Unit costs tend to rise in the short run
because, among other reasons, employees
will have to
be paid overtime. A point may even be reached where they start to get
in each
other’s way. As output increases, there is a build-up of stress and friction
on managers,
machines and materials as they are pushed to the limit. Also, standard
scale
economies become less effective. Learning-by-doing in any particular
activity
occurs at a declining rate and eventually reaches zero. Employees too can
become
over-specialised, leading to loss of adaptability and initiative.
In the long run, these problems can be
addressed by expanding the size of the
plant,
buying more machines and adding to staff. Management systems can be
developed,
and bottlenecks and constraints can be systematically addressed. The
long-run
overall average cost of the firm may continue to slope downwards for a
considerable
range of output. Successful firms tend to see a continuous downward
trend in
unit costs. Yet the constraints on minimum efficient size eventually
become
binding, at different scale levels in different industries.
After a certain output level, diseconomies
of scale swing into action. These
involve increases
in unit costs as output rises. Diseconomies of scale take a number
of forms.
1. Informational requirements grow as the firm becomes larger. Instead of the informal
communication
system of a small firm, larger firms have to employ special
systems to
disseminate information.
2. Management control becomes more difficult as firms get bigger, leading to
higher unit
costs.
3. Industrial relations problems can become more acute, and disproportionate
effort has
to be devoted to motivating staff and cultivating corporate esprit de
corps.
4. As firms become larger they suffer a loss
of flexibility. Customised demand
becomes
harder to cater for.
5. Transport costs set limits to size in
some industries. For this reason, corrugated
cardboard
manufacturing and construction materials, such as cement and
gravel,
usually have to be installed nearer the consumer than in many other
industries.
This sets a limit on plant size.
The scope for exploiting scale economies
and for avoiding diseconomies of
scale is in
a constant state of flux. ‘New wave’ manufacturing strategies, variously
labelled as
world-class manufacturing, lean production, flexible specialisation,
post-Fordism
and Total Quality Management, can restore economies based on
new forms of
work organisation. To raise productivity, teams or groups can be
formed
around the production of common parts or the search for customers._13
Lean
production, for example, is based on teams of multi-skilled workers and
flexible
automated
machines. It is ‘lean’ in that it uses fewer inventories, less space
and more
teamwork, with an objective of zero defects and minimum inventory.
It strives
to combine the advantages of mass production and craft production.
In some industries the optimum scale of
operation is increasing, but in others the advent of new technology has given a
renewed lease of life to smaller firms. Computerised reservation systems
provide special advantages to larger airline carriers, but information
technology has improved the ease and cost of access of smaller firms to data
which previously only a large firm could have afforded to acquire. Major drug
companies find that they can control the rising cost of innovation by
contracting out research to smaller specialised medical research companies.
Chiroscience and Celsis, two of Britain Europe to
competition from smaller competitors. The
telecoms industry no longer requires enormous sunk costs in the form of cables
linking every receiving household.
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