Objectives of growth - Economies of scale 3.2.1
Internal economies of scale - The cost savings that can come about from the growth of the business itself e.g. as it increases the scale of its current operations this leads to a fall in unit costs.
External economies of scale - The cost savings that come about from growth outside a business but within the market or industry in which it operates. All competitors benefit
Growth - A common corporate objective which means expanding the sales revenue of a business, probably in the hope that profits will increase too.
One reason for a business wanting to grow it to achieve economies of scale. By growing the scale of output, a business can achieve lower unit costs which can thereby improve a firm's competitiveness.
E.g. The major grocery supermarket chains are able to obtain much lower prices from key suppliers than smaller independent retailers - due to volume of demand they provide to those suppliers. This gives supermarkets a significant cost advantage.
Technical = The use of specialist equipment or processes to boost productivity leading to a fall in average costs. Therefore, fixed costs are spread over a greater level of output and the businesses competitiveness is increased.
E.g. As firms grow, they are often able to invest heavily in automation in order to further improve their efficiency and productivity. Capital-intensive and automated production can provide firms with a significant unit cost advantage over smaller firms as well as creating a tough barrier to market entry.
Managerial = When specialist managers can be employed to help reduce unit costs and boost efficiency, which leads to a fall in average unit costs.
E.g. Smaller firms are often unable to afford managers with specialist expertise (such as in finance, HR, marketing) . As a firm grows it is better able to bring in specialist managerial expertise which should enable it to be more efficiently run.
Cooperation = Greater cooperation between businesses within the same industry and region resulting in greater efficiencies. This could be in the form of networking groups or joint projects such as funding research and development which can all lead to a sharing of expertise also.
Support services = The benefits enjoyed when additional services that specialise in a particular industry locate near to the industry of your business. Specialist services can include banking, insurance, waste management etc. It can also be a smaller scale, where the small business can start to help the big business by supplying to them but also reap rewards as they are able to become a supplier.
External economies of scale - The cost savings that come about from growth outside a business but within the market or industry in which it operates. All competitors benefit
Growth - A common corporate objective which means expanding the sales revenue of a business, probably in the hope that profits will increase too.
One reason for a business wanting to grow it to achieve economies of scale. By growing the scale of output, a business can achieve lower unit costs which can thereby improve a firm's competitiveness.
Unit costs = Total production costs in period (£) / Total output in period (units) = £?
How can economies of scale provide a Competitive Advantage?
The main types of Internal economies of scale are:
- Purchasing
- Technical
- Managerial
E.g. The major grocery supermarket chains are able to obtain much lower prices from key suppliers than smaller independent retailers - due to volume of demand they provide to those suppliers. This gives supermarkets a significant cost advantage.
Technical = The use of specialist equipment or processes to boost productivity leading to a fall in average costs. Therefore, fixed costs are spread over a greater level of output and the businesses competitiveness is increased.
E.g. As firms grow, they are often able to invest heavily in automation in order to further improve their efficiency and productivity. Capital-intensive and automated production can provide firms with a significant unit cost advantage over smaller firms as well as creating a tough barrier to market entry.
Managerial = When specialist managers can be employed to help reduce unit costs and boost efficiency, which leads to a fall in average unit costs.
E.g. Smaller firms are often unable to afford managers with specialist expertise (such as in finance, HR, marketing) . As a firm grows it is better able to bring in specialist managerial expertise which should enable it to be more efficiently run.
The main types of External economies of scale are:
- Expertise
- Cooperation
- Support services
Cooperation = Greater cooperation between businesses within the same industry and region resulting in greater efficiencies. This could be in the form of networking groups or joint projects such as funding research and development which can all lead to a sharing of expertise also.
Support services = The benefits enjoyed when additional services that specialise in a particular industry locate near to the industry of your business. Specialist services can include banking, insurance, waste management etc. It can also be a smaller scale, where the small business can start to help the big business by supplying to them but also reap rewards as they are able to become a supplier.
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