Small businesses operated by just one person will have different scale of operations from the largest in the world publicly traded companies such as Apple, Amazon or Google.
The term scale of operations simply means the size of business operations measured by the business’s maximum output.
Business expansion by employing more available resources (or inputs), is referred to as ‘increasing the scale of production’.
What to consider before growing the business?
So, what can influence the scale of operations?
The decision to expand the scale of operations of a business is a very serious one. There are likely to be considerable costs involved such as purchasing more land, more buildings, new equipment and employing more workers.
If the business is not successful in its expansion plans, the capital needed to acquire more factors of production could have been spent otherwise.
What can influence the scale of operations?
Factors that influence the scale of operations of a business include:
- Objectives of the owners. The owners may wish to keep the business small and operate as a sole trader or a partnership, simple and easy to manage. Or, they may have ambitions to become one of the largest companies in the country, or even in the entire world.
- Size of the market. If the firm operates in a small market, it will not allow for large-scale production simply because there are not that many customers. Very large markets include those that fulfill basic human needs such as food, beverages, clothes, housing, healthcare, etc. If the market size is substantial, each business is likely to operate on a large scale.
- Availability of capital. With limited capital, successful growth will be less likely. However, even having large capital available for expansion, or having an ability to raise large sums of money, does not guarantee any future success. Capital should be employed into the business to bring substantial benefits.
- Availability of quality workforce. Without access to knowledgeable, skilled and experienced workers, it might be difficult for a business to grow as training low skilled employees may take a long time. Better workers are usually more effective, more productive and more creative.
- Number and strength of competitors. The market share of each firm may be small in the markets with many companies. On another hand with only few companies in the market, the market share of each business will be substantial.
- Risk tolerance of the owners. If the business owners and directors lack of risk-taking personalities, they may not be willing to invest in unknown new products or expand into new markets overseas. Becoming a successful entrepreneur usually requires taking initiative, lots of self-confidence and taking risks. Some countries even offer citizenship by investment to business owners to lower the risk of running the firm in another country.
Owners grow their businesses not only to serve more customers, but they also wish to benefit from the advantages of economies of scale. Economies of scale are reductions in a firm’s unit costs of production, or the Average Cost (AC), that result from an increase in the scale of operations.
