Economies of Scale – Cadbury

This is a post for my Economics A2 course, which is about both economies of scale and diseconomies of scale, based on the confectionery company Cadbury.

Many companies have benefited from the implementation of economies of scale. When an increase in the quantity produced of a good can increase with less than average input costs, economies of scale  are said to be  achieved. This means that when growth expands and a company can produce more goods, a company is more likely to decrease its costs. Economic growth may be achieved when economies of scale are realized. However, diseconomies of scale can happen when production is less than in proportion to inputs. The costs on average would rise as there are insufficiencies occuring within the firm.

Internal economies of scale are when an individual company lowers costs and increases production; whereas external economies of scale are on a larger scale, specifically within the industry itself. When an industry’s operation begin to expand, this will see a resultant decrease in costs for a company in that industry – external economies of scale have been achieved, which will benefit all firms within the industry.

This theory can be applied particularly to the company Cadbury, the confectioney industry’s second largest global company. If a powerhouse such as Cadbury want to remain at large in the market, then they need to invest in economies of scale. An example of this was when Cadbury was merged with the company Schweppes. Since they had invested in new machiney in one of their modern confectionary plants (run by Cadbury Schweppes), they were able to switch part of factory capacity from lines where demand was in decline, to where demand was on the increase through well organised production management.  Also, the merged company benefited from technical and financial economies of scale. Firstly, they were able to produce better, bigger and faster machinery, meaning they could cheaply produce a large quantity of units, lowering their costs. Secondly, as the merge increased the size of the business, which meant that the company was seen as a secured firm. This made borrowing capital at low interest rates easier, as banks knew that the company was less of a risk.

A large company like Cabdury could present itself with diseconomies of scale if it expands too quickly. If they were to expand and create multiple branches across the world, then it would be quite a task to monitor the productivity and quality of output from these many thousands of employees. With different managers of these individual branches having different objectives, and so the input that Cadbury is placing in the business could be more than the levels of production. Also, with thousands of employees, their is the risk of a reduction in morale levels for individual workers. As a result, productivity levels may fall, wasting factor inputs and increasing costs for the company.

More recently Kraft, the world’s second largest food company, took over Cadbury. Experts believed that the combination of the two companys could lead to the creation of a ‘global confectionary giant’. This is because Kraft are now able to increase their market shares and growth overseas, whilst Cadbury could expand its markets and place itself as a contender among the US confectionary market. Kraft stated that this combination allowed them to invest in economies of scale, meaning sales and distribution would increase and deliver £640m in revenue synergies.

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