Operational StrategiesScale and Resources Mix

Aims and Objectives

Aim: • Understand operational scale and resources mix.

Objectives:• Define operational objectives• Explain why firms set operational objectives• Analyse different operational objectives• Evaluate whether firms should set operational

objective.

Starter

• Toyota is an extremely large business. What benefits exist for Toyota of operating on such a large scale?

Scale of Operation

• The size of an organisation will determine how efficiently it can operate.

• Firm is operating most efficiently at it’s optimum point where average costs of production are at their lowest.

• Before a firm reaches this point it benefits from economies of scale.

• After this point it will experience a rise in average costs: diseconomies of scale.

Economies of Scale

Definition:• The benefits enjoyed by a

firm as a result of operating on a large scale.

• Average cost per unit of output falls, the more products a business produces, until the optimum output point.

Diseconomies of Scale

Definition:• The disadvantages to a

firm of operating on too large a scale, and producing beyond optimum output.

• Average cost per unit of output increases as output increases.

Economies and Diseconomies of Scale

Average Cost

Good X

Output Good X

Economies of Scale

Optimum Output

Diseconomies of Scale

Economies of Scale

PurchasingEconomies of

Scale

Benefits of buying in large quantities from suppliers. Lower average costs, mean these can be passed onto consumers in the form of low prices.

Technical Economies of

Scale

The ability to buy technologically

advanced equipment and spread the costs

over a large amount of units.

Specialisation Economies of

Scale

Ability to hire specialists as the business grows. More efficient production can

take place due to everyone

knowing their roles.

Diseconomies of Scale

Communication Diseconomy

Breakdowns in communication resulting from an increase in size of operations.

Coordination Diseconomy

Breakdown in coordination in

the business resulting from an increase in

the size of operations.

Resources Mix

Definition:Combination of capital and labour resources used in a business to achieve output

Capital Intensive:Businesses which are reliant on capital equipment such as machinery.

Labour Intensive:Businesses which rely heavily on labour.

Capital and Labour Intensive

Capital Intensive Advantages and Disadvantages

Capital Intensive Advantages and Disadvantages

- Reduction in human error- Greater speed- Easier workforce planning- Achieve economies of scale easier/ potential to benefit more

- High initial capital cost- Finances may be affected if capital bought with loans, and the interest rate changes- Lack of human ideas to improve production processes-Less flexibility in responding to demand changes

Labour Intensive Advantages and Disadvantages

- Greater flexibility in workforce- Creates employment in economy- Better customer service- Can offer specialised goods easier to meet consumer needs- Opportunity for Kaizen

- Production can be affected by industrial action- Possible workforce shortages- illness, days off, could lead to production targets not being met- High HRM costs- Could become over reliant on specialised workers, what happens when they’re ill?

Labour Intensive Advantages and Disadvantages

Plenary

1) Define economies of scale2) Define diseconomies of scale3) What is meant by the term optimum level of

output?4) With the use of a diagram explain how a

growing chain of Bike Stores may benefit from economies of scale.

5) Distinguish between capital intensive and labour intensive.