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Chapter 12: Operational Strategies: Scale and Resource Mix
Choosing the right scale of production
Economies of scale
- Fixed costs must be paid, regardless of the number of units that an organisation produces and sells
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- Variable costs can be combined more effectively in a large firm, also leading to a saving in unit
costs
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Technical economies
- Modern equipment that will improve efficiency can be installed
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- Mass production (flow) techniques can be employed to improve productivity
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- Large-scale transportation can reduce distribution costs per unit
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- Improvements in communication systems using new technology can enhance customer service and
the working environment, improving the company’s operations and its reputation
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In smaller organisations, staff tend
to take on a wider variety of tasks, and specialist skills when needed, are brought from outside at a
relatively high price
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- Small firms are unlikely to be able to pay a high enough salary to attract the best staff, so larger
firms should be more efficient
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Purchasing economies
- Large firms can buy in bulk
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- Suppliers may offer greater discounts in order to guarantee a contract with a large customer
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- This can both increase effectiveness of advertising and reduce unit costs
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Financial economies
- Large firms should be able to get loans more easily and at lower rates of interest
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g
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Research and development economies
- Large companies can afford to devote more money to innovation and research and development
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Social and welfare economies
- Larger companies are able to provide social facilities such as sports clubs
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- Will make it easier to recruit workers and should improve morale among existing staff, leading
to a more highly motivated workforce with lower levels of absenteeism and a lower rate of labour
turnover
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- These economies should reduce the overheads of the business and thus improve its
competitiveness
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Coordination diseconomies
- May be a loss of control by management as an organisation becomes more complex, particularly if
the organisation becomes more geographically spread or management experiences an increasing
workload
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- Large firms often have more rigid and inflexible economies
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- Difficulties also occur as spans of control widens, it becomes much more difficult for managers to
meet with subordinates
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- Employees who do not receive, or are not involved in, communications may feel unvalued and
demotivated
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Even if motivational methods are used,
it is less likely that managers will know the best approach for each subordinate
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- Large hierarchies create feelings of distance between decision makers and employees
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Other diseconomies of scale
- TECHNICAL DISECONOMIES: production on a very large scale can become difficult to organise
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- STAFF PROBLEMS: industrial relations problems are higher staff turnover and absences may result
from factors described above
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Choosing the optimal mix of resources: capital and labour intensity
- Four resources used to produce outputs though the transformation process are: enterprise; land;
labour and capital
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Factors influencing the choice between capital-intensive and labour-intensive production
The method of production
- A mass production on a large scale requires capital equipment i
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machinery
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- If products are specifically designed for the consumer, labour-intensive methods are more likely
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The skills and efficiency of the factors of production
- A business that depends on the skill of workers is more likely to use labour-intensive methods
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Relative costs of labour and capital
- Labour is relatively expensive in Western Europe as compared to other parts of the world
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- In other parts of the world, labour is much cheaper to use, so production lines are more labour
intensive
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- Unreliable equipment may encourage firms to choose labour-intensive production
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- As a consequence, these firms will choose labour-intensive production
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The customer
- If customers want personal contact, this may limit the scope for capital intensity

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