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Economies of Scale
These occur when mass producing a good results in lower average cost. Economies of scale occur within an firm (internal) or within an industry (external).
Internal Economies of Scale
These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of:
Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively.
Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc.
Financial economies made by borrowing money at lower rates of interest than smaller firms.
Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.
Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.
Research and development economies made when developing new and better products.
External Economies of Scale
These are economies made outside the firm as a result of its location and occur when:
A local skilled labor force is available.
Specialist local back-up forms can supply parts or services.
An area has a good transport network.
An area has an excellent reputation for producing a particular good. For example, Sheffield is associated with steel.
Question # 1
Select one company that is operating globally and explain how its global operations take advantage of the Economies of Scale that it's global operations provide.
Question # 2
Collins and Porras make the argument that these two assumptions are myths, that you can be wildly successful without either a great idea or a dynamic charismatic leader. They site a number of eventually successful companies that started off without even a real sense of direction or firm plans. The companies they site to support their theory, however, were started anywhere from 1937 - 1960.
We live in the 21st century, where time and distance are no longer obstacles, where the mantra is globalization. Given our current environment, is the concept of 'must have' either a great idea or a dynamic, charismatic leader myth or reality? Provide examples to support your position.
It would be great if global companies only had to worry about developing the right product, the perfect packaging or the most efficient production plant.
The reality is that many global corporations (and not just American global corporations) find themselves dealing with related issues - terrrorism, political unrest, coups, etc. In Iraq and Saudi Arabia, American companies have been the target of attacks by terrorists who wish to undermine the local governments. Foreign facilities of highly visible American companies - McDonalds, Coke, Budweiser, IBM, Nike - are often sacked and looted when opposition parties are trying to stir up local unrest against the existing governments. Many Central and South American gangs have made quite a good living off of kidnapping foreign executives and then demanding ransom from the global company for the safe return of the executive. While Globalization is a fact of life that is here to stay, local environmental groups sometimes strike out at large global companies because they feel they are threatening the local culture, or changing old ways they want to cling to. The more global and visible you become, the more you increase the odds of running into these types of related problems.
So what position should global companies take regarding these related issues? Keep in mind there is a corresponding relationship between risk and reward. Should companies expand and work in only highly industrialized, politically stable countries? Should they expand into less stable countries but leave at the first sign of problems? Should they become involved in supporting (through money and resources) political parties that ensure governmental stability? Should they give up on promoting the well known American brand names and adopt names in each country that reflect local traditions or preferences? Any problem with developing small local security firms to provide security for production facilities and employee living compounds?
Just how far should global companies go in dealing with these types of related issues in countries where they operate?
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I think Microsoft has taken full advantage of these Economies of Scale in many ways. First let's look at the support for Microsoft products. Years ago Microsoft's technical support operators were based only in the USA, now Microsoft has technical support operators all over the world. Hiring operators from the international market enables Microsoft to pay less in some cases and sell more computers and accessories to consumers in other countries. These international operators speak many different languages and this allows Microsoft to expand rapidly. Secondly they hire workers from all over the world to make parts for their computers and other products. It is no secret that most workers hired from other countries are ...
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