Question

1. What are economies of scale and diseconomies of scale?
2. How are economies of scale different from economies of scope?
3. Summarize the different cost-cutting methods employed by firms in their business.
4. What is unique about the business practices and strategy of the company Li and Fung? Visit their website for more current information at www.lifung.com

Answer 1

a. Scale economies are when the cost per unit of production (Average cost) decreases as output (sales) rises. Scale disadvantages are when the cost per unit of production (Average cost) increases as the output (sales) increases. Growth brings both benefits and disadvantages to an enterprise. These interact, and decide the optimum or most efficient size for the business depending on the nature of the business and how it is managed.

The most common reason for Scale Economies is that some production costs are fixed (as manufacturing increses those costs remain constant). Hence since costs per unit (average costs) are calculated by dividing costs by the number of output units Reasons for Scale Disease Economies 1. Communication-gets more complicated 2. Coordination-between Divisions 3. X- Inefficiency-Increasing (non-productive) management costs 4. Problem with the principal agent-delegating to employees who are not as committed as the owner

b. Economy of scope and Economy of scale are two different concepts that are used to help cut the costs of a business. Scope economies focus on the average total cost of manufacturing a variety of goods while economies of scale focus on the cost advantage that arises when there is a higher level of manufacturing of one good.

c. Save money on office supplies by contacting vendors to let them know that you are shopping at a price. Look outside your traditional salesperson pool. Large discount suppliers like BJ's, Amazon or Wal-Mart can often beat traditional vendor prices of office supply. Optimizing productivity effectively lowers your business costs. Remember, time wasted equals dollars wasted.
Minimize distractions and limit the availability of time wasters. Use apps such as Focus Booster or Rescue Time to help employees focus and stay focused on the task.

Virtual meetings help to minimize travel expenses and virtual offices can eliminate the physical space requirements. While we certainly don't want to eliminate personal contact altogether, save it where it's most beneficial for instances.

d. The firm deals with both soft and hard goods, but is more focused on hard goods as they offer higher margins compared to soft goods. The firm operated on the old traditional physical offline model of existence. But the advent of internet technology has changed the scenario somewhat and raised serious concerns about the operation of the profitable enterprise. There's been a trend that almost every business 'online competitors outstrip their offline competitor organizations and firms.

Li & Fung's management understands this fact and is always prepared to incorporate new technology into the business operations. The company is simultaneously seeking a defensive and offensive strategy, and is introducing online operations along with offline operations. This will not only defend the company's position to businesses against the online business but will also give them competition because of the company's good and high reputation.