How, according to “The Functions of the HQ Unit in the Multi-Business Firm,” do economies of scale and economies of scope provide cost advantage opportunities to firms? · What considerations would be relevant to a firm’s deciding which strategy (scale or scope) to adopt? · How does the choice of executive focus – strategic planning, strategic control, financial control – influence HQ functions and approaches in a multi-business firm?
In economies of scale lower cost of goods sold by leveraging increased production volume and sales. This occurs when costs measured on a per item basis decrease as a result of fixed costs being divided among more items being produced. This higher yield on fixed costs is normally associated more with the production aspects of a business. Ultimately, savings can be passed on to the consumers if the characteristics of the products are capable of exploiting the achieved savings.
Examples of economies of scale at Yum! Yum! Gourmet Popcorn Company can be exercised through the purchase of ingredients in higher concentrations. These larger orders decrease shipping prices and fixed-costs associated with production. Additional examples can also be experienced by expanding into wholesale markets. The increased volume of sales would also decrease shipping and storage costs associated with products. In the latter example, the sales volume would have to occur at a level high enough to justify increases wages paid and equipment maintenance. Typically economies of scale are best implemented by larger companies able achieve and benefit from the volume of operations required to substantiate the increased investment. Economies of scope lower the cost of goods sold by focusing on specificity. The specificity achieved is not limited to any type of cost, but primarily involves variable costs. By channeling these resources, firms achieve higher efficiency in a concentrated capacity.
The Term Paper on Economies Of Scale 2
... the minimum efficient scale (MES) is achieved. If LRAC is falling when output is increasing then the firm is experiencing economies of scale. For example a ... a business where marginal revenue = marginal cost. External economies of scale (EEoS)External economies of scale occur outside of a firm but within an industry. Thus, when ...
Again, using Yum! Yum! Gourmet Popcorn Company as an example at the micro-level, an example of economies of scope would be raising production of flavored cotton candy from 30 gallons (bags) to 60 gallons per day. The costs involved in flavored cotton candy production are distributed between overhead for the facility charges, bulk ingredients, and a portion of wages from the production specialist on shift. In this case the variance in facility costs, wages, and ingredients involved in production are so miniscule that they are nearly immeasurable. The only critical product characteristic involved is cotton candy’s shelf life of one to three days based on existing company quality standards. Given these variables, the manager’s only decision point is essentially timing the production of cotton candy (one hour per 30 bags) in a manner that does not hinder the production and fulfillment of other store products.
