Be wary of the phenomenon of “uneconomical scale” in the expansion of abrasives and abrasives enterprises

Abstract Diseconomies of scale means that as the scale of production expands, the marginal benefit gradually declines, even falling below zero and becoming negative. The reason for this phenomenon may be that the internal structure is more complicated due to the expansion of scale.
Diseconomies of scale (Diseconomies of scale) refers to with the expansion of production scale, the marginal benefit is gradually decline, even below zero, become negative. The reason for this phenomenon may be that the internal structure is more complicated due to the expansion of scale. This kind of complexity will consume internal resources, and this loss will make the benefits of scale expansion reduce each other, or it may be bureaucratic growth, or Innovative barriers have increased, so there has been a phenomenon of uneconomic scale.

Uneconomic scale comes from a concept of economies of scale. Economies of scale are generally defined as the initial stage. The manufacturers have increased their economic benefits by expanding production scale. This is called economies of scale. When production expands to a certain scale, manufacturers continue to expand production scale, which will lead to a decline in economic efficiency. Uneconomical.

Contrary to the larger scale and lower cost of economies of scale, the diminishing economies of scale refer to the larger the scale and the higher the cost, leading to a reduction in the company's profit margin.

In economics, there are total cost curves and average cost curves, both of which are concave upwards. The intersection of these two curves means the existence of the best scale. Before reaching this optimal scale, the bigger the better, the more called “economies of scale”; after reaching the optimal scale, the bigger the scale, the less economical it is, or “uneconomical”.

1. Uneconomical classification

If the scale of the enterprise is too small, it will not reach the minimum scale required by the industry of the enterprise, or the scale will expand beyond a certain limit. The increase of product output is less than the expansion of production scale, and even the product output is absolutely reduced. It is not economical for scale.

Scale is not economic

Intrinsic uneconomical refers to the increase in long-term average cost due to changes in the company's own factors when the company expands. The main reason for the inherent uneconomic is the reduction in management efficiency due to the expansion of the company. The inherent uneconomical economy gradually increases the long-term average cost curve from its lowest point. (The lowest point is the lowest average cost, that is, the best economies of scale. If the scale continues to increase, the average cost starts to rise, then the scale is uneconomic.)

External scale is not economic

External uneconomic refers to the phenomenon that the long-term average cost of an enterprise rises with the expansion of the industry. It is rooted in the deterioration of the external environment caused by the expansion of the industry, such as the rise in factor prices and the decline in sales market. The external uneconomical shift causes the long-term average cost curve to move vertically upwards, indicating that the long-term average cost of the current unit of production has increased over the past.

2. Influencing factors of uneconomic scale

Technical factor

The scale of the enterprise is compatible with certain technical conditions.

The expansion of the scale of enterprises will inevitably lead to the expansion of production capacity, and the expansion of production capacity is based on technological progress. The scale of the enterprise has both a tendency to gradually expand with the advancement of technology and is subject to technical conditions. Therefore, the size of a company can only be a dynamic combination closely related to production technology.

Market supply and demand

In order to expand the scale, enterprises must clearly grasp the opportunity, and must make correct predictions on the market supply and demand situation and the changing trend, and make a correct judgment on the balance between the relevant industries of the products and the total supply and demand of the society.

Management factor

In general, the size of a company is directly proportional to the difficulty of management and inversely proportional to the efficiency of management. Large enterprises must set up complex management levels and design a large number of incentive and supervision mechanisms, which will inevitably increase the number of non-production personnel and equipment, resulting in rising costs and increased costs.

Product relevance factor

For companies engaged in the production of multiple products, the less relevant the products are, the more technical equipment and labor input is required, and the higher the product cost. In addition, the smaller the relevance of the products, the more different the management system between the various products, and the more complicated the coordination between them, thus reducing the management and production efficiency.

3. Theoretical analysis of scale uneconomic

The enterprise group expects to expand its scale to develop economies of scale and achieve greater operational efficiency. This is the goal pursued by the enterprise group. However, if the scale is too large, it will cause scale uneconomic problems.

To put it simply, the economies of scale of a business group mean that companies can achieve double the output at a cost less than double, and correspondingly, when double output requires more than double the investment, it will result in an uneconomic scale. problem. Economies of scale are usually measured by the “cost-output” elasticity. If economies of scale exist (cost increases are lower than the proportion of output increase), the marginal cost will be lower than the average cost, and vice versa if the marginal cost is lower. The average cost, there is economies of scale, so whether the analysis of the enterprise group has produced a problem of scale uneconomic, in fact, is to analyze whether its marginal cost is lower than the average cost. Marginal cost and average cost are two important concepts and are important factors in the level of choice. The total cost of business (TC) consists of two elements: fixed cost (FC) and variable cost (VC). When the production scale of the enterprise is expanded, the production cost will change, the fixed cost will remain unchanged, and the variable cost will change with the change of production. The marginal cost (MC) reflects the change in the cost of the enterprise. The marginal cost is called the incremental cost, which is the increase of the cost caused by the production of an additional unit of output MC=ΔVC/△Q.

When a long-term average cost LAC is in a declining stage to produce a certain output, the long-term marginal cost LMC is lower than the long-term average cost. If the input is increased, the economies of scale will be produced. When the long-term average cost is in the rising stage and the long-term marginal cost is higher than the long-term average cost, then the scale uneconomic effect is generated.

in conclusion:

1. Uneconomic scale is caused by uneconomic management. There is no scale and no economy, and only management is not economic;
2. The development of the enterprise has an optimal scale. If the enterprise is well managed, this point will move backwards and the scale of the enterprise can be made larger;
3, management is not good, the scale of the enterprise is unlikely to be large, if you want to scale, you must first manage.

4. Case analysis of uneconomic scale

At the beginning of the establishment of the three companies, there are very few people. All the people directly obey the responsible person. Although the scale is small, any strategy can be implemented in a timely and effective manner, and the problem can be timely and resolved. At the peak of the four-year four-year period, there are at least tens of thousands of managers, distributors, wholesalers, and retailers. In internal management, the disadvantages brought about by the huge structure are particularly prominent. The economies of scale are playing an active role and many loopholes are inevitable. By 1997, there were 300 prefecture-level subsidiaries of the three companies, 2210 county-level offices, and 13,500 township-level workstations. It seems that the size of the three plants is huge, and the marketing flow is vast. Actually, there are overlapping institutions, people are overstaffed, and each other is rubbing. The subordinate organizations even have a phenomenon of three people on the phone, which is inefficient.

The rapid expansion of scale and public relations concept has contributed to the explosive growth of the three strains, but many of them are profit-driven business teams and are a very dangerous team. Therefore, from the top management to the middle management, to the workstations in the village, the scale is too large, resulting in slower implementation, the information of business development is difficult to pass to the ears of the responsible person, each department fights, The front-line workstations were also commanded by a number of managers. The poor management caused the three groups to be over-exaggerated. The quality could not be guaranteed. The national sales of the three plants fell sharply. The monthly sales fell from several hundred million yuan to less than 10 million. Yuan, the huge "empire" with 150,000 employees collapsed like this.

Relying on economies of scale to increase profits has an important premise, that is, the industry pattern has basically remained unchanged, and the break-even point is stable or unchanged. As long as the industry's break-even point remains unchanged, scale growth will certainly lead to profit growth. In other words, the premise of economies of scale is that the scale is growing, and the industry pattern has not changed, and the competitors have not changed. However, this premise does not exist in a rapidly changing economic environment.

5. Uneconomical solution

First of all, the decision-makers of the enterprise need to recognize the importance of management from the concept. At the same time as the scale of the enterprise, it focuses on strengthening the basic management of the enterprise, clarifying the stage of the enterprise, and then making a real change in the management of the enterprise.

Secondly, if enterprises are to be large-scale, they must establish their operations on a reproducible or reproducible scientific and standardized management platform, establish a management model suitable for the company's industry and enterprise characteristics, and focus on cultivating a group of professional managers. .

Third, establish a modern human resources management system to provide a continuous stream of human resources for the scale of enterprises.

Fourth, adopt a new matrix organization structure to form a competitive mechanism within the enterprise to cultivate the competitiveness of the entire company in the market.

Fifth, hire experts from the society, use the outside staff of the company to make suggestions for the company, and improve the efficiency of the matrix team through the “borrowing brain project”.

Sixth, the performance of reform and innovation is included in the evaluation content of management personnel, and the enthusiasm for innovation of management personnel is mobilized.

Through the implementation of the above plan, the circulatory system composed of various functional activities is improved, the operation speed is accelerated, the cycle is shortened, and various problems existing in the production and operation process are exposed. Because the internal competition mechanism of the enterprise solves the problem of misuse of assets, it limits the tendency of forgiveness and error to a certain extent; the bystander effect exerted by the “brain-based project” has curbed the formation of mutual shelter and enterprise network; the performance of reform and innovation has been included. The content of the assessment forced managers to abandon the efforts to spend more energy on internal coordination to meet the political standards of promotion, reducing the damage to motivation, especially focusing on the excessive concentration of large corporate headquarters and the lack of awareness of risk management. problem.

For example, when engaging in the development of a risky product, it must be supported by the headquarters and given the support of the development department with the above funds, resulting in an increase in the cost of the head office. If the people, talents, and property rights are decentralized as much as possible, the headquarters will only serve as a consultation. The role of “doctors” or “strategic consultants” can respond to new customer needs in a more timely manner, take concrete actions more quickly, and through these various means, establish the so-called “unexpected” costs of the integrated organization. To a large extent, it will become "unexpected", and the pathogenic factors are exposed and exposed to full attention. The prevention and treatment of the scale of the economic development of the enterprise has become a matter of course. There are many reasons why China's countermeasures lead to the uneconomic scale of Chinese enterprise groups, such as the unscientific method of determining economies of scale, the adoption of extensive economic growth methods, and the under-optimization of the group structure.

Using scientific methods to determine economies of scale

From the analysis of economies of scale, the marginal benefit equals the marginal cost, which can achieve the best effect of input and output, but how to make the scale of the enterprise group adapt to this, for the enterprise groups engaged in different industries and producing different products. There are indeed big differences. Generally, it is restricted by the level of productivity development, the characteristics of industry or product production, and the way in which resources are allocated socially. The level of productivity development is the basis for the organization of production. The modern production technology, technical equipment, transportation methods, management methods, and the high development of information and technology have laid the foundation for large-scale production management of enterprise groups, and large-scale production lines. The application of automatic control technology and computer network technology provides a broad choice for enterprise groups to improve production efficiency, extend management scope and reduce production costs. Determining and measuring economies of scale can generally be used: long-term average cost curve method, moderate survival method and statistical analysis method.

Achieving intensive economic growth

Chinese companies basically adopt extensive growth methods. Many state-owned enterprise groups have problems such as high resource consumption, slow capital turnover, loss and waste, and low economic returns. If we are still pursuing speed efficiency according to the extensive growth mode of the past, then there will be a series of problems such as rising costs, rising prices, low quality, and market backlog, and the difficulties of enterprise groups will become increasingly serious. Transforming the growth mode and taking the connotative expansion of reproduction and intensive growth has become a top priority for enterprise groups. The key to intensive growth is to rely on technological advances. Enterprise groups should increase the research and development costs of enterprises, because enterprises are closer to the market than research institutes, and the research and development costs of enterprises can be more directly converted into productivity. The development projects they carry are market-applicable and effective.

Optimize group structure through asset restructuring

At present, the internal asset relations and business relationships of many enterprise groups in China are messy. The management system of individual enterprises in the past is still being used. The relationship between centralization and decentralization is not well handled. The identity and responsibilities of members at all levels are not clear. Therefore, we must choose the right time, carry out the work of restructuring, and give full play to the role of the intermediate management in business management. Asset restructuring is a better way to optimize the structure of the group. Simply put, asset restructuring is the re-optimization of assets to improve asset utilization. Asset reorganization can occur within the enterprise, or between the enterprise and the enterprise. The former is called in vivo reorganization, and the latter is called in vitro reorganization. Through asset restructuring, enterprise groups can rationalize their internal asset relationships and business relationships, as well as the relationships between member companies, to standardize their organizational structure and improve the overall efficiency of the group.

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