Introduction
Economies of scale can be defined as a way of cutting down the average cost of a product to the customer by producing more products. Economies of scale happen when more number of units of goods are produced with no additional in input cost. Economies of scale are achieved when an organization or a company distributes the fixed cost (cost that does not change due to changes in production) over the increase number of units produced. Economies of scale has largely benefited the large companies because they purchase goods in bulk and have increased efficiency and thus contributing to cheaper cost and increased profitability. The increased efficiency comes when there is division of labour and specialization; where the employees/ staff are assigned each a specific duty to attend to which becomes a routine and thus the staff can do the task much better and more efficiently. This then increase the general out put of the company and thus economies of scale.
In service businesses focus should be on the need and requirement of the customer. In service business, however, economies of scale may not be achieved within an individual organization or company because the out put is not quantifiable, but it can be applied and benefits reaped. Service companies should investigate their financial cost in order to discover the root cause of the problem as they are experiencing and that hinder them from achieving economies of scale benefits. Sometimes it may seem a bit difficult to manage large service and thus service providers opt to have small businesses. In today’s global economy, companies that provide services are looking for ways to improve their productivity and their efficiency and thus they have opted for co-operation for mutual benefit. Co-operation for mutual benefit by service providers will help them improve their service delivery, pricing, sales and marketing of the service.
Benefit for co-operation for mutual benefit
Small businesses whether service or product provider should form co-operation for mutual benefit which is the most feasible solution to achieving the economies of scale benefits. This means joining hands with other similar or local business so as to benefit from reduced prices. Before joining hands for mutual benefits, companies should ensure that that they have smoothen out their differences and their similarities.
However, this does not mean forming partnership or merging but trusting other businesses so as to have economies of scale. For instant, when the business come together, supplies can be purchased in bulk for the merged businesses and this reduces average cost per unit purchased, for example, if two or more business come together to purchase materials they commonly use, they can buy the material in bulk and then divide the material and the cost eventually. This will then reduce the cost of the product to the customers and more units will be produced.
Another instant is when a company depends on its staff to go out and sell the product; it has to set aside some amount of money for the staff. And if another company need the same person, the two companies can join together to employ the person and then split the cost of paying the staff. The staff would then act as a representative of the two companies. The sales person would then sell same amount of products for the two companies, for example, if one company is dealing with outside catering and want a person to market their products it can merge with a company that is decorating services and employ on sales person who can market both services. They can then share the cost of employing the sales person. Another instant is when two or more companies’ share same asserts such as equipments that have fixed cost that do not changes of production. The companies may then share the fixed cost and thus reducing the average fixed cost per unit. Examples of these asserts may include delivery vans which when they are shares the cost of maintaining and running them may be reduced.
Another instant where companies can co-operate is when conducting training to its staff. Sometimes it is necessary for companies to conduct training to their staff concerning certain issues. If two companies decide to come together and train their staff together, the cost of training can be shared between the two involved companies.
If companies know where cost is being incurred, pricing of the products can be done more accurately so that profits can still be achieved.
Conclusion
Economies of scale mostly apply to the large companies but the small companies can also enjoy the benefit reaped by the large companies. This can only happen if the small companies come together or co-operate in proving services and producing the products. Through forming co-operation for mutual benefit the small companies can benefit and grow to large companies and thus they will enjoy more profits from the economies of scale. The service business will also be able to price their services more effectively thus minimizing the chances of having or incurring losses.
References
- Richard Normann, and Rafael Ramirez,. “From Value Chain to Value Constellation: Designing Interactive Strategy” Harvard Business Review, Volume 71, Number 4 (1993), pp. 65-77.
- Eric Harmon, Scott C. Hensel, and Timothy E. Lukes, “Measuring performance in services”, McKinsey Quarterly, 2006.