2. 02 July 2016© easilyinteractive.com 2007-91 Scale of production Choosing the right scale

3. 02 July 2016© easilyinteractive.com 2007-92 Deciding what to produce factors – task  What issues should a business consider before launching a new venture?  Use the following headings to help you  The market  Production  Profitability  3 minutes… *

4. 02 July 2016© easilyinteractive.com 2007-93 Deciding what to produce factors – suggested answers  The market  Is there a ‘gap in the market’?  What do consumers want?  Quality, price, reliability, brand image, after-sales service etc.  Production  Do we have the right skills?  Training  Do we have the right machinery?  Investment?  How much should we produce?  Profitability  Will the expected revenue pay the costs?  Will we make a profit?  Is the size of the profit worth the risk? *

5. 02 July 2016© easilyinteractive.com 2007-94 Choosing the right scale task  A major mistake that a new business can make is to get their scale wrong  Identify problems of starting out too:  Big  Small *

6. 02 July 2016© easilyinteractive.com 2007-95 Choosing the right scale suggested answers  A major mistake that a new business can make is to get their scale wrong:  Too big:  Borrow heavily to invest in many expensive fixed assets, large and prestigious offices/factory etc.  Sales then completely fail to meet forecasts and load repayments cannot be made  Too small:  Invest in minimal fixed assets, minimal staff and perhaps even work from home to reduce costs  Sales massively beat expectations and the business can’t cope – there are delays, perhaps quality is poor and mistakes are made as staff struggle to cope  While the business sorts itself out other competitors are able to enter the market and an opportunity is missed *

7. 02 July 2016© easilyinteractive.com 2007-96 Scale of production Specialisation and the division of labour Do you recognise this man? (answer on next slide)

8. 02 July 2016© easilyinteractive.com 2007-97 Specialisation and the division of labour  The more workers specialise, the more efficiently they can work  Division of labour: Splitting a production process into small, specialised jobs in order to increase efficiency * e.g. A sole trader must be a ‘jack of all trades but a master of none’. She will pay an accountant, a solicitor – perhaps an advertising agency, cleaners etc. – because she knows that they can do their specialist work better and more efficiently than she herself can, whilst she can focus on what she does best The phrase ‘division of labour’ was coined by a famous Scottish economist called Adam Smith (the new face of the £20 note). In his book ‘The Wealth of Nations’, which was published in 1776 he wrote that one worker could probably make only one pin per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day.

9. 02 July 2016© easilyinteractive.com 2007-98 The trade of the pin-maker…  “a workman … could scarce … make one pin in a day, and certainly could not make twenty.  But … the whole work … is divided into a number of branches…  One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving, the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper;  and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.  I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them … upwards of forty-eight thousand pins in a day.” * From: An Inquiry into the Nature And Causes of the Wealth of Nations, Adam Smith, 1776 Source: http://www.adamsmith.org/smith/won-b1-c1.htm

10. 02 July 2016© easilyinteractive.com 2007-99 Specialisation and the division of labour  Advantages of division of labour   efficiency – more output in the same time   training due to simplified tasks   productivity due to  training meaning that the worker is productive in a short amount of time  Concentration on one repetitive task makes workers more skilled at performing that task  Disadvantages  Lack of motivation: Absenteeism may rise due to boredom  A break-down on the production line may cause problems to the entire process   flexibility: Workers have limited skill so may be unable to cover other staff absences   start-up costs: The specialist machinery necessary for division of labour is expensive and leads to an increased break-even point *

11. 02 July 2016© easilyinteractive.com 2007-910 Specialisation and the division of labour - task  Identify and list the tasks involved in clearing up following a meal at home – from clearing the table to having everything cleaned and put away  How many separate tasks are there?  Given unlimited resources, how could division of labour be used to maximise efficiency and minimise the time taken to do these tasks? * Image by Stig Andersen. Used with permission

12. 02 July 2016© easilyinteractive.com 2007-911 Economies of scale Economies of scale: Advantages of being a large firm due to lower average costs per unit

13. 02 July 2016© easilyinteractive.com 2007-912 Economies of scale More sources of finance Lower interest rates Financial Specialist managers Managerial Specialist equipment Division of labour Technical Product Market Diversity Risk-Bearing Trading Bulk-buyingAdvertising Economies of scale *

14. 02 July 2016© easilyinteractive.com 2007-913 Economies of scale  Trading economies  Larger firms are likely to get better rates when buying raw materials than smaller firms  The cost of advertising can be spread over more product units sold than in a small firm  They can transport much bigger loads than smaller firms at little extra cost * Both vehicles require one driver but...  Van payload approx 7m 3  Lorry payload approx 60m 3

15. 02 July 2016© easilyinteractive.com 2007-914 Economies of scale  Financial: Larger firms find it cheaper and easier to raise money  Managerial: Larger firms can afford specialist managers – marketing experts, solicitors, accountants etc. which increases efficiency  Technical  Larger machinery is often more efficient  Division of labour enables workers to specialise  Risk-bearing: Bigger companies can spread their risk by investing in more products and more markets *

16. 02 July 2016© easilyinteractive.com 2007-915 Economies of scale task  Make a poster illustrating the main categories of Economies of Scale for your classroom wall *

17. 02 July 2016© easilyinteractive.com 2007-916 Diseconomies of scale

18. 02 July 2016© easilyinteractive.com 2007-917 Diseconomies of scale  Diseconomies of scale: Very large businesses may become less efficient than smaller ones leading to increased unit costs  E.g. due to problems with  Communication  Coordination of the various departments/branches/factories etc.  Morale – staff may not feel valued *

19. 02 July 2016© easilyinteractive.com 2007-918 Economies and diseconomies of scale – task  Think of two local examples of fast food restaurants (burgers, pizza etc.)  One should be a should be a small local business, and the other a national/multinational chain  What advantages/disadvantages does each one has compared to the other * Consider customer service, marketing, purchasing, recruitment and training of staff, access to sources of finance etc.

20. 02 July 2016© easilyinteractive.com 2007-919 Japanese production methods