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The impact of economies and diseconomies of scale Tesco face

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Introduction

The impact of economies and diseconomies of scale Tesco face As businesses grow and their output increases, they commonly benefit from a reduction in average costs of production. Total costs will increase with increases in output, but the cost of producing each unit falls as output increases. This reduction in average costs is what gives larger firms a competitive advantage over smaller firms. This fall in average costs as output increases is known as Economies of Scale. Tesco benefit from economies of scale because they are constantly opening new stores around the country, such as their new store in Stockport. Therefore, they are always increasing their output, and so benefit from lower average costs. That is why Tesco seem to have the monopoly is supermarkets, as they have an advantage over smaller supermarkets such as Morissons, who do not buy as much quantity. In the short run, Tesco benefit from economies of scale by selling in bulk. They do this using special offers, such as 'If you spend �50, you get 5p per litre off your fuel' and also 'Buy one get one free'. ...read more.

Middle

One of these internal economies of scale is purchasing. As Tesco continue to grow, they increase the size of their orders for raw materials. This results in the cost of each individual component purchased will fall. This will therefore reduce the average cost of production. Another internal economy of scale from which Tesco benefit is technical. As they grow, they are able to use the latest equipment and incorporate new methods of production. An example of is their new self-service checkouts from which people can purchases their goods from a machine using a scanner. This increases efficiency and productivity, reducing average costs of output because it means they don't have to employ as many workers. Other internal economies of scale include finances, because Tesco have enough financial backing, it means they do not have to borrow money and pay interest on that money as smaller supermarkets do. Tesco also employ managers who specialise in different areas. These managers will know how to get the best value for each � spent, whether it is in production, marketing or purchasing. ...read more.

Conclusion

In Tesco, as there are so many workers, the manger may not be able to see if everyone is doing their job. This then means Tesco are suffering from diseconomies of scale. This diseconomy is internal, meaning it is a problem that can be controlled by the company. Internal diseconomies of scale are often qualitative in nature, hard to measure financially, but can still reduce the efficiency of Tesco. An external diseconomy may be the competition of labour. As there are so many firms in Manchester, it means it is harder for them to recruit the best workers and also keep them. Another external diseconomy of scale is increasing employment costs. More supermarkets means that Tesco eventually pay more wages as there is more demand for labour, hence increasing the average costs with output. Overall, we can see that Tesco suffer from both economies and diseconomies of scale. I feel that Tesco benefit more from economies of scale, even though they suffer from diseconomies of scale. The reason is that as they increase their output there is significant changes in their average costs to account for the diseconomies of scale which only slightly increase the average costs. ...read more.

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Response to the question

This essay responds superbly to the question, giving a strong insight into economies of scale and diseconomies of scale. I liked how they recognised the difference between internal and external economies of scale, but I would've liked to have seen ...

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Response to the question

This essay responds superbly to the question, giving a strong insight into economies of scale and diseconomies of scale. I liked how they recognised the difference between internal and external economies of scale, but I would've liked to have seen this briefly summarised in the introduction to make their understanding clear. A clear diagram showing how average costs decrease (economies of scale), and then increase (diseconomies) as output increases would have made this essay stronger.

Level of analysis

The analysis in this essay is sound, but each example of economies of scale could be explained better. For example, when talking about purchasing economies of scale, you could reference a simple demand diagram showing how a large quantity should result in a lower sale price. If I were doing this essay, I would explore the concept of skilled managers. Large firms are able to attract talented employees and so become more productively efficient. This essay mentions efficiency quite regularly, but using technical terms such as productive or allocative efficiency would show higher level understanding. When talking about diseconomies of scale, I would recommend talking about the structure of the firm becoming more disjointed, and thus production isn't as efficient. I am unsure about their point of wages, as generally Tesco hire shop workers with low skills and pay them low wages. If the demand for workers increase, it is unlikely the wages will increase significantly, especially due to the unemployment numbers at the minute. Such discussion would be perceptive and gain credit. I would've liked to have seen some awareness of the effect economies of scale can have on competitors. As Tesco benefits from economies of scale, it acts as a barrier to entry for new firms trying to enter the market, ensuring Tesco maintain their market share.

Quality of writing

This essay is structured well, having a clear introduction and conclusion. I liked how each economy of scale was tackled separately, and there was a clear progression from economies of scale to diseconomies of scale. There are a few instances of slips in spelling, punctuation and grammar such as "benfit" which could be removed after a proof read. I would recommend trying not to use the first person, as this sounds less sophisticated and more opinion based. Using phrases such as "it is clear from the analysis shown" will make your argument more convincing.


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Reviewed by groat 26/02/2012

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