Question

Define and explain the tactical-strategic capacity decisions, capacity utilization and economies of scale. Establish a relationship between those. Use examples.

Answer 1

Answer-Decision making is central to all the managerial activities of a business firm. It consists of planning, organizing, staffing, directing or controlling the business in order make specific decisions regarding day-to-day activities of the firm and to achieve common goals. Tactical, strategic and capacity decisions are all types of managerial decisions of a business which may may have short-term implications as well as long-term implications on the enterprise.

Strategic decisions of a business enterprise is a major form of unstructured managerial decision making which influences major courses of actions. Strategic decision making is directly related to achievement of common goals of an enterprise and hence influence a major part of business. The strategic decision making have long-term implications on the business en­terprise. Generally, these decisions are are uncertain and dynamic because they are based on partial knowledge of the environmen­tal factors.

Tactical decisions are nothing but the practical implementation of strategic decisions. These decisions are always directed towards the development of divi­sional plans, structuring, establishing distribution, acquisition of resources such as men, material, capital etc.

Capacity decision is the ability of business facility to produce a certain level of output within a specific time period. For example when a firm has to make a decision regarding the production a product whether old or a new product, it always decides how much capacity is needed. Capacity here means the factors such as number of workers, machines, skills, defects, suppliers, government regulations etc. Capacity decisions have its impacts on many aspects of a firm like the ability to meet future demands so that shortages do not arise in future,operating costs as if capacity is overestimated or underestimated and initial costs too. And all these factors in turn affect other factors like competitiveness, management etc.

Capacity utilisation is the extent to which an enterprise or a business firm uses its installed productive capacity. It is the relationship between output that is being produced with the installed equipment, and the potential output which could be  produced with it, when the installed capacity is fully used.

Economies of scale are advantages reaped by companies or business firms when they become efficient in production. These advantages are achieved when firms can increase their production awhile lowering their costs of production. This happens when the company grows into a bigger capacity because costs are then spread over a larger number of goods. In other words, size of the business matters when it comes to economies of scale. The larger the business firm, the more the cost advantage i.e. the more the economies of scale.

Strategic, tactical, capacity decisions, capacity utlisation and economies of scale are all interrelated concepts in business. Strategic decisions are fundamental decision that affect business and the implementation of strategic decision is called tactical decision. Similarly capacity decision is required for capacity utilisation and full capacity utlisation is needed to reap economies of scale.