A PRELUDE TO OPERATIONS MANAGEMENT
CONCEPT OF
OPTIMUM SIZE OF
BUSINESS UNIT:
The concept of optimum size of business unit was introduced by EAG. Robinson .He defines optimum firm as “ a firm which operates at the scale at which ,in existing conditions of technique and o0rganising ability in a given industry, has the lowest average cost of production per unit, when all those costs, which must be covered in the long run, are included”
Optimum size means the best size or ideal size. The size of a business unit refers to the “ scale of production output”. The optimum firm is that firm which produces the best appropriate level of output under the given conditions.
Generally, a business firm starts its activities on a small scale and gradually increases its output , to bring down the cost of production per unit produced.. When a firm increases its size or scale of production ,there exists various forms of
economies and diseconomies .Economies minus diseconomies give the net economies in the cost of production. Therefore , the optimum size of a firm is the one where the net economies are the maximum, so that it produces output at the lowest average costs in the long run
The following are the main characteristics of an optimum business unit.
Most Efficient Unit: It has the maximum economies and minimum diseconomies of scale. So it is the most effi8cient business unit in a particular industry.
Concerned with Long-run Average Cost: The optimum size of a business unit is basically concerned with long run average cost .Therefore ,it has no direct relevance to the profit criteria.
Under Given Conditions: The output size of a business unit is determined under the given market and technological conditions. Therefore, the optimum size is not rigid It varies with changes in technology and market conditions
Varies from Industry to Industry: The optimum size of a business unit relates to a particular industry. Therefore the optimum size varies from industry to industry and from time to time.
Optimum Use of Resources : The optimum size of a business unit requires the best possible use of resources. Therefore, the management of such
firms would try to make optimum use of resources to generate highest possible efficiency.
Theoretical Significance: The concept of optimum firm has only theoretical significance The optimum firm emerges a on account of the ordinary play of economic
forces under perfect competition .In reality ,perfect competition is a rare phenomenon, and so is the case with optimum firm.
Factors Affecting the Optimum Size:
Technical Forces: The optimum size of a firm depends upon technological forces in a given situation. It varies with changes in technology. The optimum size of a firm increases with the advancement of technology .Therefore sophisticated technology favors the
large size firms.
Managerial Forces: The managerial forces affect the optimum size ofn a business unit. The optimum size of a
firm expands with professional management. The managerial cost per unit is loess. Therefore, managerial forces favour alarge firm, as large firms can appoint experts to take effective managerial decisions. However, it is to be noted that a large firm loses ite efficiency beyond a certain limit (size) as diseconomies tend to appear.
Financial Forces: Normally, a large firm can enjoy financial economies in raising capital for modernization and expansion. Large firms can obtain funds at low interest rates. So capital cost per unit is less Small firms may find it difficult to raise capital funds due to lack of security and low credit worthiness Therefore, easy availability of funds at low (interest rate or otherwise) induces a firm to expand its size.
Marketing Forces: A large firm is in a better position to market goods and services as compared to a smaller firm. large firms can obtain economies of scale both in buying and in selling goods or services. Large firms can obtain economies in purchasing due to bulk discounts. They caan also obtain economies in distribution such as in transportation .Therefore, marketing forces favor large sized firms.
Forces of Risks and Fluctuations: With the growing size of a firm , and diversification of output, business risks are minimized .During boom or prosperity phase, the size of a firm increases as the risks of business are minimized Therefore, during boom phase, large firms are in better position. However, during recession phase, the size of a firm needs to decrease as the risks of business increases. Therefore, during recession times, the forces of risks favor small size firms
External Economies: The optimum size of a business unit is greatly influenced by the external economies. when the size of industry grows. Therefore, large size firms can take advantage of external economies.
From the above explanation, it is clear that the optimum size of a firm in the long run is influenced by several forces. Each set of forces will produce a separate optimum output level. Therefore, all such forces need to be reconciled to the best advantage of the firm so that it becomes an optimum business unit. For instance, optimum is smaller than managerial optimum , then the firm can solve the problem by increasing production units or introducing new technology.