Economies of Scale means % drop in average cost of
production following 1% increase in output. It simply means the more will be
the production the less will be the cost of production.
This economies of scale can be related to BCG Matrix. BCG
Matrix is a product portfolio matrix designed in a way to classify products
according to their growth factors. The products having low growth can be
discontinued and products having high growth, more investment can be made. In this,
economies of scale can be applied.
First is the Cash Cow products. They are at the high peak of growth.
Cash cows have high economies of scale. They earn the maximum profit so they
are produced at a large scale.
Second is the Star products. They are at the growing stage. This
product earns profits and will earn a huge market share in the future. They
have average economies of scale. Production is on a little lower side,
anticipating high production in future.
Third is the Dog products. They are low on market share as well
as profits. Disinvesting in this product is the best option. They have
diseconomies of scale. Production cost is very high and no profits in return.
Fourth is Question Mark products. These are the new
products. They are at their introductory stage. They are yet to experience the
economies of scale.
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