Project Analysis

4. MARKET AND DEMAND ANALYSIS

(PROJECT PREPARATION)
Introduction:
When project analysis has failed to anticipate the outcome of a project investment, a common reason
appears to have been simply poor preparation of the analysis. Practice has shown that as a bitter
consequence of poor project preparation too many industrial projects suffer in terms of:

Low capacity utilization

Heavy costs overruns

Deteriorated financial profitability

Lingering illness or the sudden death syndrome

Overestimated returns

Underestimated costs

Omission of a necessary component

Optimistic projection (Yield, date)

Failure to consider the variability of climate

Optimistic calendar for implementation

Underestimated costs are common, either as a result of the analysts being systematically optimistic
about cost or making an especially poor estimate about the cost of particular component.

Sometimes a component necessary for proper functioning of the project or an activity critical to
the project is omitted from the cost estimates.

Excessively optimistic projections frequently are made during project preparation. (Areas to be
brought under cultivation, yields, rates of increase in livestock, population in the area).

In agricultural projects often there is a failure to consider explicitly the variability of the climate
and thus overestimate returns.

Too optimistic a calendar for project implementation the analysis often does not test the effect on
the project return of delay in getting the project underway.

Overestimated returns from investment because sometimes the analysis fails to account for an
adverse effect of the investment on production either in the project area or elsewhere. (Irrigation)

Therefore, survival aid granted to sick industries poses heavy budgetary burdens in the form of subsidies
and from the macro economic point of view it implies miss allocations and ultimately severe losses of
scarce resources.
Thus, in order to design and analyze effective projects, those responsible must consider many aspects that
together determine how remunerative a proposed investment will be. All aspects are related. Each touches

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on the others, and a judgment about one aspect affects judgments about all others. All aspects must be
considered and reconsidered at every stage in the project planning and implementation cycle.
A major responsibility of the project analyst is to keep questioning all the technical specialists who are
contributing to a project plan to ensure that all relevant aspects have been explicitly considered and allowed
for.

1.

A feasibility study should arrive at definitive conclusions on all the basic aspects of a project after
considering various alternatives.

2.

The objective of a full feasibility study is to provide a basis for a final investment decision. Therefore
it should define all project features as precisely as possible.

3.

On the other hand a feasibility study should be detailed and precise enough to enable decisions to be
taken for instance on project financing.

4.

Moreover, the description of the project components should be refined enough to permit the executing
agencies to use the study as a guide for project implementation.

5.

Project planning is an interdisciplinary activity involving engineers, economists, and specialists in

areas such as agronomy, soils, geology, hydrology, manufacturing, processing, extension and
management. It is becoming more and more frequent to consult also sociologist.

However, it is worth mentioning that feasibility studies are not always free from vested interests. Those
who commission studies, for example,
-

Governmental institutions

Investment promotion organizations

Development banks as well as

Private companies, etc are facing the problem of receiving objective and neutral expertise.

However, those supplying and offering feasibility studies such as

-

Consulting firms

Industrial Enterprises

Turn key contractors, and

Equipment suppliers could have more or less strong self interest sometimes. That is why there
are so many White Elephant, projects, completely unprofitable and wasting away. Therefore,
one should have a sharp eye on the crucial aspects of a feasibility study.

Moreover, it is not only necessary to have a professional interdisciplinary team work, but it is also
indispensable to link all planning activities even at the identification and pre feasibility stage as early as
possible with all parties, which may be involved in the project.

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4. Market And Demand Analysis

4.1 The Role of Market Analysis in a Feasibility Study
Market research is a special stage in the feasibility study. Market research usually ranks top in the
sequence of the core chapters of a feasibility study.
a)

Engineers, financial analysts as well as Economist, who have to calculate the socio economic costs
and benefits of a project, can only start their job, if the market analyst has finished his part and has
delivered a sales forecast and market strategy to his colleagues. They all depend on these information,
which have a strong impact for instance on:
-

capacity planning,

technology selection,

staffing the sales,

promotion and service department

working capital and

financial planning.

b) In addition they rely on the quality of the market analysis, since their calculations can easily turn out to
be waste of time, if the demand and sales forecast has to be revised.
c)

Moreover, market analysis is obviously more ambitious and risky in comparison to the other parts of a
feasibility study, as it has to fight with the future. The projection of future demand and expected sales
needs a by far deeper Look in to the Crystal ball. Market research needs imagination, creativity and
feeling.

d) The marketing demand and sales forecast is necessarily subjective and vague, since, in the final end
-

It has to deal with the behavior of human beings;

It has to assume how customers respond to the taste, smell and to all the properties of the
product, to the design, packaging, labeling and not to forget to the price.

e)

Market research definitely cannot provide in certainty, particularly if we take into account a projects
total life span of 10 15 years.

In most cases, the first step in project analysis is to estimate the potential size of the market for the product
proposed to be manufactured (or service planned to be offered) and get an idea about the market share that
is likely to be captured. Put differently, market and demand analysis is concerned with:
a)

Likely aggregate demand for the product

b)

The possible market share for the product.

Given the importance of market and demand analysis, it should be carried out in an orderly and systematic
manner. The key steps in such analysis are as follows;

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Situational analysis and specification of objectives

Collection of secondary information

Conduct of market survey (primary information)

Characterization of the market

Demand forecasting

Market planning

The first stage in preparing the feasibility study comprises the estimation of size, composition and
development trends of demand for the product or products, careful analysis of determining variables and
their market environment, demand forecast and the ultimate goal of the procedure: Sales volume and
revenue projections.
Once the sales projections are available, a detailed production program should be prepared showing the
various production activities and their timing. The final step at this stage is to determine the plant capacity
taking into account alternative levels of production, investment outlays and sales revenue.
The extensive and careful analysis of past, present and future demand for the product to be produced,
together with market, institutional and political forces influencing demand and sales of the product in
question is of crucial importance to the success of the entire project:
Estimates of sales revenue will, at a later stage of feasibility study, be the basis for evaluation of
alternatives and final decisions regarding:
-

Production program

Plant capacity

Material and inputs choice

Location

Financial evaluation

Ultimate marketing strategy

The production program is primarily dependent on projected sales. It is also obvious that expected sales
would form one of the important determinants of plant capacity decision. The same is true for decisions on
materials and inputs, being the consequence of production program.
Proximity to the main markets and existing transportation facilities will, among other consideration, affect
the choice of plant location, particularly for bulky and/or perishable products.
All measures of financial evaluation of projects feasibility are based on estimates of costs and revenues.
Thus, an inaccurate or wrong demand and sales projection, being the result of careless and lighthearted

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attitude towards demand and market analysis, may lead to ultimate project failure despite all the financial
analysis showing the project to be perfectly viable on paper.
Demand and Market analysis is therefore the first screening stage in the feasibility study, at which
projects that cannot expect satisfactory market acceptance shall be rejected. Therefore, it is much easier
and cheaper to screen the project at this stage than to have it rejected by the market.
The practice of feasibility study preparation is largely an iterative procedure and therefore involves a
number of back and - forth steps. The final sales projection cannot be made without a decision on
specific price level, and this in turn cannot be made prior to analysis of production costs and break even
analyses, which will be conducted at the later stage.

4.2 Major Dimensions of the Demand and Market Analysis

The general list of major dimension of the demand and market analysis should cover the following aspects:

1.

2.

3.

4.

5.

General Characteristics of the Economy:

-

Economic potential

Production structure

Foreign trade

Economic policy

Product
-

Characteristic features

Substitutes and complementary goods

Demand
-

Sales and orders

Buyers characteristics

Demand determining factors

Purchasing power

Supply
-

Supply potential

Local production

Imports and exports

Competitors position

Marketing environment (marketing strategy, marketing mix)

-

Price levels and tendencies

Distribution channels

Physical distribution network

Promotion

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6.

Legal and political environment

4.2.1. General Indicators of the Economy

The general indicators of economic potential and activity are necessary in order to put further, more
detailed, considerations in the proper framework.
The level of economic welfare and dynamics of economic development will serve as an important indicator
of the character and intensity of demand. The existing production structure and trends in these structures
changes may suggest present and potential classes of products required in the market, their technical
advancement and quality.
The same is true for foreign trade analysis, which also, or perhaps first of all, will indicate the countrys
openness to the outside world. In case of export market analysis a number of problems concerning
market accessibility, together with specific terms and conditions of operating in the foreign market, freight
and insurance aspects as well as terms of delivery and payment should be added to the list.
The economic policy analysis will show the level of government support and protection that local
producers may expect to enjoy.

4.2.2. Product
The product to be marketed should be introduced covering all its properties and characteristics, advantages
and disadvantages types and qualities.

Moreover, information about substitutes and complementary

products provide valuable inputs for the marketing strategy to be designed or for demand and sales forecast.
A clear awareness of which group the projects product belongs to is necessary to define the scope of
demand and market analysis and to understand the characteristic features of the analyzed market.
National Markets, which are the most typically used geographic dimension of the study, are almost never
homogenous. After analyzing the total market, its segmentation should therefore be performed, that is a
number of sub markets (segments) should be distinguished, characterized by greater homogeneity with
respect to features significant from the point segment members market responses:
Consumers differ often markedly in:
-

Incomes

Demographic features

Sociological and

Psychological features

Therefore, effective market segmentation will:

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-

Help to understand better market behavior and responses

Enable the concentration of efforts on promising market segments

Enable the fine turning of marketing strategy to the needs of target segments

Increase total sales, reduce costs and step up profits

The most typical variables, by which markets can be segmented are:

Geographic:
-

Administrative regions

Geographic regions

Climate

City size

Rural district size

Socio Economic:
-

Income

Age

Sex

Occupation

Education

Family size

Religion

Nationality

Social class

Culture

Personality and behavior:

-

Life style

Leadership

Ambition

Buying motive

Service sensitivity

Promotional sensitivity

Several of the above variables can be used to perform an effective segmentation of a particular market.
Their choice depends on the character of the product and purpose of analysis. One should not, however, be
tempted to employ too many segmenting criteria bearing in mind that the resulting segment should be:
-

Large enough

Accessible through the existing channels

Measurable.

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Since criteria for segmentation of markets differ from product to product, it is not possible to design
guidelines as to their nature and structure, but it is necessary to define such elements in a feasibility study
for a particular product. In some cases, such as dairy products, a large national market may be regionally
divided; in other cases, such as the steel, aluminium or paper industry, the market limits may extend beyond
national frontiers.

4.2.3. Demand
Demand is the quantity of goods that buyers are ready to purchase at a specific price in a particular market
at a given point of time.
The critical factor in demand and market analysis is an estimate of the demand for a specific product(s)
during the life span of a proposed project, keeping in mind that the viability of the project is dependent,
among other things, on the projected sales.
The size of the demand, at any given time, is a function of several variable factors
such as:
-

Population and income levels

Development trends

Price level and tendency

Income and price elasticity of demand

Technology

Availability and prices of substitutes and complementary products

Buyers expectation so as to the future economic situation

Their behavioral patterns and a number of other market forces as well as legal and political
factors.

An inadequate or inaccurate analysis of the demand growth pattern, market potential and expected market
share usually results in either excess production and poor capacity utilization, as is often the case in
developing counties or plant capacity that is insufficient to meet market needs and unable to take advantage
of economies of scale. The point of departure in Demand Analysis is the determination of current effective
demand.
The base for estimation is the actual consumption figure during the relevant period. It may, however, not
be easy to obtain consumption figures for most products.
A beginning has to be made with apparent consumption of a product, which, for a domestic market, is
arrived at, for a given period, by aggregating its production and deducing or adding the changes in the
balance of trade and in inventories.
Thus, apparent consumption (Co) is given by:

Co = P + (I E) + (So Sc)
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Where:
P = the production during the period;
I

= the imports

E = the exports
So = the level of stocks at the commence of the period, and
Sc = the level of stocks at the close of the period (changes in the stock level)
In a competitive market apparent consumption can be equated with current effective demand but not in
most developing countries, as there are various restrictions on consumption and imports of manufactured
goods.
In estimating the demand for a product, it is necessary to allow for various factors that might have remained
suppressed through rationing or exchange restrictions. The amount allowed will depend on each individual
product, the nature of the market, the size and structure of the industry.
Another possible factor is the existence of monopolistic or oligopolistic imperfections restricting domestic
production by plan target or the non availability of inputs, domestic or imported.
The present effective demand for a given year may not be representative to the market under study,
therefore it must be compared with demand development trend and its dynamics.
Detailed analysis of characteristics features of buyers and their purchasing power, total and in segment
breakdown, is necessary to precisely estimate sales and develop marketing strategy to satisfy target
segments. This should be combined with the study of factors determining demand, which will be of
significance in understanding the character and changes of demand for a given product, construction of
demand models, and demand forecasting.

4.2.4. Supply
In addition to demand, supply and its characteristics have to be assessed. This contributes to define the
products or companys competitive position on the market as well as to discuss demand/supply balance.
Although the competitive position can only be described comprehensively when aspects of marketing are
included, a physical description of domestic supply is an inevitable first step. The analysis should include,
inter alias, the following factors:
-

Number of producers

Production program

Existing capacity

Plants under construction

Capacity utilization

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-

Output/sales

Market shares

Production costs

Technology applied

Age of equipment

Location

Local producers past and present output, together with capacity utilization review provides a convenient
departure point for the analysis of supply situation combined with demand estimates, will determine the
projects position in the market and, therefore, expected sales.
Local production should be corrected by the balance of foreign trade in a particular commodity under study
together with the absolute size of exports and imports and their trends.
A high import volume combined with local producers full capacity utilization may indicate surplus of
demand over local supply capacity or, if the exports volume is correspondingly high, the existence of
foreign markets more rewarding to the local producers than the domestic one.
Low or negligible import volume is not necessarily an indication of internally balanced market, particularly
in the presence of strict import control measures.
In both cases, the future position of the new project appears promising, although a very thorough analysis
of demand is called for in the second case.
If, however, a high import volume accompanies a low level of local capacity utilization, the project under
study will only be viable if it can effectively compete with importers in term of quality, price and other
elements of marketing strategy, unless a substantial amount of market protection may be expected.

4.2.5. Marketing Environment (Marketing mix /Strategy)

Further improvement in establishing the projects expected position in the market will be achieved through
studying the elements of Marketing Environment.
There is a tendency to associate marketing mix variables with effective decision making and thus
postponing, the collection and analysis of relevant information until much later, operational phases of
project development.

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It is true that most decisions regarding marketing management will be called for when the project becomes
operational. It is, nonetheless, also true that marketing strategy will have a decisive influence on expected
sales levels and revenues, which have to be forecasted at this very stage of feasibility study.
In general, no matter what is the new project envisaged position vis a vis competition, broad marketing
strategy should be developed at this stages if any meaningful sales volume and sales revenue forecasts are
to be arrived at.
Against this background, an analysis of the existing marketing environment has to be carried out. This
offers insight into further determinants of competitiveness. From the marketing point of view,
competitiveness is not just a matter of pricing as frequently assumed. In fact, it is determined by three
more factors.
-

Price

Product

Place (Distribution)

Promotion

The following aspects of the 4P of marketing (marketing strategy) may be studied, among others:
Pricing
-

Price level

Income, price, and substitution elasticity of demand

Pricing methods (cost plus pricing, marginal cost pricing, price differentiation, discounts)

Regulations for pricing

Payment conditions

Financing conditions

Production mix

Product development strategies

Design and fashion

Brand name

General image building

Packaging

Labeling service

Warranty terms

Legal aspects (i.e. regulations regarding health and safety)

Product

Place (Distribution)
-

Distribution channels

Logistics (transport, storage)

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Promotion
-

Personal selling

Advertising

Publicity

Sales promotion

Promotion mix

Legal aspects

The combination of the marketing instruments must be determined with regard to the customers or end
users as well as the distribution channels. Product, price, promotion and distribution the components of
marketing mix must be seen as interdependent marketing tools, which are to be combined in an optimal
way so as to achieve the marketing objectives.

a. Product and product policy

An investment project is only financially feasible when the project output has a value for the consumers, in
other words, when the product can be sold on the market.
In the feasibility study it should be investigated whether the project better concentrate on a single product
or a range of different products. The product mix should be designed to meet the needs and preferences of
the customers.
The determination of the characteristics of products and the outline of a policy are the basis for the
production program and plant capacity, the engineering design, the projection of investment, production
and marketing costs, as well as the evaluation of the market risks against possible marketing strategies.

b. Price and price policy

The determination of product price levels is part of both the basic project strategy and the long-term
marketing strategy.
Relatively low quality products usually need a low price strategy; while a high price strategy would
require a higher performance level in terms of product quality, design, warranties, brand names and
services. For the determination of sales prices, the internal production and Marketing costs, customer
reactions to different prices (price elasticity) and the price policies of competitors must be considered.
Factors to assess when determining the price policy.
-

Margins (wholesale and retail)

Existence of public price controls

Discount policy

Delivery and payment conditions

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c. Promotion
Promotional measures will be required by the investment project for
-

Entering the market with new product

To stay in the market and reach the long term objective of the project

The feasibility study should identify the promotional measures required to reach the projected sales volume
and estimate the costs of these measures.
Promotional tools:
-

Advertising to stimulate demand

Public relations

Personal sales

Sales promotion

Brand policy

d. Sales and channels of distribution

Distributions from the factory through wholesales to retailers, through retailers or directly to
consumers are the main distribution channels used by producers to reach the end users.

4.2.6 Projection of Sales Revenue (Sales Forecast)

Sales are the quantity of product that is actually purchased at a specific price and under specific marketing
strategy in a particular market at a given point in time.
Thus, the industry sales will practically equal effective demand in the absence of supply shortage, but
projects sales may be substantially smaller than the demand in the given market, depending on the projects
capacity, marketing strategy and position vis a vis competitors.
The projection of sales revenues is essentially an extension of marketing research (initial demand analysis),
on the bases of which a project is developed also in terms of specific sales volumes during different periods
after the project goes into production.
Estimating sales revenue is an iterative process that should also take into account the optional plant
capacity, appropriate technology, a technically feasible production program and alternative marketing
strategies. The final determination of sales revenues may therefore only be possible once technology and
plant capacity are more clearly known.

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The project planner has consequently to feed the technology concept into the sales and marketing program
in order to harmonize both and to outline the production program.
Projections of sales can only be made according to the market structure, market requirements and
marketing strategies that are followed. Such strategies have to be defined and an assessment made of the
implication in terms of product pricing, production program, promotional efforts and the sale and
distribution mechanism. Only then can a reasonable projection be made of the likely annual sales (in units)
and the revenue from such sales.
When estimating the development of sales revenues it must be decided in advance whether to include the
sales tax, which can become a rather important cost item. If the sales tax is included in the sales revenue, it
has also to be incorporated in the production costs. This ensures that the tax is both counted as cash inflow
(as part of sales revenue) and as cash outflow (as part of the production costs) and thus it cancels out.

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The proper sequence of steps in arriving at sales projection should run as follows.

Demand Estimates

Supply Potential
Estimates

Projects Marketing
Strategy

Expected Competitors
Strategies (if any)

Sales Projection

4.3

The Production Program

After projecting of sales during different stages of production, a feasibility study should define the detailed
production program. A production program should define the levels of output to be achieved during
specified periods and, from this viewpoint, should be directly related to the specific sales forecasts.

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(1)The production program should indicate the basic products, by products, and wastes during
the process.
The demand and market analysis specify the sales program, which should be transformed into the plant
production program taking into account losses of production within the production plant site, in storage,
transportation and by warranty service.
(2)The production program (capacity utilization) changes in time during project life. Initially the
production may not be higher than 40 to 50% of the overall design capacity for the first one or two
years of operation because market is not ready to acquire large amounts of new product or the
technological difficulties obstruct the full capacity operation of the equipment.
Full production capacity is being reached usually towards the third or fourth year and stabilizes for about
10 to 15 years. The growth of the demand continuous improvement in technology usually encourages
modernization of project, which enables the production growth. After certain period (probably 30 or more
years) the project is terminated due to the low market competitiveness, decapitalization of the equipment or
sometimes, environmental reasons.
To plan such a program the various production stages should be considered in detail, both in terms of
production activities and timing.

Within the overall plant capacity, there can be various levels of

production activities during different stages determined by various factors in different projects.
It would be prudent to recognize that the full production may not be practicable for most projects during the
initial production operations. The reasons could be :
i) Even if full production were to be achieved in the first year, marketing and sales might prove a bottle
neck.
ii) At the initial years production may be programmed at well below the full capacity in order to adjust a
gradual growth of demand for a particular product.
iii) Growth of skills in operations can also be a limiting factor in a number of industries and production has
to be tailored to the development of such skills and productivity.
iv)The determinants of a production program during the initial production years vary considerably from
project to project. Thus different approaches would have to be adopted for different industries:
a)

Single product continuous process manufacture as a cement production.

b) Multiple product continuous process production as in an oil refinery

c)

Batch/job order production such as in an engineering workshop and

d) Assembly/mass manufacture as for the production of motor cars

In the first case, the growth of sales may not be a great problem unless production capacity is in excess of
local demand but production problems may be more critical. In the second case, both production and sales
problems may arise. In the third case, though production aspects may present difficulties, obtaining a

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satisfactory order book would be critical. In the fourth case, the sales aspects in relation to price would be
dominant.
3) Extraction rates and operating ratios should be effectively determined and adequately
planned.
4) Once a production program defines the levels of outputs in terms of end product, and possibly of
intermediate products and the operating ratio between various production lines and processes, the
specific requirements of materials and labour should be qualified for each stage.
The specific quantities needed for each stage of the production program and costs that these entail should
be determined. The input requirements and costs have to be assessed for:
a)

Basic materials such as materials, semi process, bought out items etc

b) Auxiliary materials and factory supplies

c)

Major utilities and

d) Direct labour requirements

Detailed estimates in this regard should be prepared for the stage of initial production and for stage of full
production.

4.4

Determination of Plant Capacity

The term plant capacity can be generally defined as the volume or number of units that can be produced
during a given period. This definition implies the out put expectation from the production of a plant.
Several factors have a bearing on the capacity decision:

Technological Requirement

Input constraints

Investment cost

Market conditions

Resources of the firm

Government policy

Technological Requirement: For many industrial projects, there is certain Minimum Economic size
determined by the technological factor. For example, a cement plant should have a capacity of at least 300
tones per day in order to use the rotary kilos method, or else it has to employ the vertical shaft method,
which is suitable for lower capacity.
Input Constraints: In developing countries, there may be constraints on the availability of certain inputs.

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Power supply may be limited

Basic raw materials may be scarce

Foreign exchange available for imports may be inadequate

These constraints should be borne in mind while choosing the plant capacity.
Investment Cost: Typically, the investment cost per unit of capacity decreases as the plant capacity
increases.
Market Conditions: the anticipated market for the product has an important bearing on plant capacity. If
the market for the product is likely to be very strong, a plant of higher capacity is preferable. If the market
is likely to be uncertain, it might be advantageous to start with a small capacity. If the market starting from
a small base, is expected to grow rapidly, the initial capacity may be higher than the initial level of demand,
- further addition to capacity may be effected with the growth of market.
Resources of the Firm: The resources, both managerial and financed, available to a firm define a limit on
its capacity decision.
Government Policy: The capacity level may be influenced by the policy of the government. The
minimum Economic capacity policy could be applied in several industries.

Feasible Normal Capacity:

This capacity is achievable under normal working conditions taking into account not only the installed
equipment and technical conditions of the plant, such as
-

Normal stoppages

Downtime

Maintenance

Tool checks

Desired shift patterns

Indivisibilities of major machines and the management system.

Thus, the feasible normal capacity is the number of units produced during one year under the above
conditions.
Feasible Normal Capacity (FNC) is defined by Human Factors and system Engineering, that is Plant Plus
Human.

Nominal Maximum Capacity (NMC):

This is the technically feasible capacity and frequently corresponds to the installed capacity as guaranteed
by the supplier of the plant. Nominal Maximum capacity is defined by system engineering, that is
Equipment installed capacity includes reserve and stand bye capacity.

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To reach maximum output figures, overtime as well as excessive consumption of factory supplies, utilities,
spare parts and wear tear parts, will inflate the normal level of production costs.

FNC < NMC

Determination of the Feasible Normal Plant Capacity

In feasibility study the determination of the appropriate plant capacity is critical.
Forecasts of demand and market penetration in respect of a particular product are the staring point. The
limited availability of basic materials and inputs or resources may be constraints for certain projects,
requiring evaluation of various alternative possibilities of plant size and capacity.
These alternatives have to be related to various levels of production and different levels of sales and
profitability.
Once the overall constraints on demand and market forecasts are defined, other components of the study
have to be assessed to determine the feasible normal plant capacity. This capacity represents the optimum
level of production.
One of the components can be critical for determining the feasible normal plant capacity of a project, but
all the implications of all these aspects should be taken into account.
Prior to the capacity determination the minimum economic size and availability of production technology
and equipment related to various production levels, should be determined.
Production capacities have tended to increase rapidly in a number of sectors in industrialized countries to
take greater advantage of economies of scales. Increased capacities give increased output resulting in lower
unit production costs.
Another important factor is that the available process technology and equipment are often standardized at
specific capacities in different production sectors.

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