INCREASING THE EFFICIENCY OF FIRMS

Objectives:

Understand the concept of productivity, and how to calculate productivity. How productivity can be affected by technology, specialization, division of labour, investment, and economies and diseconomies of scale. The reasons for, and consequences of, diversification and horizontal and vertical integration.

PRODUCTIVITY: We know that production is the amount produced. But what is productivity? Productivity is the amount that can be produced per unit of input.

Productivity is measured by comparing what is produced (outputs) to the amount of resource used (inputs) over a period of time.

Productivity is calculated by

Output divided by input

OUTPUT  /   INPUT

Productivity of labour is output per worker.

Productivity of capital is output per machine.

A firm is interested in increasing productivity as this lowers the cost of production.

For the firm: increased efficiency and competitiveness, and increased profits. For the worker: income and leisure time can be increased. For the economy: economic growth and a higher standard of living.

ACHIEVING INCREASED PRODUCTIVITY

Productivity can be improved by getting people / firms to work more efficiently or smarter. There are many different ways to improve productivity � it can be improved if any of the inputs are used more efficiently or in a better combination. The replacing of people with machinery will often help to improve productivity. To improve productivity a firm needs to find ways in which labour can be used more efficiently in combination with other resources.

TECHNOLOGY

Investing in new capital or ways in which to produce a good will help a firm to improve output per unit of input. Investing in better equipment, new plant and machinery will help labour to improve labour productivity as less workers may now be required to do the same task or they may become quicker and more efficient at their job.

RESEARCH AND DEVELOPMENT.

Developing new technology (equipment or processes) may involve research and development. Introducing new technology will require investment spending by firms.

SPECIALISATION

By concentrating on the production of one type of good or service the firm is able to become more efficient at making / providing the commodity. Workers become specialised and more highly skilled in the production of that good increasing productivity. Specialisation leads to interdependence.

DIVISION OF LABOUR

This is the further breaking up of the production process into specialised tasks.

Advantages and disadvantages of division of labour

ADVANTAGES DISADVANTAGES Workers become more efficient. Reduces the cost of production for each good. Training time is reduced. Workers can concentrate on areas they are good at. Repetition allows workers to become better and quicker at their jobs. Possible automation of boring, dangerous or heavy jobs. May be little job satisfaction in repetitive tasks. Boring doing the same task over and over. Loss of craftsmanship as you are doing only one small part of the production process.

SPECIALISATION IN MANAGEMENT

Like division of labour, jobs in management can be further specialised into a number of separate management positions.

This allows the general manager to delegate responsibility for certain functions in middle management who have specialised in that area and are able to gain the expertise required. This can increase the level of skills and efficiency and greater delegation is possible.

ECONOMIES AND DISECONOMIES OF SCALE

Economies of Scale - these occur when any increase in output results in a decrease in the average costs of production. So if a firm decided to increase production and as a result it had to employ more people, if the output per person increased then the average cost of production would decrease. Economies of scale can occur because of-

1. Specialisation and division of labour 2. Economies of scale - any increase in the firms size results in savings to the firm through increased efficiencies. 3. Longer production runs, bulk buying of inputs.

Diseconomies of Scale- occur when the cost of producing each item rises as the amount of output increases. If a firm decided to increase production, as the output increased it would employ more workers. As it continued to employ more workers all that would happen is there would be overcrowding, output per worker would drop and therefore average costs of production would rise.

SOME REASONS FOR ECONOMIES AND DISECONOMIES OF SCALE

ECONOMIES OF SCALE DISECONOMIES OF SCALE Bulk buying. Marketing economies - being able to spread advertising costs over many products. Financial economies - being able to borrow money at a cheaper rate. Able to invest in more capital and improve efficiency Greater division of labour. Congestion of employees and equipment. Communication problems, especially between management and workers. Disadvantages of division of labour take effect. Decisions not taken quickly

THE GROWTH OF FIRMS.

Firms can expand by.

Using retained profits, by putting profits back into the firm. Sell more shares or borrow more finance and invest it into further expansion. The firm can speed up expansion by franchising the business. This is where a proven business package is sold onto others. E.g. Pak�n� Save and Mc Donalds. Takeover or merge with other firms through integration and diversification.

Many firms can try to reduce their costs of production is by expanding the business through merger or integration.

INTEGRATION

HORIZONTAL INTEGRATION

This is when a firm merges with another firm at the same stage of production.

For example if New World supermarkets (owned by Food Stuffs) took over Woolworths supermarkets (owned by progressive enterprises). They are both producing at the same stage of production in the tertiary sector.

ADVANTAGES DISADVANTAGES Reduce costs. Able to buy in bulk. Eliminate competition. Reduce personal. Increase profits. Prices may decrease as firm can reduce costs. Consumer has less choice as there are now less firms. Prices may increase as there is now less competition. Less range of choice as there are less firms in the market.

VERTICAL INTEGRATION

This is when a firm merges with another firm at a different stage of production.

Backward vertical integration - this is when a firm merges with another firm at an earlier stage of production.

For example if an Watties (a secondary sector firm) takes over an orchard (a primary sector firm).

Forward vertical integration - this is when a firm merges with another firm at a later stage of production.

For example id Watties merges with or takes over Countdown supermarkets (a tertiary sector firm owned by progressive enterprises).

The advantages of vertical integration include.

Increases the control of the supply chain. Increases efficiency of the supply chain. Secures source of supply. Secures market for their output.

DIVERSIFICATION

This occurs when a producer decides to increase its range or variety of products, such as a market gardening business (growing vegetables) decides to put some of its resources into sheep production. Diversification could involve a firm taking over or starting up another firm in an unrelated business industry; for example a caf� owner buying a bookshop. Firms diversify to gain a new source of income and to spread risk. When sales in one industry are depressed , other industries may provide better profits. A disadvantage of this kind of expansion is that the firm may know very little about the new industry.