Question

Select a large company with operations in Hong Kong, which is enjoying both economies of scale and scope. Identify and explain TWO possible reasons for enjoying the lower average total cost due to the economies of scale and scope respectively. Suggest TWO methods that this company can adopt to prevent ‘diseconomies of scale

and scope’

Answer 1

7 Eleven is a a largecompany with operations in Hongkong.7-Eleven is a convenient and food retailer with 50,000 outlets world wide . Economies of scope lay stress on the average total cost of production of a number of goods while economies of scale focus on the cost advange when one good is produced on a large scale. 7-Eleven has been able to utilse economies of scale in an effective manner to make profit.Reasons are they own large franchise and can be profitable which indicates economies of scale.7 Eleven targets urban markets and caters to local needs.Again they have own processing plants and distribution networks and thus can sell their own brand of items ie icecreams and procesed food.Another reason may be they purchase in large amounts from the suppliers , their risk in market is spread across numerous markets ,and their items are sold in international market.7 -Eleven has been able to exploit economies of scope in customer relationship business . This is because they work with wide range of product and service vendors who render help in defining new product as well as services,according to the needs of the customers.

Diseconomies of scale is an economic term which shows average cost to increase along with output.To avoid diseconomies of scale companies can outsource in order to reduce cost while still maintaining control over production.Another way may be human resource management through training, communication ,promotion etc

minimise bureaucracyand also minimise increased decision taking time which is generally connected with growth.