In this article I will be talking about Economies of Scale which you will need to know in your A2 BUSS3 paper. I will be talking about Internal Economies of Scale, External Economies of Scale and am going to relate these to real life supermarket chains, Tesco and Budgens.
Internal Economies of Scale
Internal economies of scale are driven from within and the business has complete control over.
- Purchasing economies- This is where a business bulk buys in order obtain lower prices for the products they buy from the supplier.
- Marketing economies- This is where a business uses mass marketing schemes, e.g T.V, Reward Schemes.
- Managerial economies- This is where a large business’ attract both specialist employees and the best employees available. This in turn improves their workforce and ultimately gives them an advantage over their smaller competitors.
- Financial economies- This is where larger business’ can obtain more loans and credit due to the banks seeing them as more trustworthy. This gives them far more access to sources of finance than their smaller competitors.
External Economies of Scale
External economies of scale are benefits of size that the firm has no direct control over.
- Economy of concentration- Firms that want to trade with the larger companies will locate nearby, e.g shopping centres clustering nearby similar stores.
- Links to universities- Universities work with the larger business’ nearby in order to train their talent, this gives the business skilled workers that are not tied down.
Tesco vs Budgens
How does Tesco’s larger size give it advantages over Budgens?
- Larger customer base
- Can afford to cut prices
- More bargaining power- Bulk buying
- Open stores/ Expand easier
- Larger size/ stock held- Bigger capacity
- Window dress accounts easier
- Wider range of products- Diversification
- More well known than Budgens, easier custom
- Lower prices
- Easier to gain finance, more sources of finance
- More flexibility
- Consumer reach is broader
- Utilize, make better use of advertising
- Better managers- attract better staff
- Financial muscle
- Broader brand range- e.g Tesco Finest, Tesco Value
- Use of technology- Self servicee, Internet shopping, Clubcard
This article has been written by Joe Black of Review Cosmos.