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.

Economic Background of Germany

Political Backround

A federal parliamentary republic based on representative democracy, with the Chancellor being the head of government and the President of Germany being the head of state. Executive power is vested in the Federal Cabinet, whilst federal legislative power vested in the parliament of Germany and the representative body of Germany’s regional states. There is a multi-party system that, since 1949, has been dominated by the Christian Democratic Union and the Social Democratic Party of Germany. The judiciary of Germany is independant of both the executive and the leglislature. Germany’s political system is laid out in the 1949 constitution, the ‘Basic Law’, which remained in effect with minor ammendments after 1990’s German reunification. The protection of individual liberty is emphasized by the constitution in an extensive catalogue of human rights and divides power between both the state and federal levels and between the executive, legislative and judicial branches.

Brief History

In 1871 Bismarck created the German Empire. There was much industrialisation during the 19th and 20th century throughout Germany, and it began colonizing parts of North Africa . During the First World War, the international aspirations of the German Empire were a contributing factor. The empire was defeated in 1918 and replaced by the Weimar Republic. The financial struggle that followed the First World War in Germany was one of the main factors that led to the rise of Hitler as the leader of a new German empire in the 1930’s. A combination of of Hitler’s aggressive foreign policy and eventual invasion of Poland precipitated the Second World War. Following Germany’s defeat in the Second World War the country was divided into British, French, US and Soviet occupation which led to the formation of two seperate states; The German Democratic Republic and The German Federal Republic . On October 3rd 1990 after 45 years of ‘Cold War’ Germany was Reunified and Berlin was made capital of Germany.

Economic Data

Germany GDP

This graph presents the levels of GDP in Germany throughout the past decade. The trend shows that from 2001, the rate of GDP have been continuously increasing; however from 2010, the levels of GDP have been decreasing.

Germany Unemployment Rate

This graph shows the levels of unemployment over the past three years. The trend shows that generally the levels of unemployment have been decreasing up until quarter three of 2011. Since then, the levels of unemployment have been increasing.

Germany Balance of Trade

This shows the Balance of Trade for Germany over the past three years. Overall, while they have had a fluctuating pattern, Germany have been in a budget surplus throughout this time period, as it does not run into negative figures.

Germany Inflation Rate

This graph shows the the inflation rate for Germany over the past three years. Overall, whilst the graph has had some fluctuations in its pattern, the inflation rate has been increasing onwards towards the second quarter of 2011. Since then, the inflation rate has been steadily decreasing.

Imports

Germany’s import sector  includes machinery, vehicles, chemicals, foodstuffs, textiles and metals. Its main trading partners for imports are the Netherlands (contributing to 8.5% of total imports), China (contributing to 8.2% of total imports) and France (also 8.2%) The total value of imports is US$1.12 trillion.

Exports

Germany, the fifth largest economy in the world and the largest economy in the Euro-Zone, depends heavily on its exports to drive the economy. With a strong network of trade relationships with almost all the major trading countries in Europe and all over the world, along with a weakened euro, Germany became the world’s 3rd largest exporter in 2010. One of the strongest demand for German’s commodities is automobiles. In 2009, Germany produced 5.2 million vehicles, and was the world’s forth largest producer and largest exporter of automobiles. Germany automobile companies also dominate 90 percent of the top tier automobile market, which boasted brands such as Mercedes-Benz and Porsche. The totoal value of German exports is US$1.337 trillion. Its main trading partners France (contributing to 10.2 percent of total exports), US (contributing to 6.7 percent of total exports) and the Netherlands (contributing to 6.7 percent of total exports).

Current Fiscal Situation

Germany is one of the leaders of the EU economy. Nevertheless, in recent years, the country has faced substantial problems, especially in regard to its fiscal policies. In spite of the ongoing economic growth, which has lasted until the recent economic recession, Germany faces the problem of the necessity to reform the national fiscal policy in order to prevent the possible downfall of the national economy. What is meant here is the fact that the current German fiscal policy cannot maintain the economic growth in a long-run perspective, while problems accumulated in the result of the ineffectiveness of the national fiscal policy can undermine the national economy at large and lead to a profound financial and economic crisis. In this respect, it is necessary to distinguish three major problems: structural/demographic problems; government debt; fiscal stimuli and EU excessive deficit procedure. In actuality, each of the aforementioned problems can become an unbearable burden for German economy, if the authorities fail to reform the national fiscal policy consistently.

Living Standards in Germany

This graph presents the living standards in Germany, in relevance to the GDP per Capita. From 2002 – 2004, it was steadily decreasing; however, from 2004 – 2009 it has begun to rapidly increase.  It declined in 2010, but began to rise again in 2011. The life expectancy, on average, in Germany is 79 years; it is ranked 32nd in the world. The Human Development Index for Germany is ranked 9th in the world.

Eurozone Crisis – Germany

http://www.guardian.co.uk/world/2012/jun/22/eurozone-crisis-germany-bullied-misunderstood

http://www.bbc.co.uk/newsbeat/15111047

http://useconomy.about.com/od/Europe/p/Eurozone-Crisis.htm

The OECD announced the eurozone debt crisis was the world’s greatest economic threat in 2011, and things have only worsened in 2012. The crisis has festered since 2009, when the world first realized Greece could default on its debt. In three years, it’s escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland and Spain. The European Union, led by  Germany and France, struggled to support these members with bailouts from the ECB (European Central Bank) and IMF (International Monetary Fund). These measures haven’t been enough, allowing the crisis to threaten the existence of the euro itself. There were three causes to the crisis:

  • There were no penalties for countries that violated the debt-to-GDP ratios set by the EU’s founding Maastricht Criteria.
  • Eurozone countries initially benefited from the low interest rates and increased investment capital made possible by the euro’s power. Because they were on the euro, they couldn’t do what most countries do to cool inflation – raise interest rates or print less currency.
  • Although there are good arguments for austerity measures, they might only slow economic growth by being too restrictive.

Germany is doing much better than its neighbours. Business there has been steady, and it’s been able to stay on top of its debts. Germany has the biggest economy of the countries which use the Euro, so it contributes the most money to bailout funds. But many think the country’s leaders have been too slow to get a grip on the Euro debt crisis. It has been under pressure to put up more cash to help its neighbours.Germany is the only country in the eurozone capable of bailing out insolvent countries such as Greece, Ireland and Portugal and coming up with the financial backing to support Spain’s collapsing banks. But however much Germans think it is in their interests to save the euro and to keep paying the soaring price tag to do so. Yet a recent survey revealed that 55% of Germans wished they had kept hold of the Deutschmark and 53% saw the common currency as a personal disadvantage to themselves. According to another study, despite a healthy German economy every second German believes they will be personally affected by the euro crisis, and, as a direct result of it, only 13% think their children will have a better standard of living than they now enjoy.