Economies of scale Essays

Economies of scale Essays Economies of scale Essay Economies of scale Essay As can be seen from the information above Granada has been losing money recently, with a negative net profit (i 132), this means that it has no profit margin, and a negative return on capital employed (-7. 3%). More detailed information on Granada and current trading and prospects can be found in the appendix. Both of these two companies have made large losses recently, but Carlton has suffered from the larger losses, Carltons net loss was i 156 million compared to a loss of i 132 million for Granada. Carlton also has a much lower return on capital employed, although they both have a negative ROCE, Carltons is far lower than Granadas. Both of these companies have been losing money, and this gives them an incentive to merge, and to attempt to cut their losses by benefiting from economies of scale. Economies of scale Economies of scale are the reasons why the average cost of production may fall with an increasing level of output. I believe that if Carlton and Granada merge they will create one larger company which will benefit more from certain economies of scale. Carlton and Granada believe that though economies of scale they should be able to save i 35 million per annum. * In the appendix, there is an article titled Advertisers warn on ITV merger, in this it is stated by the head of broadcast at Media Planning Group that the merger will provide economies of scale, this is independent, unbiased evidence that the merger will provide economies of scale. The most important economies of scale in my opinion are: Financial economies of scale allow larger businesses to obtain money for expansion easier and cheaper. If Carlton and Granada merged they would create one much larger business. This larger business would thus benefit from financial economies of scale, the merged company would find it much easier to borrow or obtain money for new ventures of expansion plans. Managerial economies of scale occur when a business grows large enough to appoint specialists to its management team. Both of these companies are already large enough to benefit from this economy of scale, however they would benefit from it much more if they were to merge. The merged business would be much more efficiently managed and would therefore save money. This is one of the most important economies of scale because it will mean that the merged group would have one combined and specialised managerial team. Marketing economies of scale occur when the costs of marketing can be spread over a larger output. Both of these businesses produce television and cinema content. If they were to merge their output would be bigger, therefore they would benefit more from this economy of scale, it would be easier to produce new products, advertising rates would be lower, and bulk distribution would bring down the costs of delivery. This is another very important economy of scale for these two companies because they both have large outputs, and if they were to merge it would cut many costs and would help them to produce new television content cheaper and more effectively. The larger business that Carlton and Granada would create by merging would benefit from research and development economies of scale. It would be much easier to create new television programmes, and if any of their ventures should fail, then the larger business would be more able to cope with the loss because it will have other projects that will succeed, the risks have been spread. An example of this is Carlton and Granadas recently failed joint venture ITV digital. This venture was a failure which cost both of these businesses a lot of money. If they were one company, while dealing with this crisis they would have found it easier to cope with because jointly they would have more other successful projects running. Diseconomies of scale Diseconomies of scale are the opposite of economies of scale. Sometimes an increased output will not result in lower costs of production per unit but higher costs. Diseconomies usually occur when a business has become so big that it is no longer well managed. Diseconomies usually occur because of a breakdown of communication. In a large business it is often hard for the workers to find out who they should talk to about any problems they may encounter. This will often result in disputes between management and employees and the employees may feel less motivated to work hard. I do not believe that if Carlton and Granada were to merge they would suffer from any of these diseconomies of scale. This is because if anything the workers will become closer to the management as a result of this merger because the merged group should be more efficiently managed1**by better channels of communications between the two previous companies and decentralization which will bring decisions closer to the people that they affect. Stakeholders outside the businesses The main stakeholder group outside the two firms are the television viewers. Viewers should benefit from better television programmes. According to the article titled QA: ITV merger found in the appendix: The merger is intended to free up more money to plough into the schedules because better programmes bring in more viewers, which brings in more money from advertisers. A press release published by the boards of Carlton and Granada says that: Viewers will benefit from enhanced programming investment designed further to improve quality and choice. 1* Opinion is unanimous on the fact that the merger should bring better programmes for viewers, which provides a positive externality, and a good reason for the merger to go ahead.