HI5016 International Trade and Enterprise sample
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HI5016:International Trade and Enterprise
Internal Economies of Scale: 4
External Economies of Scale: 8
The progression of globalization has offered various scopes for the business of the 21st century and expansion of the organizations takes place in other countries due to liberalization of trade (McCann & Acs, 2011). There are various advantages that an organization can enjoy when they expand their market in outside countries. One of the advantages for the organization is that they are able to increase the production of the organization when there are a lot of resources which they can obtain after expansion of their organization and thus they are able to gain the advantage of saving the cost of the organization. As stated by Athanassiou (2015), the economies of scale is the process of gaining advantage by the organizations with the help of increasing the organizational production and this can help the businesses to gain advantage by fully utilizing their factors of production which can lessen the cost of production (Athanassiou, 2015). The information related to the economies of scale can be necessary for the purpose of decision making by the organization related to the organizational operations and also this can provide assistance in the process of management of the financial decisions by the organization as well as can help in maiming their production which can help the business towards selling more products in order to gain more revenue. But in this process, the cost or the expenditure of the business can be declined with the help of increasing the production and thus is one of the most advantageous processes of the business. As opined by Polkinghorn (2016), the economies of scale is a long known practice which can be very crucial for the purpose of increasing the business revenue and this process also helps in assisting other business process such as operations (Polkinghorn, 2016).
This report discusses the aspects of internal as well as external economies of scale and the advantage as well as disadvantages that economies of scale have upon the business and it’s far reaching impact as well.
It has been discussed in many researches in the past that when the number of items in the production procedure increases, it can provide decline to the cost of the production. But it is to be remembered that when the scale of economy is increased up to definite point it can provide economies of scale and after that point, the cost of production might again increase or the quality of the products produced can further decline and it is known as diseconomies of scale as stated by Marshall. The economies of scale can be further subdivided into two parts and they are internal scale of economies and external scale of economies.
The internal scale of economy is earned by the business when the organization increases its production and there are various benefits that are attached with the internal economies of scale. The internal scale of economy can be unique for the organization and it can provide advantage of good organization management, specialization of the processes of production as well as techniques and others (Hannah, 2013). The internal economy of scale of an organization is also independent in nature and also do not depend upon the decisions made by the other organizations. As stated by Beccalli et al., (2015) internal economy so scale is related to the increase in the output of the organization and it cannot result in internal economies of scale until and unless the production of the organization increases which has the capability to increase the organization output (Beccalli et al., 2015).
The internal economies of scale can further be divided into two more parts as stated below:
The pecuniary economies as opinionated by Dávila & Korinek (2017) the pecuniary economies are those economies which can be earned when the organization gets the resources of production at a cheaper price or pays les amount of money for the factors of the production (Dávila & Korinek, 2017). This is also applicable in case of the factors of distribution and when an organization gets spends less amount of money for the distribution of their produced goods or bringing in raw materials up to the organization it can decrease the cost of the organization and thus can help in reaching pecuniary economies of scale. This is mostly applicable in case of larger firms as they obtain raw materials from the suppliers at bulk for the production purpose and this can help the to decrease the cost of the organization while producing. Additionally, this is also true when they borrow a huge sum of money from the banks, they can get concession while paying the interests.
According to Celli (2013), pecuniary scale of economy can also be gained when the organization which is multinational in nature contacts the advertisement agencies and they get discount due to the number of ads they publish per year or in a certain period of time (Celli, 2013). This can also help in cost reduction of the organization and thus an economy of scale that is earned by the business is pecuniary in nature.
There are a certain conditions under which this kind of economies of scale can be observed and generally this happens to a large organization that is operating within the industry. According to Carlino (2012) it has been stated in his research that the large firms buys the raw materials in bulk and thus can get discount from the suppliers while they buy the raw materials in bulk and this is monetary gain that can be earned which can result in economies of scale (Carlino, 2012). Also, this is also a true fact that lower interest rates are charged from the firms which are large and various other terms and conditions which works in favour of the organization which can also earn them economies of scale as well. Additionally, the companies which work in the transport division and provide facilities of transportation to the large companies provide discount to these large companies as the large companies has to do large scale handling of the transports. This also works in favour of the large organization as they can gain a huge amount of discount and thus the production cost gets even lowered. Lastly, the ad agencies as well as the newspapers also provides discount to these companies as large organization requires much advertisement for the promotion of their brand and thus these discounts can also help in bringing down the cost of the organization in the production department which can help in gaining EOS (Casadesus-Masanell & Ricart, 2010).
According to Storey (2016), when the physical input quantities are reduced which includes the raw materials, labour as well as capital, it can help in the process of gaining real economies of scale (Storey, 2016). With the help of reduction of these inputs, the organizations are able to make reduction in the cost of the organization when the production amount remains the same or increases and thus can achieve real scale of economy. A variety of ways can be there with the help of which real economies of scale can be achieved that include the following as stated below:
Technical scale of economy:
There is a huge influence of the technical economy upon the size of the organization and this kind of economies are generally enjoyed by the organizations which are large in nature and invests huge amount of money in technical components (Armbruster et al., 2008). The larger firms are able to buy machineries and the technologies which are more advanced in nature and this can help in the process of producing quality products as well as produce more output of products as well. Thus it can be stated that when the larger firms spent their money in buying latest technical machineries, they can gain economies of scale and these technical scale of the economy is further divided into three parts as cited below:
Linked process economy:
The processes that are linked in nature can help the larger organization to save the amount of time which smaller firms spend upon carrying their products from one place to other. The activities of the larger organizations are planned in a way that they are productive in nature and this can help in saving the time as well as the cost of the transportation of the products and services.
Economy of dimension:
The technical economies can also be enjoyed when the firm increases the production scale and with the help of increasing the production of the number of units within the organization, the firm is able to decrease the cost of the average unit production and this can help the firm to gain advantage within the business environment (Hughes & Mester, 2013). This process of gaining economies of scale is depend upon selling the produced units in the market and selling all the units can help in gaining more amount of return which helps in gaining the economies of scale.
Use of by-products economy:
This happens only in the firms which are larger in nature and there are huge amount of by-products which are produced when the production takes place within the organization. The by-products are generally the waste materials that are used by the large organization to create other materials or sell it in the market to gain some income which can save the cost of the organization and thus usage of by-products can help the organization to gain economies of scale through technical processes (Baumers et al., 2016).
Labour scale of Economies:
When there is an expanded scale of economy observed, there can be various amounts of labour economies as well. This kind of labour economies can bring in various forms of inventions and also save the time of the organization when large amount of labour are invested to cut short the tie of production. Also the labours can have diverse range of specialization which can help in cutting short of time of the works which requires specialization of various kinds. A multinational organization or the organizations which are generally large in nature can invest a huge amount of money for labours and the workers are provided with the works in the subjects where they have specialization. Also the human resource manager of the organization from time to time check after the quality of the work of the employees and this can help in ensuring that the employees are performing their work effectively. As Goffee & Scase (2015) has stated that sometimes, trainings are provided to the employees for increasing their efficiency and this can help in the process of time saving while the labours are doing their work as well as it ensures new ideas are gained by the workers while they are working with efficacy (Goffee & Scase, 2015).
Marketing scale of Economies:
After the production scale of a large organization is improved in nature, it can generally enjoy marketing scale of economies as they are able to sale large number of products in the market. The marketing scale of economy consists of economies of advertisement and when the advertisement are of large amount, the ad agencies as well as the newspapers can provide them with the benefits to provide greater amount of ads at lesser costs (Armenter & Koren, 2015). This can also help in the procedure of opening up of newer showrooms as well as create sole distributors and also develop their own R&D facilities. Thus larger organizations are able to increase the quality of their products and services with the help of these new R&D facilities and thus economies of scale can be earned by the larger organizations in their own business environment.
Storage and transportation scale of economies:
A large scale production firm can also enjoy the economies of storage as well as transports. The firms which are larger in nature can have their own storage facilities and also their own transports which can help them in carrying the raw materials form suppliers to the production plants and also can provide assistance in carrying the finished products from the production plants to the warehouses or to the distributors. Thus when the process of the products are down ij the market for the particular product, these items can be stored by the organization and when the prices once again goes up, they can sale them same and earn high amount of revenue which helps in earning economies of scale (Atack, 2018).
Managerial scale of economy:
This kind of economies signifies the procedure of accurate management of the firms that produces in larger amount and also refers to the fact that it helps in production at managerial costs. According to Lopez-de-Silanes et al., (2015), the works under these economies of scale in an organization is further divided into various parts and the concept of sub department comes into the act (Lopez-de-Silanes et al., 2015). There are managers in every department who keeps the minute details of every works going on in the department and each expert of the departments are trained to reduce the organizational costs by reduction in the amount of wastage and also helping the organization by ensuring that very work is achieved at time. By reduction of the wastage, the experts or the managers ensure that the production cost is lessened and this can be gained with the help of management specialization.
According to Mukherjee (2010), the economies of scale which are external in nature refer to those benefits which can be gained by the organization by functioning in the industry in which it operates (Mukherjee, 2010). This kind of economies can be gained by an organization when the government of the country expands their lending hand to the industry as well as this can happen due to the expansion of the industry. Lokshin et al., (2008) has opinionated that the external economies of scale can be enjoyed when by several number of organization and also by all the firms which works in the same industry which is going through a phase of economies of scale (Lokshin et al., 2008). This is due to the fact that the production scale of any industry might increase and this can provide any firm to enjoy an external economy of scale. One of the best instances of the external economies of scale can be drawn from the coal industry and it can be said that when the production scale purpose of an organization contains an implied variable than the industry output. There are three of the following parts in which the external economies of scale can be divided into as cited underneath:
Disintegrated economies of scale:
When there is development in an industry, the organizations that works in the industry decides to divided the functions as well as subdivide it into groups so that every organizations can specialize in something which is diverse in nature. For instance it can be said that in a motorcycle industry, there are different parts produced by different organizations and some organizations might specialize in building chassis, while some other organizations might specialize in building chain for the motorcycle where it might earn the economies of scale. The economies of disintegration are of two types which include vertical disintegration and horizontal disintegration (Bonn, 2017).
The horizontal disintegration is the procedure when the organization which exists in the industry focuses upon one product, while in vertical disintegration; the focus is maintained upon diverse range of products. When the excess materials or the by-products of one organization is used by another organization within the same industry it can produce economies of scale. The firms which are in the production division in the higher chain of supply uses their by-products to sale those to organization which are in the lower division of the chain and thus realises the costs of the business which can produce economies of scale.
Concentration economies of scale:
Holtz-Eakin & Lovely (2017) stated that when there are large number of firms that operates in an area there are some of the benefits that are enjoyed by the firms and the first and foremost among them is that the transportation as well as communication facilities can be enjoyed at a lower cost (Holtz-Eakin & Lovely, 2017). Further, it can also be said that the raw materials are also available at lower cost than that of the normal. Lastly, the R&D facilities that are offered by other firms are at lower cost to the organization and the banks will also provide their loans at lower rate of interest which altogether works towards gaining the organization economies of sales due to concentration of the firms in a particular area.
Information economies of scale:
It is a true fact that an increase in the number of firm in the economy of a country makes the firm inter dependable upon each other and it can be stated that they are not required to conduct researches individually in order to gain information. Lăzăroiu (2015) has opined that there are many journals which are published upon the same topic and thus it can help an organization to save the cost of the organization on R&D and this can help in the process of gaining advantage in terms of information economies of scale (Lăzăroiu, 2015). The newer markets which are explored by the firms already have lost of information relate to the availability of the labours as well as raw materials and also information which are related to the production techniques which are latest in nature.
Thus, as per the above argument, it can be stated that economies of scale is a very significant topic for the businesses in the 21st century which can help in saving the cost of the organization so that they are able to gain advantage over their competitors. Most of the organizations at the present days focus upon decreasing the cost of the organization which can increase the revenue and the economies of scale provide the right path to the organization for decreasing the organizational cost with the help of which the competitive advantage can be gained by the organization. Furthermore, the internal economies of scale as well as scale of external scale of economies also play a determinable role which can help the organization to take the benefit form the internal as well as from their external business environment (Jones & Kalmi, 2012). Along with the cost reduction, the internal and external economies can also act towards providing the organization with or information related to the industry which can help the organization to avoid conducting further research and launch products which can satisfy the organization by increasing their production through gaining economies of scale.
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