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Necessary elements in economies of scale

Economies of scale are the necessary elements which are every organization want to get in a complex competition. PepsiCo is one of the largest companies have gotten economies of scale. Pepsi is well- known all over the world about the soft- drink, beverage’s food and snack. In this assignment, we will analyze about the economies of scale where increasing the scale of production leads to a lower cost per unit of output. In general just the large firm gets the economies of scale in comparison with the smaller firm. These are the portfolio of the PepsiCo ‘economies of scale which are focused on:

Specialization and division of labor.

Indivisibilities.

The “container principle”.

By products.

Organizational economies.

Financial economies.

Economies of scope.

SPECIALIZATION AND DIVISION OF LABOR

Specialization is agreement within a community, group or organization under which the member most suited (by virtue of their natural aptitude, location, skill or other qualification) for a specific activity on task assume greater responsibility for its execution or performance. [Business dictionary].

Division of labor is narrow specialization of task within a production process so that each worker can become a specialist in doing one thing, especially on an assembly line. In traditional industries (see sunset industries) division of labor is a major motive force for economic- growth. However, in the era of mass customization (which requires multiple skills and very short machine change over time) division of labor has become much more flexible. [Business dictionary]

There are some connection between specialization and division of labor, it also related to economies of scale.

The scale of company will effect to conduce to a result’s company. The numbers of workers are also influence to the company. When a company is running a small business with a small scale, they don’t have much employ. All people in the company have to work for multiple functions which are one person will do a lot of job even they don’t have a skill of that. In the family company, there are just several people so they have to do the most works: sales, marketing, service, maintenance… In this case the result will not high because of the worker can’t pay attention on their specific job as good as they should.

In other case, a company is getting bigger. They have big scale and have many workers so they can divide their job to agree with each worker’s level. They can have different department: human resource, marketing, accounting… Each worker in each department will have enough knowledge and skill to do their job, then the productivity will getting higher and will not losing money for something is originate.

This is an example release to this concept.

Pepsi-Cola Company announced today an innovative restructuring of its U.S. operations to improve customer service capability, and to position the company for future growth opportunities. There are some different parts of the company were divided by the CEO of the company. They repair to open more store to show out more about their production. They apply the specialization and division of labor into activity of business to build a scale of company. The business units will report everything to the national business units. Each unit market will be run by a manager for a market report general manager. Business units will reports to one of two chief executive officers in the national business unit, who in turn report to chairman and CEO of the company. All the workers in company work follow their manager and they work. The work that they are doing is fit with their skill and knowledge; they work in different department with different skill. They also divide by accounting department, sale department, human resource department…the specialization and division of labor is influence to economies of scale of company.

“The only sustainable competitive advantage is people”1

1 Human resource information system, business of school, university at Albany, http://www.albany.edu/business/brochure_hris.pdf

FINANCIAL ECONOMIES

Large firms ,compare to firms with smaller scale , have more advantages like having lower interest rates when they make loans from banks, easier to have contracts with capital funding companies and even make better bargain with suppliers for the raw materials due to their abilities to buy in huge amount .(John Sloman ,2007) . In the long run, if a firm wants to expand its business bigger by building up more factories, buy most modern machinery for production, hire more employees with better skills or even spend money on R&D, the most important thing it must have is the financial economies of scale. Because of that , already large firms are likely to be able to develope theirselves to do business more efficiently than smaller ones.

Table : Pepsico’s long-term debt and annual interest rate from 1999-2009

Source: Based on Pepsico’s annual reports from 1999-2009

As the graph shows, the amount of money that Pepsi borrowed from many sources every year was really huge. From 1999-2009 the minimum amount was 1,702 billion dollars in 2003 while it was extremly high at 7,859 billion in 2008. Although the world’s economy was still suffering from the crisis earlier, in 2008, Pepsi continually moved forward by expanding its business bigger, mainly in Brazil,Mexico,India,Russia and China annual report. Pepsi’s reputation, profits in previous years gave it the opportunity the have such strong supporting from banks and funds. In additional, you may noticed that the interest rates of the loans that Pepsi borrowed, considered as low risk ones, are much lower than that other companies could have .

Pepsi also gains benefit from financial economies because it has more bargaining power than its suppliers. For example , Pepsi Cola is one of Pepsi main products that has really high market share, it with its major competitor CoCa Cola may make up to more than 90% market share in cola products in some countries and thus raw materials suppliers for producing cola has not much bargaining power to Pepsi. They have to sell materials to Pepsi with cheaper price because ,firstly ,they do not have many choices left and secondly, Pepsi can consume theirs products much more than others small companies.

ORGANISATIONAL ECONOMIES

A large firm usually has many factories that located in various locations and may produce different productions but under control of just one centralised administration in order to do business more effeciently(John Sloman ,2007).

. Because of that ,in case of Pepsico, whenever a demand on a product that being produced by one of the firm’s factory significantly increases, the headquarter can make others factory make that product to gain more profit. In other hand , if the cost of that product keeps getting higher , the headquarter may switch the factory’s production to other products which are more profitable.

THE “CONTAINER PRINCIPLE”

In the 1950s, it was not easy for people to find Australian beef, perfume from France or clothes which are made from Vietnam. As a result, “container” was invented to help businessmen to bring their products with minimum fee. The reason for this was container’s fee was extremely expensive which lead to a price of many products was higher, so a small number of businesses used this transportation. What does “container” mean? And what is its mission? According to Cambridge Dictionary, “container” is an empty object, such as a box or a bottle, which is served to hold something, especially to carry or move it. Additionally, based on Marc Levinson, an economist and former finance editor of the Economist, he described a new kind of container that: “A soulless aluminum or steel box held together with weld and rivet, with a wooden floor and two enormous doors at one the end: the standard container has all the romance of a tin can.” As a consequence, shipping price by the container fell significantly. This is an explanation for the relationship between a capacity and surface area of container. According to Sloman, 2007, he proved that by giving an example of a container with length, height and width in one meter, means one cubic meter of volume and a surface area of six meter square. Then, he doubled the length into two meter, as a result, the capacity can be increased eight times by increasing surface area only four times and rising around four times in cost. The “ container principle” explains specifically e theory that investing a small amount of money which lead to a higher positive consequence.

INDIVISIBILITIES

                    Indivisibilities: the impossibility of dividing a factor without treating it individually or separating it into smaller units. In the economies of scale, indivisibilities is a factor that models a company’s productions expansion based on input. The basic use of indivisibilities is to portray on how indivisibilities; in this case the different machines used to produce and package, can effectively affect the full input of producer.

                        As a large international cooperation, everyday, Pepsi produced approximately 1 to 2 million litter of soft beverage a day.  It’s very important that Pepsi can make a full use out of all their machines.

                       Recently, Pepsi Fristo have a new solar field where they had place 192 solar collectors to absorb sunlight. These captured solar energy will then be used to generates steam and heat up the cooking oil to produce SunChips. By making the full use out of the 192 solar collectors, Pepsi will save a great amount of fuel and oil.

                          According to an article,  by the end of 2009 packaging division had reached up to 2,400 boxes. However, with this current capacity in 2010,  the numbers of production up to 3,000 million boxes.

                            The four producing divisions can produced above 250 stock keeps units which already included 1,600 cans/min, 12 oz filling line, one of 40 bottles/min.

                             As a large cooperation, it’s very important for Pepsi to make full use out of all of their machine. Economically speaking, it will help Pepsi save a large amount of money each and everyday just by using the full capacity of their production lines.

ECONOMIES OF SCOPE

The firm, which is, has the economies of scale if they are got more than one lines of product or in their producing. According to David Kass in his 1998 article,”Economies of scope and Home healthcare”, economies of scope exist if a firm can produce several product lines at a given output level more cheaply than a combination of separate firms each producing a single at the same output level. Base on the above definition of economies of scope, we can identify that Pepsi. Co is the firm that is satisfies to have the economies of scale, specifically has the economies of scope.

In this assignment, I want to analyze some of element to justify that Pepsi has the economies of scope. Pepsi. Co is a big company, which is well known in over the world. If go to the main website of Pepsi family, you can easy to find out that Pepsi is attending in nearly 200 countries in globe. With the mission that to become the world’s premier consumer products company concentrated on convenient foods and beverages,(Our vision and Vision ) , there are hundreds of product lines in four divisions majoring to lead global in food, snack and barrage company. In the Pepsi. Co’s ”Built to grow” report 2001; Pepsi was classified in the third (3 grate) of “World’s leading foods and beverage companies.”

Just have a preliminarily look, we will amaze about the number of product that Pepsi has presented into food and beverage market .As I mention before, Pepsi. Co family have four major division-which include PepsiCo Americas Beverages (PAB), PepsiCo Americas Foods (PAF), PepsiCo Europe and PepsiCo Asia, Middle East& Africa (AMEA).(The PepsiCo Family)

PepsiCo Americas Beverages (PAB).

This is a part of carbonate soft drinks, juices and juice drinks, ready-to-drink teas and coffee drinks, isotonic sports drinks, bottled water and enhanced waters – which are in the beverage brands in Pepsi. Included in this brand are the several of product are famous such as Mountain Dew, Diet Pepsi, Gatorade, Tropicana Pure Premium, Aquafina water, Sierra Mist, Mug, Tropicana juice drinks, Propel, SoBe, Slice, Dole, Tropicana Twister and Tropicana Season's Best.

PepsiCo Americas Foods (PAF).

Frito-Lay north America; Quaker Foods North America in Ravenna and Ohio; Sabritas in Mexico City; Gamesa – headquatered in Monterrey, Mexico; Latin Americas Foods – operations in Brazil, Agerntina , Colombia , Peru and Venezuela are the portfolio of PepsiCo Americas Foods (PAF) ‘ businesses.

In the separate – product lines of this PAF, there are huge of

Productions.

Frito- Lay North America got LAY’S and RUFFLES potato chip; DORITOS tortilla chips; TOSTITOS tortilla chips and dips; CHEETOS cheese flavored snacks; FRITOS corn chip; ROLD GOLD pretzels; SUNCHIP multigrain snacks; CRACKER JACK candy coated popcorn.

Quaker Foods North America brand include Quaker oatmeal; Life and Cap’n Crunch ready-to-eat cereals; Aut Jemina mixes and syrups; Rice-A-Rroni; Pasta Roni and Near East side dishes.

Sabritas manufactures and markets several local brands such as Crujitos;Poffet; Rancheritos and Sabritones.

Marias Gamesa; Emperador; Acoiris; Mamut; Chokis and Maizoro are the most successful product of Gamesa brand.

The portfolios of the Latin Americas Foods are Lay’s, Cheetos, Fritos and Doritos and lucky snack.

PepsiCo Europe.

PepsiCo has present in 45 countries in Europe with Frito Lay Snack; Pepsi-Cola beverages; Gatorade Sports Drinks; Tropicana Juice and Quaker foods.

Thses are the list of the most popular products in the region: Walker Crisp; Quaker Oats; Paw Ridge; Pepsi; Diet Pepsi; Pepsi MAX; Pepsi RAW; 7 Up; Copella; Doritos; Gatorade; Red Sky; V Water; Planet Lunch; Lays; Cheetos; Smiths; Duyvis; Snack-a- Jack; Quaker; Cruesli; looza; Twistos; Solinki.

PepsiCo Asia, Middle East& Africa (AMEA)

Market and sells a number of well known snack food brands such as: Lay’s; Kurkure; Chipsy; Doritos; Smith’s; Cheetoe; Red Rock; Deli and Ruffles.

Beside that AMEA also make the independent contract manufacturers in marketing and selling for the Quaker-brand cereals and snacks.

CONCLUSION

As a large international cooperation, it’s very important for Pepsi to spend their money wisely. By following the concept of economies of scale, PepsiCo have had save not only a great amount of money, it will also help reduce the average cost.

. Organization is one of the main key that lead to successful business. By using Specialization and Division of Labor, Multi-stage division, and Organizational Economies methods in economies of scales, it have helped PepsiCo organize their production lines, division and people. Which will then speed up the working along with producing goods process and lead PepsiCo to become one of the largest food companies in the world. It’s also very important to make full use out of their assets and goods. By using the “container principle”, and indivisibilities which in Pepsi case as a large company can make the full use out of these two principle and save a great amount of energies and resources (results had already been mention from above). Every customer seek for products with high quality. In order to fulfill their needs Pepsi have spent multiply millions dollars into their research department to invent better products, and improve old products and bring them to meet the right standard of quality. As now when global warming has become one of the greatest international threat, many customers seeks for eco-friendly production which is also another reason why Pepsi should use by-product. This also helps Pepsi save their good sources by re-use, recycle their products. Economies of scope and financial economies will help Pepsi collaborate and cooperate with other company business.

By using economies of scales, Pepsi have slowly archive their success. Become one of the greatest food and beverage company in the world. Yet, they are not slowing down yet. Stay tuned because there is a lot more to come from PepsiCo

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