Chapter 26 - Location and Scale

Question 1

Optimal Location

Answer 1

A business location that gives the best combination of quantitative and qualitative factors.

Question 2

Quantitative Factors

Answer 2

Issues that managers should consider that can be measured in financial or numerical terms.

Question 3

Qualitative Factors

Answer 3

Issues that managers should consider that are not measurable in financial or numerical terms.

Question 4

Quantitative Factors

Answer 4

1) Site and other fixed costs - Ex: Buildings
2) Labor Costs - Capital or Labor Intensive
3) Transport Costs - Supply of raw materials
4) Potential Revenue
5) Government Grants - Foreign governments interested in new firms
6) External Economy and Diseconomy Of Scale - Delve into further detail later
7) Profit Estimations
8) Investment Appraisal - the analysis done to consider the profitability of an
investment over the life of an asset alongside considerations of affordability and strategic fit.
9) Break Even Analysis - How fast, how much to be profitable

Question 5

Qualitative Factors

Answer 5

1) Safety - Potential risks in the production process
2) Space For Further Expansion - Is it expensive?
3) Manager’s Preference - May want to remain small
4) Ethical Considerations - Workers are redundant if there is relocation. ( Immoral)
5) Environmental Concerns - Sensitive Environment
6) Infrastructure - Quality - Mainly Transport and Communication
7) Planning Restrictions - Local Authorities
8) Advantages Of Multi-Scale Locations - Operations on more than one site.

Question 6

Off Shoring

Answer 6

The relocation of a business process from one country to another country.

Question 7

Reasons for Off-Shoring

Answer 7

1) Reduce Costs
2) Supply of well-qualified workforce
3) Access to global markets
4) Avoiding protectionist trade barriers
- Tariffs Or Taxes
- Quotas
5) Government financial support to relocating businesses
6) Exchange Rate
- Fluctuates a lot
- Forced to use a blanket currency
- Price of product is affected

Question 8

Trade Barriers

Answer 8

Taxis or tariffs or other limitations on the free international movement of goods and services.

Question 9

Reshoring

Answer 9

Transferring a business operation that was moved overseas back to the country where it was originally located.

Question 10

Reasons for reshoring

Answer 10

1) Language and other communication barriers - Face to face communication is less likely
2) Cultural differences - Consumer taste and religious beliefs
3) Product quality and level of service concerns - Call centers leading to inferior customer service
4) Supply chain concerns - Loss of control of quality and reliability of delivery
5) Ethical Concerns - Consumer boycott.

Question 11

Scale of Operations

Answer 11

The maximum output that can be achieved using the available inputs ( resources )

Question 12

Factors Affecting Scale Of Operations

Answer 12

1) Owners Objectives - Wish to keep the business small and easy to manage
2) Capital available - if limited, growth is less likely
3) Size of market - the firm operates in a very small market , there won’t be a requirement for large-scale productions
4) Number of competitors - the market of each firm may be small if there are many rivals
5) Scope of Economies of Scale - If these are substantial, each business is likely to operate on a large scale.

Question 13

Internal Economies of Scale

Answer 13

Factors that cause reductions in unit ( average ) costs of production as the business expands its scale of operations.

Question 14

Types of Internal Economies

Answer 14

1) Purchasing
2) Technical
3) Financial
4) Marketing
5) Managerial

Question 15

Purchasing Internal Economies

Answer 15

• Bulk buying economies
• Discounts
• Big firms can use this.

Question 16

Technical Internal Economies

Answer 16

• Flow productions
• Costs are covered
• Lower unit costs
• More technological equipment

Question 17

Financial Internal Economies

Answer 17

• Banks and lending firms, track record
• Interest rate charges to these firms are lower
• Going public - issuing of shares

Question 18

Marketing Internal Economies

Answer 18

• Budgets are higher
• High Impact

Question 19

Managerial Internal Economies

Answer 19

• Can employ specialist managers
• More efficient than generals managers who operate multiple jobs
• Fewer mistakes

Question 20

Internal Diseconomies of Scale

Answer 20

Factors that cause unit costs of prodction to increase when a business increases its scale of operations.

Question 21

Types of Internal Diseconomies

Answer 21

1) Communication
2) Alienation of workforce
3) Poor Coordination

Question 22

Communication ( Internal Diseconomies )

Answer 22

• Poor communication of feedback from and to workers
• Excessive use of non - personal communication media
• Communication overload - greater number of messages being sent
• Distortion of messages caused by long chain of command

Question 23

Alienation Of Workforce ( Internal Diseconomies )

Answer 23

• Bigger the firm, more difficult to directly involve everyone
• Lack of sense of purpose
• More demotivated
• Flow production overcomes this however
  
  • Team Working
  • Job Enrichment

Question 24

Poor Coordination ( Internal Diseconomies )

Answer 24

• Concentrate on core activities of the business
• Helps reduce coordination and communication problems
• Demerger - Separating one business unit from another, especially to reverse to an earlier management

Question 25

How to avoid internal diseconomies

Answer 25

1) Management by objectives
- Avoid coordination problems
- Each department has agreed objectives
- Working towards long terms goals
2) Decentralisation
- Divisions some degree of autonomy and independence
- Control is exercised by managers
- However, must avoid pursuing conflicting objectives as this results in poor coordination
3) Reduce Diversification
- Concentrate on core activities of the business
- Helps reduce coordination and communication problems
- Demerger - Separating one business unit from another, especially to reverse to an earlier management

Question 26

External Economies of Scale

Answer 26

Factors causing unit cost reductions that can benefit a business as the industry expands in one region.

Question 27

External Diseconomies of Scale

Answer 27

Factors causing unit costs to rise as an industry expands, especially in a given region.

Question 28

Example for external diseconomies

Answer 28

If an industry continues to grow in one location it can lead to cost increases for other businesses.
There will be increased demand for land and property and suitable labor.
Demand pressures will cause unit costs to rise for businesses in the industry operating in this location.