Economies & Diseconomies of Scale: Reducing Average Costs and Increasing Profits - Essay Sample

Introduction

Economies and diseconomies of scale are production-related, and they contribute significantly to the wealth generated by an organisation. Economies of scale, for instance, can be achieved or rather obtained when there is a significant increment in production scale, which reduces average costs in the long run (Agarwal, 2019). In other words, the cost of products can be discussed to be decreased when an organisation involves itself in the production of more units. An example of economies of scale is the bulk buying power that various organisations possess. Bulk buying from suppliers ensures that discounts are encountered, which in turn reduces the operating costs of any business.

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The following graph shows economies and diseconomies of scale:

Quantity

Cost

Where: LRAC- Long Run Average Cost, and

LRMC - Long Run Marginal Cost

Diseconomies of scale occur when there is rising in average costs in the long run, which are as a result of an organisation expanding over its optimum scale (Louch, 2019). An example of diseconomies of scale is the dysfunctionality of communication in enormous organisations since there is a lack of interdepartmental information flow. Therefore, this can create issues in markets where production targets to sell its products to generate profits.

Location of a Business

The location where a business is to be set up is crucial in determining the success that will be enjoyed by such a business. Laws are always changing in different regions, and before selecting a location for a company, significant research should be made to ensure that the local laws, climate, among other factors, are favourable for business. In light of this, several factors are crucial in determining the right location for setting up any organisation. Firstly, accessibility is of uttermost importance. It is crucial as it is the main determinant of how frequent deliveries can reach the organisation or a consumer (Fox, 2017). As a result, the location of a business should consider transport links. In densely populated areas, the cost of rentals and property is usually high, and hence, locating one's business in the outskirts of town, which still enjoys good infrastructure, might be the best decision.

The skills base in the area is the second factor to consider in finding a suitable business location. Labour is essential for any organisation to succeed. As a result, the location of the business should be infested by skilled people who are willing to perform at their level best to ensure that the success of the organisation is experienced. In considering skilled labour, employment rates should as well be focused to ensure cheap, but the quality rate is accessible to the business. Thirdly, business rates are also considered when finding a suitable location for business (Agarwal, 2019). Cash flow is the most vital thing for businesses since it is the major determinant for the long-term survival of any organisation. As a result of this, average business rates such as rent, taxes and utility bills should be researched to ensure that they are favourable for setting up a new business venture.

In addition to the previously discussed factors, competition is most crucial when finding a suitable location for a business. One should do a competitor analysis to ensure they do not locate their business where there is the existence of established competitors (Fox, 2017). This is because established competitors have laggards who are very loyal to their brands and might not buy the products associated with the new opened business operations. A business should be located in a region where competition is minimal.

Efficiency and Effectiveness of a Production Process

In a business context, the effectiveness and efficiency of the production process are two words that are interchangeably used yet very crucial. For instance, the effectiveness of a production process refers to the fervent ability of a business operator to maximise the strengths of a business that they operate in. The efficiency of a production process refers to the ability of a business operator to maximise the resources and activities that the business engages itself in, in a bid to increase profit and revenue generation from the business (Louch, 2014). In light of the latter, it can be argued that consumer service provision and productivity are significantly dependent on both efficiency and effectiveness.

Effectiveness in a business context is a performance measure and is a key indicator of how well a production process meets the expectations of the main stakeholders. Besides, effectiveness takes precedence over efficiency when analysing the process of an organisation (Biswas, 2018). Process efficiency acts as an internal form of measure regarding performance, and it indicates how a production process obtains outputs from inputs. A high output ratio means there is high efficiency in the production process.

Motivation and Workforce Planning

Effective workforce planning and motivation help mitigate labour turnover, hence ensuring employee retention is achieved in a significant manner. For instance, higher motivation leads to higher employee commitment because a highly motivated employee feels that their needs are met, and hence highly committed to offering an organisation their services rather than leaving. Commitment can be further improved by including employees in critical decision-making processes, which will ensure they feel appreciated, hence, motivated to work for the organisation rather than leaving (Ingram, n.d.). Effective motivation also ensures that job satisfaction is attained by a majority of employees, reducing the urge to quit from working in the organisation in question.

Workforce planning is associated with high employee retention and production yields. Despite the challenges that workforce planning faces in an attempt to be launched in an organisation (control, timeframe, detail, among others), it remains the top priority for many human resource managers to implement (Louch, 2014). In addition to employee retention, workforce planning is also relevant in ensuring that leaders are provided with the right metrics, align headcount with strategic planning, control unplanned costs, among others.

Motivation Theories

As it has been previously seen, motivation is crucial in employee retention and ensuring that employees perform at their level best in terms of production. Some of the motivational theories which will be discussed in this paper include Maslow's hierarchy of needs, McGregor's X and Y theory, equity theory, and vroom's expectancy theory. According to Maslow, human needs are always changing until they reach the self-actualization level, which in turn is dependent on the job satisfaction of employees (Fox, 2017). The higher the job satisfaction of an employee, the higher the motivation that the particular employee experiences.

According to McGregor's X and Y theory, two types of employees exist in an organisation (Fox, 2017). Those that have a negative attitude on work, theory X, and who must be pushed to perform. The other employees are positively motivated to work, theory Y, and do not need force to work efficiently. Those that have negative attitudes should be coerced to work hard, and incentives should be provided to boost their morale towards work. Equity theory proposes that employees will forever be motivated if they are treated equally at places of work. The last theory of vroom's expectancy proposes that behaviour is always the result of choices that are available for prioritisation. Therefore, providing a good working environment will always motivate employees greatly since they will have a positive environment that will shape their behaviours.

Contemporary Approaches to Motivation

There are several contemporary approaches to motivation, which have changed the way organisations strive to motivate their employees. Firstly, the paternalistic approach is the most relevant (Biswas, 2018). The carrot approach, or rather paternalistic, proposes the treatment of employees as family and proposes an unconditional reward system that appreciates the efforts input by employees. As a result, employees experience great job satisfaction, which in turn provides job security for lots of employees. The latter motivates them and ensures that they perform their duties fully and compassionately. Responsibility is also achieved as a result.

The second modern contemporary approach is the exchange theory, commonly referred to as the carrot and stick approach (Biswas, 2018). An employee is induced to the idea of working hard and stay motivated in the bid to earn unconditional rewards. This modernised theory has been described to be a penalty-reward method since an employee is coerced to work and get rewards for their productivity, which also acts as the main motivating force under this approach.

References

Agarwal, P. (2019, April 11). Economies of Scale. Retrieved from https://www.intelligenteconomist.com/economies-of-scale/.

Biswas, P. (2018, January 22). IATF 16949:2016 Process effectiveness and efficiency. Retrieved from http://isoconsultantpune.com/iatf-169492016-process-effectiveness-and-efficiency/.

Fox, J. (2017, October 17). Six factors to consider when choosing a location for your Business. Retrieved from https://www.virgin.com/entrepreneur/six-factors-consider-when-choosing-location-your-business.

Ingram, D. (n.d.). Motivation Theories & Employee Turnover. Retrieved From https://smallbusiness.chron.com/motivation-theories-employee-turnover-11785.html.

Louch, P. (2014, October 3). Workforce Planning Is Essential to High-Performing Organisations. Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/technology/pages/Louch-workforce-planning.aspx.