PROFILE 2: INTERNAL ORGANISATIONAL ENVIRONMENT

SECTION 5: PRODDUCTION

Production
The creation of goods and services to satisfy the needs and wants of consumers. It may
also be defined as changing inputs into outputs.

FACTORS OF PRODUCTION
1. Land
2. Labour
3. Capital
4. Enterprise/Entrepreneurship

1. LAND
This consists of all the natural resources on the earth including those in the sea and the
atmosphere around us. Each country in the Caribbean has various natural resources which
can be used in various industries to produce goods.

2. LABOUR
This includes all human resources which are needed to combine other factors of
production to produce goods and services. It refers to both physical and mental ability.
This factor is rewarded with wages, salaries and or profits. This factor is very important
since people are needed to operate equipment, program machinery, make decisions,
interact with clients etc. Without it, the other factors would be useless. Labour can be
divided into
 Skilled (engineers, doctors, teachers, nurses architects etc)
 Semi-skilled (driver, plumber, data entry operator etc)
 Unskilled (watchman, vendor, labourer etc.)
Factors Affecting the Labour Supply
 Wage rate
 Hours of work
 Size and structure of population
 Age at which people enter and leave the labour force
 Religious and cultural practices
 Adequacy of health services
 Mobility of labour
 Quality of labour force
 Government policies
 Willingness of people to work
 Migration patterns
 The number of women who opt to remain at home

PRODUCTIVITY
This is the rate at which goods are produced (efficiency of production). It may also be the
relationship between the amount which is produced and all the inputs( raw materials,
money etc.) which have to be used to produce those goods.

Factors Affecting Productivity

 Education and Training
 The amount and quality of capital
 Motivation
 Working Conditions
 Health of Workers
 Good Management
Human resource development is important if an organisation is to grow and become more
successful. The following areas need to be addressed when developing any H.R. policies.
 Education- schools, universities etc.
 Skills- job related e.g. technical colleges and training boards, on the job training e.g.
SJPP
 Health- disease eradication
 Nutrition
 Working conditions

MIGRATION AND ITS EFFECTS ON LABOUR FORCE

Migration is the permanent movement of people from one area to another. It can take to
forms
 Rural to urban areas (domestic migration)
 One country to another (international migration)
Migration usually occurs for the following reasons:
 People are in search of betters jobs
 Educational opportunities
 Better standard of living
 Lack of social services e.g. schools, medical facilities etc. in rural areas
 Better infrastructure- electricity, water, roads etc.

Positive Effects
1. Workers send remittances in the form of money/goods to the families they left behind
2. It can ease the population pressure in a country with scarce resources.
3. It can increase the pool of labour which organisations have to choose from.
Negative Effects
1. “Brain drain”. This occurs where the skilled and professional persons leave the
community or country in search of better opportunities. This hinders development
(economic, social, intellectual) of the area from which the workers originated.
2. More money has to be spent on training new workers as others leave.
3. Overcrowding in the receiving area can lead to the creation of slums, health problems,
pressure on services such as schools, sanitation and recreational facilities.
4. Increase in the rate of unemployment.
5. Cultural and family life can be disrupted.

3. CAPITAL
Capital is the money and all other assets which are employed in the process of production.

Types of Capital
(Diagram to be drawn here)

1. Physical Capital
This consists of fixed and working capital.
2. Working Capital
Items required for the day to day operation of the business and which are continually being
used up e.g. raw materials, cash etc.

3. Fixed Capital
This usually refers to items which are long lasting and are used in the production of goods
and services e.g. buildings, machinery, tools etc.

4. Financial Capital
Money which is used to run the operations of the organisation. It consists of loan capital
and share capital

5. Social Capital
This takes the form of government expenditure on factories, machinery, roads, utilities etc.
The infrastructure is then used by organisations to assist in effective operations.

Role of Capital in Production

Capital plays a vital role in the overall production of good/services. Money is
needed for overall operation of the business e.g. purchase of equipment and raw materials,
payment of wages/salaries etc. The use of fixed capital(tools, equipment) increases the
productivity of labour. E.g. the use of a tractor rather than a hoe can increase the rate at
which a field is ploughed.
The amount and type of capital a firm uses depends on the size and type of industry
in which it operates. E.g. the production of cars requires large factories and specialised
equipment while the production of leather goods can be done in a small shop with little
equipment.
With the use of capital, division of labour is made possible which in turn can
increase the level of productivity/ output per person.
 Capital is also used for investment into various capital ventures. This can be done by
saving with financial institutions (banks, cooperatives etc.) which then in turn loan the
money to different organisations or entrepreneurs.

4. ENTERPRISE/ENTREPRENEURSHIP
This is the ability to coordinate and combine the various factors of production in an
effort to successfully run the organisation. The entrepreneur is often seen as the fourth
factor of production. This role is also carried out by the various managers within
businesses. Without it production is not possible. An entrepreneur can be seen as
someone who has the following functions:
1. Creation of ideas
2. Takes the initiative and risks
3. Raises finances to fund production
4. Determines what , for whom and how much to produce
5. Ensures that factors are used in the correct proportions

Benefits of Being Self-employed

1. Receives all profits
2. Can set own hours
3. Makes all decisions and reports to no one
4. Close personal relationship with clients

Problems of Being Self-employed

1. Bears all losses
2. Work long hours
3. may not always get a salary
4. May find it difficult to acquire loans
 Exercise
1. What is the difference between production and productivity?
2. List the factors of production and give an example of each.
3. What is migration?
4. Identify TWO effects of migration ( one positive and one negative).
5. State THREE factors which can affect productivity.
6. Explain which capital is necessary for the running of a business.
7. Give THREE factors which affect the labour supply.
 PROFILE 2: INTERNAL ORGANISATIONAL ENVIRONMENT
SECTION 5: PRODDUCTION

PRODUCTION LEVELS
1. Subsistence Production
This is the production of goods to satisfy one’s own personal needs. E.g. kitchen garden,
sewing one’s own clothing etc.
Benefits
 It saves money
 One of a kind items are created
 Creativity can be explored

2. Domestic Production
The production of good/services for the local market
Benefits
 Use of local inputs e.g. labour, capital, raw materials etc.
 Provision of jobs
 Reduces imports
 Reduces the use of foreign exchange
 Economy may become self-sufficient

3. Surplus and export

The production of goods above what is needed to supply domestic needs. The surplus is
sold on the international market.
Benefits
 Foreign exchange earned
 The development of an external market
  Jobs
 Can improve Balance of Trade and current account of Balance of Payment

TYPES OF PRODUCTION
1. Extractive/Primary Sector
This type of production involves the extraction of basic raw materials from the land e.g.
mining, agriculture, fishing, forestry. Some of these resources can be used directly or are
used as the raw materials of other industries to be converted to other goods.

2a. Manufacturing/ Secondary Sector

This sector generally uses the raw materials of primary sector to create other goods. E.g.
sugar, oil refining, canning, furniture and garment making etc.

2b Construction
This is also part of secondary sector and uses products from the manufacturing area e.g.
building

3. Service/Tertiary Sector
This is known as the service sector where no “tangible” goods are produced. It is divided
into direst services which are needed for their own sake (education, health etc.) and
indirect services which are needed in order to exchange goods (transportation,
communications, banking etc.)

4. Quaternary Sector
Exercise: For the following countries, give examples of primary, secondary and
tertiary production

BARBADOS
Primary
Secondary
Tertiary

Jamaica
Primary
Secondary
Tertiary

Trinidad
Primary
Secondary
Tertiary

Guyana
Primary
Secondary
Tertiary
 COTTAGE INDUSTRIES
These are industries which are usually carried out in the home. They usually require some
form of skill in order to manufacture goods. These industries are very important to rural
areas as they provide income, employment and provide goods and services which may
only have been available in the town which may be far away.

Characteristics
1. Work mainly carried out manually
2. Home based
3. Business carried out on a small scale.
4. Use of local raw materials.
5. Family members provide labour and in some cases help is hired.

Exercise: 1. Give 4 benefits and 4 problems of cottage industries

2. Identify the role of small firms in the economy

Benefits

Problems
 LINKAGE INDUSTRIES
Industries which are dependent on another’s output to produce goods and services. E.g. the
rum distillery is dependant on the sugar industry. Linkage may be:
 Backward
 Forward

Importance of Linkage Industries

1. Employment
2. Foreign Exchange earner
3. Self-sufficiency
4. Use of local resources
5. Close proximity between industries can reduce costs e.g. transportation
6. Reduction of imports
7. Increase in investment
8. Knowledge can be shared

Problems
1. Limited raw materials
2. Access to foreign market is not guaranteed
3. Shortage of capital

FACTORS INFLUENCING LOCATION OF INDUSTRIES

1. Geographical
2. Availability of raw materials and supplies
3. Infrastructure
4. Power
5. Water
6. Transport
7. Health Facilities
8. Labour supply
9. Governmental Regulations
 ROLE/FUNCTION OF SMALL FIRMS
(Class discussion)

LARGE SCALE PRODUCTION

Advantages
1. They find it easier to raise large sums of capital
2. More capital is available for
 Advertising
 R&D
 Purchasing labour saving machinery
 Employing specialist personnel
3. Mass production allows for the possibilities of specialisation (division of labour)
4. Special prices and discounts can be obtained when buying in bulk
5. Mass production may lead to a reduction in production cost ( economies of scale)

Disadvantages
1. Standardisation of products can lead to a reduction of choice
2. The union may become a problem for the firm in terms of wages/strikes etc.
3. Mass production may cause boredom in workers and thus reduced quality
4. It may become too complex to manage

Economies of Scale
This is the reduction in unit(average) costs of producing a product in proportion to the
increase in the size of operation of the firm. There are two types of economies of scale:
 Internal
 External
 Internal Economies of Scale
These are those which are at the level of the individual plant or as a result of how the
firm is organised. They include:
 Technical Economies of Scale- The use of equipment to its full capacity which will
increase output.
 Financial Economies of Scale- Large firms can acquire capital (assets or
money)easier than small firms because borrowing is easier than small ones which
can then be used for expansion of operations.
 Marketing Economies of Scale- Buying raw materials in bulk attracts discounts,
thus reducing cost. This leads to cheaper production and overall unit cost.
 Managerial Economies of Scale- This involves the use of division of labour,
specialists can be hired for greater organisation and control of operations. This
leads to increase in the efficiency of operations. The division of the firm into various
departments can also lead to economies of scale unlike the sole trader who has to
accomplish all tasks on his/her own.
 Risk-bearing Economies of Scale- A large firm can spread its risk by selling more
than one type of good. When one sells slowly, the other can pick up the slack.

External Economies of Scale

These are achieved as a result of the location of the firm. They include:
 A supply of skilled labour may be located in the area
 The good reputation
 Similar firms which are located close together can pool efforts in R & D
 As the firm expands, more supporting companies may grow up in the surrounding
areas helping to reduce cost. E.g. banks, cleaning companies, catering services etc.
Diseconomies of Scale
A firm cannot continue to grow infinitely. At some point in the expansion, increasing costs
will outweigh the output. This is known as diseconomy of scale. Examples of such are:
  Increased managerial costs
 Problems with the control and flow of information
 Inability to adapt to change quickly
 Breakdown in communication between staff and management
 Poor quality products
 Lack of relationship with customers
 Greater government scrutiny
 Increase in waste and pollution
 Standardised products(mass production) limits choice

Law of Variable Proportion

This law, also known as the law of diminishing returns, states that as a firm continues to
add variable factors (e.g. labour) to fixed factors, initially there will be an increase in
production per person. Eventually, the addition variable factors will result in less output
per person(law of diminishing returns). Therefore it can be said that initially production
will increase, peak and then decline.
 GROWTH OF BUSINESS AND ITS EFFECTS

How Firms Grow

1. Expanding their markets
2. Creating new products
3. Merging with another firm
4. Takeover

Why Firms Grow

1. To reduce cost & achieve economies of scale
2. To increase profits
3. To achieve grater security

Effects of Growth
In any organisation growth will have an effect on the following

1. Organisational structure
It may become more complex, affecting the chain of command and the span of control of
individuals. New departments may also be created. There is also implications for the
increase in the amount of communication within the firm. Authority may now be delegated
among a greater number of personnel whereas one or two persons may have held it.

2. Capital
More money is now required to finance operations. E.g. buying equipment, paying
workers, raw materials etc. In order to finance its operations the firm may now have to
increase its borrowing or issues shares where possible.
3. Labour
An increase in the number of workers usually occurs but the extent to which is does may
depend on if the
firm is labour or capital intensive. There may also be division of labour/specialisation
which increases output. Specialists may also be hired.

4. Potential for export

As production increases and the local market is being satisfied, surplus production may be
exported as a market is established.

5. Scale of production
This will increase as long as inputs have increased and are being used efficiently. Various
economies of scale can occur as production expands

6. Use of Technology
There will be greater used of technology as long as it will lead to reductions in cost and
increases in output. In turn it may cause a reduction in labour

CAPITAL INTENSIVE vs LABOUR INTENSIVE PRODUCTION

Capital intensive industries are those which use more machines than humans in the
production process e.g. automobile manufacturing. This method mainly operates in
developed countries which have access to the money to purchase equipment. The quality
of products can be standardised, output in usually greater and fewer people are employed.

Labour intensive industries use large pools of human and animal labour e.g. garment
making. Employment is generated and the wage bill tend to be high. This method of
production is found mainly in developing countries.
N.B. In the Caribbean many jobs which were done manually are now seeing the
introduction of the use of machines e.g. in the past, sugar cane was cut by hand it is now
cut in many countries by the use of the combine harvesters which complete the job at a
quicker rate. In other areas such as pattern making and drafting, architecture, engineering
etc., CAD (Computer Aided Design) is becoming more common. It speeds up the process
and improves on quality and standardisation. CAI(Computer Aided Instruction) is also a
tool where the computer is used for the giving of instructions. It allows a person to move at
their own pace, offering methods of testing, feedbacks and remedial work until the learner
understands.
 TECHNOLOGICAL DEVELOPMENT & ITS IMPLICATIONS
Mechanisation
The replacement of and animal labour by machines to perform tasks in the production
process

Automation
A process in which a number of tasks are performed by machines with minimal human
intervention. It takes mechanisation one step further.

Benefits of Technology
1. Reduction in labour cost and increase in profits
2. Errors are reduced and quality can be standardised
3. Reduction in per unit cost
4. Increase in production
5. Cost of products to consumers may be reduced

Problems of Technology
1. Increase in unemployment
2. Equipment may quickly become obsolete and have to be replaced thus increasing cost.
3. The required skilled labour to operate the equipment may be in short supply
4. Only standardised products can be provided which do not take into account the taste of
consumers.