examples of economies of scale Discuss why companies can also experience diseconomies of scale

Unit costs formula - reminder Average cost per unit is calculated using this formula: Total production costs in period (£) Total output in period (units)

Economies of scale illustrated Average Cost per Unit (£) Quantity of output Cost Curve AC1 AC2 Q1Q2 Unit costs are falling as output increases from Q1 to Q2 = economies of scale Unit costs are falling as output increases from Q1 to Q2 = economies of scale Unit costs start to rise as output rises above Q3 = diseconomies of scale Unit costs start to rise as output rises above Q3 = diseconomies of scale Q3

Diseconomies of Scale LAC Costs Output Economies of Scale Diseconomies of Scale Minimum efficient scale The level of output at which average cost stops falling as output increases

Minimum efficient scale The output at which average unit costs of production are at their minimum

Internal v External Economies of Scale Arise from the increased output of the business itself Internal Occur within an industry: all competitors benefit External

Examples of Internal economies of scale Buying economies Buying in greater quantities usually results in a lower price (bulk-buying) TechnicalUse of specialist equipment or processes to boost productivity MarketingSpreading a fixed marketing spend over a larger range of products, markets and customers NetworkAdding extra customers or users to a network that is already established (e.g. mobile phones) FinancialLarger firms benefit from access to more and cheaper finance

External economies of scale Arise from the industry as a whole – i.e. all competitors benefit Often associated with particular geographic areas E.g. Creative & media in London Examples Having many specialist suppliers close by Access to research and development facilities Pool of skilled labour to choose from

Diseconomies of scale Factors which cause the average production cost per unit of a business to increase above the efficient level

Economies of scale For your exam the board want you to focus on It is still worth knowing about others to build out your answers and display your wider knowledge! PurchasingSpecialisationTechnical

Examples of diseconomies of scale Poor communication More difficult to control a larger, more complex business More frequent machinery & employee breakdown if output & capacity utilisation is too high Loss of management focus

What about this for scale!

Oasis of the seas What advantages does the stunning scale of the ship offer customers and the operator Royal Caribbean? Are there potential diseconomies of scale?

Quick revision test – 10 mins It’s the last 10 mins of the exam There are two questions left One of them is on economies of scale You have the potential to shift up a grade by just picking up 10 marks