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Chapter 14 - Location and Scale - Coggle Diagram
Chapter 14 - Location and Scale
Location
Geographic Factors - Climate, earthquakes, floods...
Demographic factors - Chosen location should have skills, experience, qualifications
Legal factors - Local laws on tax, government assistance, planning, waste disposal
Political factors - Political stability of a region and governmental intervention
Resources - Close access to raw materials or components reduces transport costs
Infrastructure - utilities, transport networks, finance, educational and health facilities
Relocation and industrial inertia
Relocation occurs when a business decides to move its location, this could be because of the changes in the factors that affected the original location decision
A business may choose to stay in the same place because the cost of moving are greater than the benefits of the move
Costs of moving include: finding and training new employees, finding new suppliers, additional marketing costs, costs of the move
Offshoring
Offshoring occurs when operations are moved overseas
There is easier access to resources and markets, costs are lower, fewer regulations, helps overcome trade barriers, foreign government subsidies are available
Reshoring
Occurs when operations are moved overseas back from the home country
Costs have risen overseas, incentives from other governments
Issues with quality or delivery times, political instability
Impact of globalisation
Globalisation brings more open trade and makes it easier to move people and money
Access to cheaper and higher quality resources, easier to set up, opens up to new markets
Scale of operations
Factors influencing the scale of a business
Demand
Business will increase scale to meet higher levels of demand
Finance
The money needs to be available to enable expansion
Business objectives
If these dont include expansion then there will be no change in scale
Legislation
Countries often have laws limiting the size of a business if it is felt that it is becoming an monopoly and too powerful in the market
Internal economies of scale
Occur when average costs fall as the scale of output increases
Average costs = Total costs / Output
Lower average costs enable lower prices or higher profit margins to be achieved and make it harder for competition
At a certain level the minimum efficient scale is reached, as scale and output increase diseconomies of scale appear
Diseconomies of scale occur when average costs increase as the scale of output increases
Types of internal economies of scale
Purchasing economies of scale
By ordering on a large scale, a business gains discounts
Technical economies of scale
A business may use more efficient technology or equipment to produce on a large scale
Managerial economies of scale
Larger businesses use management specialists such as Human resource experts and legal experts leading to better decision making and fewer mistakes
Administrative
A particular task uses the same paperwork or process whatever the quantity, so if scale increases the costs can be spread over more units
Financial
As a business gets bigger it has more assets and may be seen as lower risk, which reduces risks of borrowing
Internal diseconomies of scale
Communication difficulties
As a business grows, communication between all employees, departments and divisions may become slower and more difficult
Coordination and duplication costs
As the size of the business increases it is more difficult and expensive to make sure that the same work isnt being done in different places
Control and lower motivation
Larger firms find it more difficult to motivate employees as workers feel more remote from managers and the business as a whole
External economies of scale
Occur when unit costs fall for every output due to external factors
Infrastructure economies of scale
New infrastructure like broadband, roads or airports
Research and development
Access to nearby universities or research facilities
Marketing economies of scale
Similar businesses operating in the same area may need to advertise less as customers visit knowing there is somewhere to buy from
Production economies of scale
If suppliers are nearby there are lower transport costs and communication costs