BUS1100 INTRODUCTION TO BUSINESS

CHAPTER 6-7
OPERATIONS MANAGEMENT
AND PRODUCTION
 Business location & size of
firms

Ways to measure the size of

firms
OUTLINE:
OUTLINE:
Internal & External
Economies of Scale;
Diseconomies of scale

Relations between production

and marketing functions
 INTRODUCTI
ON
• Operation Management (OM) focuses, on
activities such as supervision, planning,
and designing business activities. More to
service

• Production Management involved in

focuses on the production of goods and
services. More in producing
goods/products
Factors Affecting Location Decisions
1. Proximity to source of supply:
• Reduce transportation costs of perishable or bulky raw materials
2. Proximity to customers:
• High population areas, close to JIT partners
3. Proximity to labor:
• Local wage rates, attitude toward unions, availability of special skills

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Factors Affecting Location Decisions
4. Community considerations:
• Local community’s attitude toward the facility (prisons, utility plants, etc.)
5. Site considerations:
• Local zoning & taxes, access to utilities, etc.
6. Quality-of-life issues:
• Climate, cultural attractions, commuting time, etc.
7. Other considerations:
• Options for future expansion, local competition, transportation access and
congestion, etc.

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Ways to measure the size of firm:
 ECONOMIES &
DISECONOMIES OF SCALE
THROUGH OPERATIONS
 Internal Economies of
Economies of Scale Scale
- Economies of scale are the
cost advantages that a business
obtains due to expansion External Economies of
Scale
Economies & Diseconomies of
Scale
Internal Diseconomies
Diseconomies of Scale of Scale
- Diseconomies of scale are the
disadvantages of being too
large. External Diseconomies
of Scale
 WHAT IS….
• Internal economies of scale
• lower long run average costs
resulting from a firm growing
in size

External economies of scale

• lower long run average costs
resulting from an industry
growing in size
INTERNAL ECONOMIES
OF SCALE
Labor Economies

As a firm grows, there is greater potential for managers to specialize in

particular tasks (e.g. marketing, human resource management, finance).

Specialist managers are likely to be more efficient as they possess a high

level of expertise, experience and qualifications compared to one person in
a smaller firm trying to perform all of these roles
Financial Economies
Many small businesses find it hard to obtain finance and
when they do obtain it, the cost of the finance is often
quite high.

This is because small businesses are perceived as being

riskier than larger businesses that have developed a good
track record.

Larger firms therefore find it easier to find potential

lenders and to raise money at lower interest rates
Technical Economies
Businesses with large-scale production can use more
advanced machinery (or use existing machinery more
efficiently).

This may include using mass production techniques, which

are a more efficient form of production.

A larger firm can also afford to invest more in research

and development
EXTERNAL ECONOMIES
OF SCALE
C
Specialist suppliers of raw materials and capital
goods

When an industry becomes large enough, it can become

worthwhile for other industries, called subsidiary industries
to set up for providing for the needs of the industry
Specialist services

Universities and colleges may run courses for workers

in large industries and banks and transport firms may
provide services, specially designed to meet the
particular needs of firms in the industry
Improved infrastructure

The growth of an industry may encourage a govt and private

sector firms to provide better facilities (road links, electricity
supplies, build new airports and develop dock facilities)
INTERNAL AND EXTERNAL
DISECONOMIES OF SCALE
Internal diseconomies of scale

• Higher long run average cost arising from a firm growing

too large.

External diseconomies of scale

• Higher long run average costs resulting from an industry

growing too large
INTERNAL DISECONOMIES OF SCALE
Difficulty controlling the firm

It can be hard for those managing a large firm to

supervise everything that is happening in the
business.

Management becomes more complex and

meetings are necessary quite often.

This can increase administrative costs and make

the firm slower in responding to changes in
marketing conditions
Communication problems

Difficult to ensure that everyone is aware about their

duties in a large firm and available opportunities like
training etc.

The may not get a chance to exchange their views and

innovative ideas to the management team.
Poor industrial relations

Higher risk for larger firms as there will be

more conflicts and diverse opinions.
Lack of motivation of workers, strikes will be
seen at certain situations in larger firms due
to poor industrial relations
EXTERNAL DISECONOMIES
C OF SCALE
Scarcity of Raw Materials

Growth of industry may increase competition for

resources, pushing up the price of key sites,
capital equipment and labor
Wage Differential

The additional amount of income that a given

worker must be offered in order to motivate them
to accept a given undesirable job, relative to other
jobs that worker could perform

Shortage of labor which causes a wage rise

RELATIONS BETWEEN PRODUCTION AND
MARKETING FUNCTIONS
The production function focuses:
The marketing function focuses:

To creating
new
products, To determine
concentrates
managing the the number
on satisfying
quality& and type of On creating
customers
ensure the products new products
and meeting
quantity of which can be
their needs
the products, marketed
and arranging
deliveries;
 Business location & size of
firms

Ways to measure the size of

firms
WE
OUTLINE:
UNDERSTOOD: Internal & External
Economies of Scale;
Diseconomies of scale

Relations between production

and marketing functions