Goals of a Firm

There a number of ways firms may achieve internal economies of scale. One such way is buying raw materials in bulk. Bulk buying generally reduces cost of the inputs and as a firm becomes larger, buying in bulk may offer greater cost-saving advantages and hence, allows the firm to engage in internal economies of scale. Another important method of achieving internal economies of scale is investment in research and development, managerial/entrepreneurial expertise and skilled labour. Although these inputs can be costly, the possibility of increased efficiency with such inputs can lead to a decrease in the average cost of production and selling. If a company is able to spread the cost of such inputs over an increase in its production units, internal economies of scale can be realized. Specialisation and division in labour can also lead to internal economies of scale It was Adam Smith who identified the division of labour and specialization as the two key means to achieve a larger return on production. Through these two techniques, employees are not only able to concentrate on a specific task, but with time, improve the skills necessary to perform their jobs. Therefore, the tasks are performed better and faster and through such efficiency, time and money is saved while production levels are increased. Many firms will also generate waste in the production process. In order to for firms to engage in internal economies of scale, they must minimise this waste or otherwise, these wastes can be sold as by-products. If these firms are able to locate a market for these by-products and set up a relationship with them, costs can be minimised greatly and can enable firms to engage in internal economies of scale.

External economies of scale is something that is much more difficult to achieve and often, they lie completely outside of the firm's reach. However, there are a number of ways in which firms can accomplish external economies of scale. One way is to set up a branch of the firm overseas. Not only does this present an entirely new market to the firm, but it can also lead to cheaper labour costs and cost-saving advantages from currency differences. E.g. Dell Computers have outsourced to India where not only is the IT Industry is booming, but where labour is much cheaper. Another way is to increase localisation towards the source of raw materials. In other words, if firms are located in close proximity to the source of their raw materials, transport costs are lowered and hence, cost-saving advantages are accrued.

In Australia, a firm's ability to engage in external economies of scale is dependant on many critical issues. These issues range from geographic issues such as the isolation or remoteness of Australia or the relatively low population Australia has, to economic issues such as micro -economic reform, international competitiveness, trade policies, technological advancement and unemployment.

Australia's 'remoteness' plays a big role in firms achieving external economies of scale. This remoteness makes exporting and importing much more difficult and at times, can be costly and inefficient. Eg. David Jones primarily deals with high-end fashion and as high-end fashion is produced mainly in Europe, David Jones has to import their products which can incur transport costs as well as the insecurity of foreign trade. Conversely, many Australian firms produce their own products and do not have to pay these transport costs. Not only does this reduce costs, but provides extra security for the firm. Australia's also has a relatively low population in comparison to other Western nations. This too plays a role in the ability of a firm to engage in external economies of scale as many firms in Australia can not mass produce their products, but rather, develop more specialised products which cater to a more domestic population. This specialisation of products often requires research and development which can be costly and sometimes, hinders a firm's ability to realize external economies of scale.

Australia has also seen its fair share of micro and macro-economic reform. Micro-economic reform involves a selection of strategies to improve the efficiency of Australia's public and private sectors. Firms can also benefit from this greatly. Over the last 15 years the Federal government initiated reforms to improve economic performance in several sectors such as education & training. In 1990, the Government passed the Training Guarantee Act which ensured that employees where to be trained and simultaneously, reforms towards higher education and skills were made. This in turn, meant that firms developed and looked for more skilled labour and the product of this was great productivity. According to the Productivity Commission, the 1990's was "the longest period of continuos growth in productivity on record, which had a powerful influence on the performance of firms and on living standards in the community". Another significant micro-economic reform has been the recent Industrial Relations changes. These reforms have given firms greater flexibility over labour and hence, these reforms have increased multi factor productivity and given firms the opportunity to achieve external economies of scale

International competitiveness also influences a firm's ability to expand and achieve external economies of scale. International competitiveness refers to the advantages a domestic industry has over foreign rivals in local or overseas markets. If firms produce goods which are relatively cheaper than goods produced overseas, their international competitiveness increases giving them greater opportunity to export and benefit from foreign markets. If this is the case, firms in Australia will most definitely expand and consequently, will be able to achieve external economies of scale.

Trade policy influences a firm's level and composition of exports and imports. Australia's Free Trade Agreement with USA most definitely will benefit firms in Australia who engage in foreign trade as they will not be required to pay certain import duties or taxes when importing from the USA. The agreement will definitely reduce costs for the firm and enable them to engage in external economies of scale.

Technological advancement is major source of economic growth and eventually, it leads to the use of new and better methods of organisation and production, as well as the introduction of new and improved goods and services. Over the last decade, Australia, along with most of the world, has seen a major boom in Information Technology. Production methods today have become increasingly computerised/electronic. Australia firms have enjoyed a more automated approach to production and much of the productivity that these firms have enjoyed is owed to technology boom.

Unemployment is another key issue which influences firms. Okun's Law describes a clear relationship between unemployment and national output, in which lowered unemployment results in higher national output. The same law can be put into practice with firms. Firms will enjoy greater output and productivity if there is less unemployment. In addition to this, another economist named A.W Phillips discovered that as unemployment decreased, inflation rose. As inflation rises, goods and services become more costly and hence, firms find it increasingly difficult to keep expenses down. However, Australia has magically been able to keep unemployment and inflation at near record lows. It is no wonder that Australian firms have been so successful and it is their ability to engage in external economies of scale that has significantly contributed to this success

It is no doubt that Australia's business environment is one of the best in the world. The Australian business environment is built upon sturdiness and strength where blue chip companies such BHP Billition and Woolworth's have supported an entire community. Australia is fortunate in the sense that entrepreneurial expertise and business acumen is rewarded well. It is of no surprise that we hear success stories such as Eddy Grove's ABC Learning Centres or John Symond's Aussie Home Loans on such a regular basis.