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HomeBusiness TheoryStrategyMethods of growth economies of scale

Methods of growth economies of scale

Photo by George Morina: pexels

Businesses can grow either organically i.e. through internal growth where profits are ploughed back into the business or through external growth such as through take-over or a merger with another business e.g. when Cadburys and Schweppes joined together. Growth enables a business to benefit from economies of scale with profound implications for the economics of production.

Technical economies are when businesses are able to benefit from improved techniques involved with large-scale production. For example, a company like Gillette or BIC operate with very large modern factories using automated production technology. The result of using these technologies is that costs of production are reduced significantly while quality control is kept to a very high level with virtually zero defects.

Managerial economies of scale involve these firms employing skilled production managers with experience working with modern technologies enabling them to manage highly sophisticated state-of-the-art factories.

Just-in-time

Commercial economies are concerned with the purchase of stocks (and the selling of end products) using a large-scale approach. Modern production plants are able to operate using components and materials that are purchased just in time for their use. The production line is managed at the speed required to meet the needs of end consumers just in time. Because companies like BIC and Gillette use mass production techniques they are able to operate their plant at high levels of capacity, while benefiting from bulk purchasing of components, equipment and materials.

Risks spreading economies of production mean that plants are able to produce a wide variety of products. For example, in a modern confectionery plant run by Cadbury Schweppes, it is possible to switch part of factory capacity from lines where demand is falling, to lines where demand is rising through well-organised production management.

By growing a business so that it operates on a large scale it is possible to benefit from a variety of production economies of scale. These economies enable large-scale production at much lower costs per unit than would be possible in a small plant.

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