Business Operations - IGCSE edexcel business studies summary notes

Borja Jimenez
Business IGCSE



CHAPTER 5
BUSINESS OPERATIONS



Contents
CHAPTER 5.............................................................................................................................. 1
ECONOMIES AND DISECONOMIES OF SCALE (40).................................................................1
PRODUCTION AND PRODUCTIVITY (41)................................................................................2
LEAN PRODUCTION (42)....................................................................................................... 4
TECHNOLOGY IN PRODUCTION (43).....................................................................................6
FACTORS OF PRODUCTION (44)........................................................................................... 7
QUALITY (45)........................................................................................................................ 8
ECONOMIES AND DISECONOMIES OF SCALE (40)
Once a business is established, the owners normally want to expand and increase the scale
of the business. One of the benefits of this is that certain costs will start to fall.

ECONOMIES OF SCALE1
Large firms can usually produce goods more cheaply
than small firms. As a firm increases its size, average
costs start to fall; this is a result of economies of scale.

INTERNAL ECONOMIES OF SCALE
These are the cost benefits and individual firms can
enjoy as it grows.
 Purchasing economies: Large firms that buy a lot of resources get cheaper rates.
Suppliers offer discounts to firms that buy raw materials and components in bulk.
 Marketing economies: these can occur because some marketing cots are fixed, so
these can be spread over more units. Promotion costs are spread over a larger
production, making it less expensive to advertise each individual product.
 Technological economies: There can be more specialization and more investment in
machinery. By investing in bigger, better and faster machines to make more
products, a business will find its unit costs of production will fall.
 Financial economies: larger firms can get cheaper money. They also have a wider
variety to choose from. Large firms can put pressure on banks when negotiating the
price for loans. Lenders see them as being less risky because of their size,
 Managerial economies: as firms expand they ca afford specialist managers. As a
result, efficiency is likely to improve and average costs will fall
 Risk-bearing economies: Larger firms are more likely to have a wider product ranges
and sell into a wider variety of markets. This reduced the risk in business.

EXTERNAL ECONOMIES OF SCALE
Sometimes all firms in an industry can enjoy falling average costs as a whole. A business can
gain certain advantages as a result of the growth of its industry
 Skilled labor: if an industry is concentrated in one area, there may be a build-up of
labor with the skills and experience required for that industry. As a result, training
costs will be lower when workers are recruited.
1
Financial advantages (falling average costs) of producing something in very large
quantities

1

, Borja Jimenez
Business IGCSE

 Infrastructure: if a particular industry dominates a region, roads and other facilities
will be shaped to suit that industry’s needs.
 Commercial services: specialist suppliers are likely to be attracted to an area where
there are similar businesses. This makes it cheaper for those businesses to employ
these.
 Cooperation: when firms in the same industry are located close to each other they
are likely to cooperate with each other. They might work together to achieve a
particular goal for the industry at a whole


DISCEONOMIES OF SCALE2
If a firm continues to expand beyond a certain point,
average costs will eventually rise; as a result of
diseconomies of scale. This is because production
is likely to become inefficient.
 Bureaucracy: if a business becomes too
bureaucratic, it means that too many
resources are used in administration. Also,
decision making may be too slow and
communication channels to long. If resources
are wasted in administration, average costs
will start to rise.
 Labor relations: if a firm becomes too big,
relations between workers and managers may
deteriorate. Management may fail to
understand workers and they may become demotivated.
 Control and coordination: a very large business may be difficult to control and
coordinate. There may be a need for more supervision, which will raise costs.


LIMITS OF GROWTH
 Lack of finance: some businesses would like to grow but are unable to raise the
finance needed to expand
 Nature of the market: some markets are too small to sustain very large companies
 Lack of managerial skills: some businesses may be unable of growing because the
owners o not have the managerial skills required to run a large business operation.
 Lack of motivation: some business owners do not want to grow their business. They
may be making enough profit to satisfy their needs and do not want to take the
responsibility of taking on more responsibility.


PRODUCTION AND PRODUCTIVITY (41)
Business can use different production methods when making products.

BATCH PRODUCTION3
Occurs when similar items are produced together. This is where a business makes a number
of products to the same design or specification and then changes production to another
product with different specifications. When products are made in batches, production is
usually divided into a number of operations.
 ADV: reduces unit costs as they’re produced in larger quantities; this is because they
can benefit from economies of scale, production is flexible, using specialist
2
Rising average costs when a firm becomes too big
3
Method that involves completing one operation at a time on all units before performing the
next

2