Issues and potential problems with international location ...
Issues and potential problems with international location 1. Language and other communications barriers Distance is a problem because there is less face to face contact, also when some operations are abroad language can be another problem. 2. Cultural differences This is the consumer´s tastes and the religious factors that determine what goods should be stocked. 3. Level of service concerns This applies to the off shoring of call centres, technical support centres and functions such as accounting. Some consumer groups argue that off shoring of these services has led to inferior customer service due to time difference problems, time delays in phone message, language barriers and different practices and conventions. 4. Supply chain concerns There may be loss of control over quality and reliability of delivery. 5. Ethical considerations There may be loss of jobs when a company locates all or some of its operations abroad. Scale of operations Scale of operations - the maximum output that can be achieved using the available inputs – this scale can only be increased in the long term by employing more of all inputs. Factors that influence the scale of operations
Owners objectives Capital available Size of the market the firm operates in Number of competitors Scope for scale of economies
Economies of Scale This is the reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations. The cost benefits arise for five main reasons
Purchasing Economies These economies are often known as bulk-buying economies. Suppliers will often offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller. In addition, they will obviously be keener to keep a very large customer happy due to the profits made on the large quantities sold. Technical Economies Technical economies, basically is the use of technology to have a greater output than the labour work-force. This will make the unit cost of the products much lower, and so they will make more at a less cost. Financial Economies This economy of scale refers the ease of getting liquidity in the firm. Larger firms will be better off getting money, by two main ways: Firstly by the use of banks and other lending institutions which are giving preferences to the large business to get this loan with a proven track record and that the business shows that if one product fails they will not be bankrupt, meaning that they have diversified products. Banks receive money with the interest rates, which are lower to larger firms, compared to small firms, and especially newly formed businesses. The second way is by the issue of shares, if the firm is a PLC. This will allow them selling many millions of dollars’ worth of shares. Marketing Economies Marketing costs obviously rise with the size of the businesses. So the larger firms which do have finance available, they tend to employ marketing managers, of advertising agencies, to study the market and direct specifically adverts to them. These costs can be spread over a higher level of sales for a big firm and this offer a substantial economy of scale. Managerial Economies Small firms often employ general managers who have a range of management functions to perform. As a firm expands, it should be able to afford to attract specialist functional managers, the skills of specialist managers and the chance of them making fewer mistakes because of their training is a potential economy for larger organisations. Diseconomies Of scale These are factors that cause average costs of production to rise when the scale of operations is increased If there were no disadvantages to large-scale operations, nearly all industries and markets would be dominated by huge corporations. The impact of “diseconomies of scale” prevents one or just a few firms from being able to completely dominate. Diseconomies of scale are those factors that increase unit’s
costs as a firm’s scale of operation increases beyond a certain size. These diseconomies are all related to the management problems associated with trying to control and direct an organisation with many thousands of workers, in many separate divisions. The three main causes are Communication Problems Large-scale operations will often lead to poor feedback to workers. These communication inefficiencies may lead to poor decisions being made, due to inadequate or delayed information. Poor feedback reduces worker incentives. Alienation of the workforce The bigger the organisation, the more difficult it becomes to directly involve every worker and to give them a sense of purpose and achievement in their work. They may fell so insignificant to the overall business plan that they become demotivated. Poor coordination As business become bigger and expand, they also expand in an international way. The major problem for senior management is to coordinate and control all of these operations as a worldwide business. If coordination doesn’t work, problems arise, and again money is needed to mend these problems, which arises costs. So a tighter control and coordination is needed. Large- scale production It is important to point out that there is not a particular point of operation at which economies of scale cease and diseconomies begin. The process is much more difficult to measure than this, as certain economies of scale may continue to be received because sales increases, but the growing significance of diseconomies gradually begins to take over and average costs may rise. In practise it is often impossible to state at what level of output this process occurs, which is why many managers may continue to expand their business unaware that the forces causing diseconomies are building up to a significant degree.
Are diseconomies avoidable?
MBO- (Management by Objectives) - This will assist in avoiding coordination problems by giving each division and department agreed objectives to work towards.
Decentralisation- This gives power to the managers below them, delegation. This will motivate them more and make them feel like an important part of the company, the will have a degree of
autonomy and independence. They will now be operated more like smaller business units. Only really significant strategic issues might need to be communicated to the centre.
Reduce diversification.
Owners objectives Capital available Size of the market the firm operates in Number of competitors Scope for scale of economies
Economies of Scale This is the reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations. The cost benefits arise for five main reasons
Purchasing Economies These economies are often known as bulk-buying economies. Suppliers will often offer substantial discounts for large orders. This is because it is cheaper for them to process and deliver one large order rather than several smaller. In addition, they will obviously be keener to keep a very large customer happy due to the profits made on the large quantities sold. Technical Economies Technical economies, basically is the use of technology to have a greater output than the labour work-force. This will make the unit cost of the products much lower, and so they will make more at a less cost. Financial Economies This economy of scale refers the ease of getting liquidity in the firm. Larger firms will be better off getting money, by two main ways: Firstly by the use of banks and other lending institutions which are giving preferences to the large business to get this loan with a proven track record and that the business shows that if one product fails they will not be bankrupt, meaning that they have diversified products. Banks receive money with the interest rates, which are lower to larger firms, compared to small firms, and especially newly formed businesses. The second way is by the issue of shares, if the firm is a PLC. This will allow them selling many millions of dollars’ worth of shares. Marketing Economies Marketing costs obviously rise with the size of the businesses. So the larger firms which do have finance available, they tend to employ marketing managers, of advertising agencies, to study the market and direct specifically adverts to them. These costs can be spread over a higher level of sales for a big firm and this offer a substantial economy of scale. Managerial Economies Small firms often employ general managers who have a range of management functions to perform. As a firm expands, it should be able to afford to attract specialist functional managers, the skills of specialist managers and the chance of them making fewer mistakes because of their training is a potential economy for larger organisations. Diseconomies Of scale These are factors that cause average costs of production to rise when the scale of operations is increased If there were no disadvantages to large-scale operations, nearly all industries and markets would be dominated by huge corporations. The impact of “diseconomies of scale” prevents one or just a few firms from being able to completely dominate. Diseconomies of scale are those factors that increase unit’s
costs as a firm’s scale of operation increases beyond a certain size. These diseconomies are all related to the management problems associated with trying to control and direct an organisation with many thousands of workers, in many separate divisions. The three main causes are Communication Problems Large-scale operations will often lead to poor feedback to workers. These communication inefficiencies may lead to poor decisions being made, due to inadequate or delayed information. Poor feedback reduces worker incentives. Alienation of the workforce The bigger the organisation, the more difficult it becomes to directly involve every worker and to give them a sense of purpose and achievement in their work. They may fell so insignificant to the overall business plan that they become demotivated. Poor coordination As business become bigger and expand, they also expand in an international way. The major problem for senior management is to coordinate and control all of these operations as a worldwide business. If coordination doesn’t work, problems arise, and again money is needed to mend these problems, which arises costs. So a tighter control and coordination is needed. Large- scale production It is important to point out that there is not a particular point of operation at which economies of scale cease and diseconomies begin. The process is much more difficult to measure than this, as certain economies of scale may continue to be received because sales increases, but the growing significance of diseconomies gradually begins to take over and average costs may rise. In practise it is often impossible to state at what level of output this process occurs, which is why many managers may continue to expand their business unaware that the forces causing diseconomies are building up to a significant degree.
Are diseconomies avoidable?
MBO- (Management by Objectives) - This will assist in avoiding coordination problems by giving each division and department agreed objectives to work towards.
Decentralisation- This gives power to the managers below them, delegation. This will motivate them more and make them feel like an important part of the company, the will have a degree of
autonomy and independence. They will now be operated more like smaller business units. Only really significant strategic issues might need to be communicated to the centre.
Reduce diversification.
