Economies Of Scale In Mixed Economy

AN ABSTRACT Economics of Scale exist when the production cost of a single product decreases with the number of unit produced. Refer to the situation in which the cost of producing an additional unit of output (i.e., the marginal cost) of a product decreases as the volume of output (i.e., the scale of production) increases. It could also be defined as the situation in which an equal percentage increase in all inputs results in a greater percentage increase in output. Generally speaking, economies of scale is about the benefits gained by the production of large volume of a product. In business, economies of scale are usually considered in relation to specific areas of the production process, which may be technical, managerial, marketing, finance, and risk. In achieving economies of scale, many factors must be considered. Economies of Scale bring cost benefit to the producers and gives the following benefits:

Because a large business can pass on lower costs to customers through lower prices.

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Increase its share of a market.

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This poses a threat to smaller businesses that can be “undercut” by the competition. Mitchell’s is one of the largest producers in Pakistan. It is ISO-9001 certified

company. It has a number of products available in the market. It is deeply concentrating on various areas where it can maintain its production cost to the lower level with the more production, thus striving for obtaining the economies of scale. It is using some of its major areas like technical farms productions, human resource training, R&D and Quality Control, where with little effort it can bring phenomenal results.

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TABLE OF CONTENTS

CONTENTS

PAGE NO. 01 02 03

Title Acknowledgement An Abstract Introduction to the Issue • Perfect Market • Mixed Economy • Equilibrium • Inputs: • Outputs • Factors of Production • Returns to Scale • Internal Economies of Scale • External Economies of Scale Introduction to the Organization: Mitchell’s Fruit Farms Ltd.

05 05 05 05 05 05 06 07 08

• Introduction & History • Vision & Mission • Mitchell’s Products • Raw Material • Export & Import • Present Performance Topic Implementation • Mitchell’s Economies of Scale Data Collection Methods SWOT Analysis Conclusion Recommendations References / Bibliography

09 10 11 12 13 13 14 15 16 18 19 20

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 Perfect Market: The following assumptions hold: a) There is a large number of buyers and sellers or small firms in the market; b) All firms know the exact pricing of the other firms. c) All firms have the same access to technology and resources d) The units of goods sold by different sellers are the same - the product is homogeneous; e) There is perfect information = all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and f) There is perfect freedom of entry to and exit from the market.

g) seller is not able to set a price and it has no control of price  Mixed Economy: Economic system in which both the private enterprise and a degree of state monopoly coexist. All modern economies are mixed where means of production are shared between the private and public sectors.  Equilibrium: In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal. Market equilibrium, for example, refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the equilibrium price or market clearing price and will tend not to change unless demand or supply change. 

Inputs:

Inputs are commodities or services that are used to produce goods and services. An economy uses its existing technology to combine inputs to produce outputs. Outputs:

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Outputs are the various useful goods or services that result from the production process and are either consumed or employed in further production. 

Factors of Production

In economics, factors of production (or productive inputs) are the resources employed to produce goods and services. They facilitate production but do not become part of the 3

product (as with raw materials) or are significantly transformed by the production process (as with fuel used to power machinery). These can be classified into three broad categories:i. Land Land, or more generally, natural resources, represents the gift of nature such as water, air, soil, minerals, that are used in the creation of products. It consists of the land used for farming or for underpinning houses, factories, and roads; the energy resources that fuel our cars and heat our homes, and the non-energy resources like copper and iron ore and sand. In today’s congested world, we must broaden the scope of natural resources to include our environmental resources, such as clean air and drinkable water. ii. Labour It consists of the human efforts used in production which also includes technical and marketing expertise. Labour can also be classified as the physical and mental contribution of an employee to the production of the good iii. Capital Human-made goods (or means of production) which are used in the production of other goods. These include machinery, tools and buildings. Physical capital: All the machines, buildings, equipment, roads and other objects made by human beings to produce goods and services. Human capital: The knowledge and skills acquired by a worker through education and experience.  Returns to Scale In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor). i. Constant Returns to Scale It denotes a case where a change in all inputs leads to a proportional change in output. For example, if labour, land, capital, and other inputs are doubled, then under constant returns to scale, output would also double. ii. Decreasing Returns to Scale It occurs when a balanced increase of all inputs leads to a less-than-proportional increase in total output. In many processes, scaling up may eventually reach a point beyond which inefficiencies set in. These might arise because the costs of management or control become large. One case has occurred in electricity

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generation, where firms found that when plants grew too large, risks of plant failure grew too large iii. Increasing Return to Scale (Economies of Scale) Increasing returns to scale arise when a balanced increase in all inputs leads to a more than proportional increase in the level of output. This is also called Economies of Scale. For examples, if all the inputs have been increased by 10 percent, then the increasing returns would be more than 10 percent. If costs increase proportionately, there are no economies of scale; if costs increase by a greater amount, there are diseconomies of scale; if costs increase by a lesser amount, there are positive economies of scale. Short example: Where all inputs increase by a factor of 2, new values for output should be: Twice the previous output given = a constant return to scale Less than twice the previous output given = a decreased return to scale More than twice the previous output given = an increased return to scale Assuming that the factor costs are constant, a firm experiencing constant returns will have constant average costs, a firm experiencing decreasing returns will have increasing average costs and a firm experiencing increasing returns will have decreasing average costs.  Internal Economics of Scale - the cost per unit depends on size of the individual firm i.

Bulk-buying economies As businesses grow they need to order larger quantities of production inputs. For example, they will order more raw materials. As the order value increases, a business obtains more bargaining power with suppliers. It may be able to obtain discounts and lower prices for the raw materials.

ii.

Technical economies Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently). This may include using mass production techniques, which are a more efficient form of production. A larger firm can also afford to invest more in research and development.

iii.

Financial economies Many small businesses find it hard to obtain finance and when they do obtain it, the cost of the finance is often quite high. This is because small businesses are

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perceived as being riskier than larger businesses that have developed a good track record. Larger firms therefore find it easier to find potential lenders and to raise money at lower interest rates. iv.

Marketing economies Every part of marketing has a cost – particularly promotional methods such as advertising and running a sales force. Many of these marketing costs are fixed costs and so as a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit.

v.

Managerial economies As a firm grows, there is greater potential for managers to specialise in particular tasks (e.g. marketing, human resource management, finance). Specialist managers are likely to be more efficient as they possess a high level of expertise, experience and qualifications compared to one person in a smaller firm trying to perform all of these roles.  External Economies of Scale - the cost per unit depends on the size of the industry, not the size of firm.

There are three main types of external economies of scale. External economies of scale occur when a firm benefits from lower unit costs as a result of the whole industry growing in size. The main types are: i.

Transport and communication links improve As an industry establishes itself and grows in a particular region, it is likely that the government will provide better transport and communication links to improve accessibility to the region. This will lower transport costs for firms in the area as journey times are reduced and also attract more potential customers.

ii.

Training and education becomes more focused on the industry Through intensive training courses and growth of education to grass-root level, more skilled worker can be developed and recruited. For example, there are many more IT courses and vast technology changes in India which has developed its software industry.

iii.

Other industries grow to support this industry A network of suppliers or support industries may grow in size and/or locate close to the main industry. This means a firm has a greater chance of finding a high quality yet affordable supplier close to their site.

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INTRODUCTION TO THE ORGANIZATION MITCHELL’S FRUIT FARMS LIMITED  Introduction and History: Mitchell’s is the oldest food company in Pakistan. It was established in 1933 by Francis J. Mitchell under the name of Indian Mildura Fruit Farms Ltd. After the country gained independence in 1947, the company's name was changed to "MITCHELL’S Fruit Farms Ltd." with the brand name of "MITCHELL’S". Since its inception, Mitchell’s has gone from strength to strength, not only expanding its product line but also maintaining quality through the years to become one of the largest food companies in the country. From the procurement of best quality raw materials, fresh from its own farms and orchards to the adoption of latest production techniques, Mitchell’s has been in sync with the evolving times. The result of Mitchell’s efforts is that today it is among the market leaders in all of its product categories. Not only that, but its products are also gaining a market abroad with exports to several parts of the world including UK, USA, Canada, the Middle-East and South-West Asia where already Mitchell’s is a name to reckon with. Mitchell’s is the only major food company in Pakistan today with fully integrated operations having its own growing and processing facilities at one location. Modern high-volume industrial equipment, professional management and a trained workforce all combine to ensure that Mitchell’s continues its dominance as the innovator, market leader and trend setter. In this regard a major step was taken in 1998, when Mitchell’s became the first food company in Pakistan to achieve ISO 9001 accreditation, thus becoming more competitive on the international stage also. Fully computerized and inter-linked regional sales offices ensuring a smooth distribution system with nationwide coverage manage countrywide sales. Highly qualified executives, using modern management tools, handle marketing, commercial, financial and accounting functions from the Head Office in Lahore.

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 VISION & MISSION STATEMENT •

To be a leader in the market by serving and providing quality products to our consumers while learning from their feedback to set even high standards.

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To be a company that continuously enhanced its superior technology skills to remain internationally competitors in this day and the age of increasing challenges.

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To be the company that attracts and retains competent people by creating a culture that fosters innovations, promotes and rewards initiatives and performance.

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To be a company which optimally combines its people technology management system and opportunity to achieve profitable growth while providing fair return to its share holders.

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To be a company that endeavors to set the highest standards in corporate ethics that fulfills its social responsibility

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 MITCHELL’S PRODUCTS It is Mitchell’s aim to provide you with healthy, innovative and good quality food that will tempt your appetite at all times. And not only that, but it also promise convenience and variety at affordable prices. With six categories encompassing over sixty products, company is proud to present the Mitchell's family - products to grace your dining table on the breakfast and dinner occasions as well as products to appease your sweet tooth. Today the Mitchell’s family continues to grow, reaching more and more households worldwide with an ever-increasing array of farm-fresh products ranging from thirst-quenching Squashes & Syrups; fruity Jams, Jellies and Marmalade; rich Tomato Ketchup & savory Sauces; tasty Pickles; refreshingly nutritious Canned Fruits & Vegetables; and a wholesome assortment of Candies & Chocolate from its wide range of confectionery products. o

Jams, Jellies & Marmalade

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Sauces & Ketchup

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Squashes

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Pickles

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Canned Food

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Confectionery (Candies & Chocolates)

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 RAW MATERIAL Mitchell’s has its own farms and where a number of fruits and other raw material is being produced by the company. This is one of the major plus point of Mitchell’s of having its own raw material. This raw material is used in the preparation of its various products and is helping it to curtail its net cost being incurred on production. Following is the raw material being produced and used by the Mitchell’s is: Tomatoes  Strawberries  Raspberries  Plums  Pineapples  Pears  Peaches  Oranges  Mangoes  Lemon  Guava  Grapefruit  Garlic  Cherries  Banana  Apricots  Apple

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 EXPORTS AND IMPORTS •

EXPORTS At present, Mitchell's products are being exported to several parts of the world,

including UK, USA, and the Middle East. In future the Company is planning to make Mitchell's a brand name familiar with households in every part of the world. •

IMPORTS There are certain Mitchell’s products that are being imported. For example,

pineapple is being imported from Singapore. Only fruit is imported, the rest of the process is done in farms. Some of the fruit is imported in the form of pulp such as mango. Though mangoes grow in farms but due to the increasing demand of mango items, it has to import some of the quantity from other countries to meet the demand. Sugar is also imported.  PRESENT PERFORMANCE The Company passed a major milestone in the year 1998, the 65th for Mitchell’s, brought a major distinction for the Company; the ISO 9001 accreditation, making it the first food company in Pakistan to achieve the honor. Today in Pakistan, Mitchell's is the only major company with fully integrated operations having its own growing and processing facilities at one location. Modern high-volume industrial equipment, professional management and a trained workforce ensure that Mitchell's maintains its lead. Fully computerized and inter-linked regional sales offices manage burgeoning countrywide sales, with those in major cities, Karachi, Lahore, Rawalpindi and Islamabad. All the offices are on the Internet/e-mail network ensuring uninterrupted flow of data. Highly qualified executives using modern management tools from the Head Office in Lahore handle commercial, financial and accounting functions. A smooth distribution system with nationwide coverage and consistency of quality have kept the most prestigious national institutions loyal to Mitchell's’ growing product range. These include Pakistan International Airlines (PIA), leading five star hotels and clubs, Utility Stores Corporation, Canteen Stores Department, chains of main stores and established restaurants in major cities.

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MITCHELL’S ECONOMIES OF SCALE Currently, all the markets in the world are a mixture of command economy and market economy, thus called as mixed economy. Pakistan is also experiencing mixed economy in its market. Mitchell’s Fruit Famrs Limited is also trying hard to maintain its market equilibrium and economies of scale through many initiatives. It is making the following efforts to gain and also maintain economies of scale. i.

Land

Mitchell’s has its own fruit farms where they have their own processing and growing facilities. These farms are producing raw material for the company. These farms are helpful in curtailing the total per unit cost of production. ii.

Large Scale Production (Bulk-buying economies)

Mitchell’s is one of the largest producers in Pakistan. They are producing a number of products which are countrywide available. Due to owing number of products, it is making production at large scale, which is helping it to reduce its net cost-per-unit of production. iii.

Human Resource (Managerial economies) As the Company considers its employees its most important asset. Its human

resource has the pivotal importance for the company. Management and employee skills are constantly being updated through training courses and study tours both at home and abroad. Currently Mitchell’s is operating with 32 executive staff members along with a big sales and labor force iv.

Research and Development & Quality Control (Technical economies) The success of Mitchell's products, and the taste that has been winning

consumers' hearts for generations, is the result of the Company's ongoing investment in and emphasis on quality control, reinforced by research and development (R & D). R&D section prepares the samples of newly formed products, which are sent to quality control section, which ensures that all our products live up to the consumers' high expectations. From selection of the finest fruits, to processing and packaging, quality control plays a key role in keeping a vigilant and unrelenting eye on every step of the process. The Quality Control staff, with a main up-to-date laboratory, two line-control labs for the Groceries and Sugar Confectionery divisions, and an incubation lab, ensures that there is no deficiency in quality standards during production.

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 DATA COLLECTION METHODS i. University’s recommended Book ii. Internet search engines iii. Websites iv. Library material were also consulted. v. Company’s website vi. Information collected from company’s regional office.

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 SWOT ANALYSIS FOR MITCHELL’S Strengths 1.

Clear intention towards maintaining its economies of scale

2.

Having sufficient resources to maintain its economies.

3.

As compared to their competitors. Consumers taste.

4.

Farm fresh fruits with having their own growing and processing facilities

5.

Mitchell’s was the pioneer in the field of squashes, they gained massive market share and achieved the positive word of mouth regarding there products as they are made of fresh farm fruits.

6.

They have export quality products in Pakistan.

7.

As they have their own fruit farms, hence availability of raw materials is no matter.

8.

Provide vast product lines.

9.

A smooth distribution system with nationwide coverage

10.

Having ability and resources to hire skilled engineers.

11.

Mitchell’s can compete in the field of food industry with other international companies because of ISO Standard quality products.

Weaknesses 1.

A big deficiency is the high cost of the products.

2.

Lack in promotional and advertising policies.

3.

They have limited number of distribution channels in Pakistan.

4.

Customer service staff needs training

5.

More budget needed for Human Resource Development

Opportunities 1.

Introducing new verities of food products.

2.

Mitchell’s can continue its dominance as the innovator.

3.

Can maintain its position as market leader.

4.

Can also continue to be a trend setter.

5.

International and domestic market expansion due to availability of resources.

6.

Local competitors generally does not have their own farms.

7.

Local competitors have less resources to produce quality goods.

8.

Can grow towards technological advancement in the field of food processing industry. 14

9.

New distribution channels.

10.

Cost of raw material is very low because Mitchell’s have partial self sufficiency due to which they are cost effective at some extents.

Threats 1.

Political instability.

2.

International Financial crises / Global recession.

3.

Challenge of work force diversity.

4.

Increasing security threats in the country.

5.

Increasing competition in the market.

6.

Retention of key staff critical.

7.

Possible negative publicity.

8.

Market demand very seasonal.

9.

The food industry is highly competitive and every company is providing new packages (flavor & prices) in short span of time.

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CONCLUSION The company which I have selected for this my assignment, is Mitchell’s. I find that the Mitchell’s is the largest and 1st ISO 9001 Certified food producing company in Pakistan. It was analyzed that the company having the well repute in the market, what they offer and what they produce the consumer accepted it with warm welcome. Mitchell’s is very much conscious and careful about its sales and about the customer level satisfaction and determined to keep its economies of scale maintained. Since 1933, they have been trying to maintain a same graph of satisfaction level and give customer a quality, fresh farm products direct from their own farms. Mitchell’s is very much concerned about its SWOT analysis and keeping a closer eye on every action it can take for the better of its products. Mitchell’s management deals with developing a marketing mix to serve a designated market. Their main focus is on the three forces; Customer, Competition, Corporation. And in addition to this, internal and external factors also play an important role to develop strategy. Mitchell’s is concerned about the external information pertains to social, economic, political and technological trends and product/market environment. The information is analyzed to identify its strengths and weaknesses. Mitchell’s possess a nationwide smooth distribution policy. They are investing money on quality assurance of the products and R&D department is working a lot to keep their quality going.

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RECOMMENDATIONS & SUGGESTIONS Mitchell’s needs to take full advantage of having its own fruit farms. It should get its employees more trained. As it produces its own raw materials, therefore, products prices should be reduced more to a common man level. Its products should easily be available at all stores. It should improve its advertising campaign. It should further look into more areas which can benefit it with economies of scale such as marketing, distribution of products through suppliers, transportation of goods etc.

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