Location and scale (optimal Location)
An optimal location decision is the best site for a new business or for relocating an existing one, which should maximise with long term profits
Factors that affect location
- the high fixed costs of the site with convenience for customers and potential sales
- the low costs of a remote site with the limited supply of suitably qualified labour
- quantitative factors with qualitative factors(see below)
- the opportunities of receiving government grants in areas of high unemployment with the risks of low sales because of low average incomes in these areas
Drawbacks of non-optimal location:
-High fixed site costs: Leads to high break-even level of production, Low profits or even losses and if capacity utilisation is low, unit fixed costs will be high
-High labour costs: Low contribution per unit produced or sold, low profits or even losses, high average variable costs which reduces competitiveness
-Low employment rate: Problems with recruiting suitable employees, high labour turnover, wage may have to increase to attract and retain workers.
-High employment rate: Average disposable income low, resulting in relatively low demand for income-elastic products
-Poor transport infrastructure: Raises transport costs for materials and finished products. Relatively inaccessible to customers. Difficult to operate (JIT) due to unrelaible deliveries.
Quantitative factors that determine location and relocation decisions:
-Site and other fixed costs such as buildings: Cost of building on a “greenfield” site (one that has been never been developed), should be compared with the costs of adapting existing buildings on developed site.
-Labour costs: Location is a factor on whether the business adopts capital intensive or labour intensive production method.
-Transport costs: Businesses that use heavy and bulky raw materials incur high transport costs if suppliers are at a great distance from the steel plant. Service industries, such as hotels and retailing, need to be conveniently located for customers, and transport costs are of less significance.
-Potential revenue: Level of revenue achieved by a business is influenced by revenue.
-Government grants: Incentive to encourage businesses to operate in their country to reduce areas of uneployment.
Qualitative factor that determine location and relocation decisions:
-Profit estimates: Comparing estimated revenue of each location, the site with the highest amnual profit may be identified.
Factors that influence the scale of operations of a business:
- owners’ objectives – they may wish to keep the business small and easy to manage
- capital available – if this is limited, growth will be less likely
- size of the market the firm operates in – a very small market will not require large-scale production
- number of competitors – the market share of each firm may be small if there are many rivals
Economies of scale:
Decrease in unit costs as the scale of production increases
External economies of scale:
Economies of scale (cost advantage) to the whole industry not just a particular company
Internal economies of scale:
-Purchasing economies: Discounts offered by suppliers through bulk purchases
-Technical economies: Large businesses able to justify costs of flow production, using most advanced technical equipment
-Financial economies: Large firms being able to obtain a bank loan at very low interest rates. Due to proven track record and diversified products
-Marketing economies: Marketing costs can be spread over a higher level of sales for a big business and this offers a substantial economy of scale.
-Managerial economies: Business expansion provides finance to employ more efficient, skillfull functional managers.
External diseconomies of scale:
Diseconomies (Cost disadvantage) for the whole industry, where unit costs for businesses operating in that industry will rise
Internal diseconomies of scale:
-Communication problems: Large scale businesses lead to communication problems such as poor communication of feedback from and to workers and distortion of messages caused by the long chain of command. Which may lead to poor decisons being made. Reduces management efficiency and leads to higher average costs.
-Alienation of workforce: Bigger the organisation, more difficult it is to involve every employee, May lead to lack of sense of purpose and achievement. Job-enrichment methods helps reduced Alienation of workforce
-Poor coordination: Business expansion leads to inability to efficiently communicate and coordinate, to ensure all departments are achieveing the same objectives.
How to overcome the impact of diseconomies of scale:
Management by objectives: Will assist in avoiding coordination problems by giving each division and department objectives to work towards to achieve long-term goals of the whole business.
Decentralisation:
Provides business divisions with autonomy and freedom, Must avoid pursuing conflicting objectives, as it results in poor coordination.
Reduce diversification
A less diversified business that concentrates on core activities may help to reduce coordination problems and communication problems. This could be achieved by a demerger. Which reduces the risk of diseconomies of scale occurring.
Quality Management
A quality product does not need to be made with the highest quality materials, but must meet the consumers expectations.
The importance of quality:
- helps create customer loyalty
- reduces costs of customer complaints: paying compensation, replacing defective products
- helps prolong product life cycles
- reduces the cost of advertising, as the brand will establish a quality image through the performance of its products
- raises the prices that can be charged for quality goods and services.
How business competitiveness is affected by quality:
- Reducing prices is not necessarily the best method of increasing competitiveness.
- Consistent high quality can lead to such a well-known brand image that higher prices can be justified for this unique selling point (USP).
- Average consumer incomes are increasing which raises consumer expectations.
Quality control
Quality control: Inspecting or checking, usually of the completed product or of the service as it is being provided to a consumer.
Businesses can use quality control and quality assurance to achieve quality output.
Quality control methods
-Prevention: This is the most effective way of improving quality. If the design of the product satisfies the requirements of the customer and allows for accurate production, then the other two stages will be less significant.
-Inspection: It involves high costs as technically qualified inspectors are needed to check the finished product.
-Correction and improvement: correcting faulty products but is also correcting the process that caused the fault in the first place. This will improve quality in the future.
Quality control inspection
Quality inspection is expensive as qualified engineers have to be used.
Impact of quality control on business:
- Inspectors believe that they have been successful when they find faults. This can cause resentment among workers.
- Employees may view inspectors as management employees who are there just to check on output and to find problems with the work. This mistrust is not good for working relationships and the overall levels of morale in the firm.
- The job of inspection can be tedious, so inspectors become demotivated and may not carry out their tasks efficiently.
- If checking takes place only at a few points in the production process, faulty products may pass through several production stages before being picked up.
- It reduces workers’ responsibility for quality. Inspectors have full authority for checking products. This lack of responsibility is demotivating and will result in lower- quality output.
Quality assurance
Setting agreed quality standards at all stages of production to ensure that customers’ satisfaction is achieved.
Importance of Quality assurance
- Puts much emphasis on the prevention of poor quality by designing products for easy fault-free manufacture and this should result in getting the quality right first time
- Stresses the importance of workers aiming for zero defects, so reducing the chances of faulty products being made or expensive reworking of faulty goods
- establishes quality standards and targets for each stage of the production process for goods and services
- checks components, materials and services bought into the business at their point of arrival, and not at the end of the production process.
-involves self-checking by workers of their own output against these agreed quality standards.
Stages at which quality is improved
-Product design: The product needs to be designed to meet the expectations of consumers.
-Quality of inputs: Quality must not be let down by bought-in components. Suppliers will have to accept and keep to strict quality standards.
-Production quality: This can be improved by all employees taking quality seriously and being responsible for it. Workers should realise that quality levels must not drop below pre-set standards.
-Delivery systems: Customers need goods and services delivered at times that are convenient to them. The punctuality and reliability of delivery systems must be monitored.
-Customer service, including after-sales service: Continued customer satisfaction will depend on the quality of contact with consumers after purchase. This is a form of customer relationship marketing
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Enterprise, Business structure & Size of business45
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External influences on business activity56
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External economic influences20
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Business strategy45
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Operations management77
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Human Resource Management Strategy44
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Investment Appraisal13
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