Answer to Question #94234 in Macroeconomics for Sharon

Question

By referring to a minimum of three factors, comprehensively discuss how firms in the service industry can achieve economies of scale. Include in your discussion the potential disadvantages of the mentioned factors.

Answer 1

Economies of scale in the service sector focus on reducing costs incurred while offering services to customers or clients. In the service sector, individual skills play a vital role in achieving economies of scale hence the focus for any firm in the sector is to reduce expenses relating to service provision. 

A firm in the service sector can achieve economies of scale through outsourcing of services, technology and standardization and specialization. Outsourcing of services leads to reduction in costs especially when experts offer specialized services and processes. It is more economical for a firm to outsource specialized service rather than maintaining them in-house. However, the disadvantage of outsourcing is the inability of a firm to make direct and crucial decisions relating to services offered. Furthermore, a firm is unable to align its culture efficiently due to the presence of another company that has its own culture. This may affect the operations and profitability of a firm.

Technology is important in service sector since it ensures that services are offered efficiently and effectively reducing the chances of work duplication. Efficiency and effectiveness reduces the costs incurred while offering services to customers in service industry hence leads to economies of scale. However, in the aim of achieving economies of scale, the use of technology is expensive since there is the requirement for a firm to buy machines and train its employees on how to use and maintain them. Additionally, technology reduces interaction between customers and the staff, which is a critical source of feedback that can be used as a base for improving services. 

Standardization provides an opportunity for a firm to efficiently increase service provision within the same time. However, this eliminates the chance for a firm to customize its services based on customers’ needs hence limiting the chance to attain competitive edge. Specialization encourages efficiency because employees are tasked with duties that align to their capabilities. This leads to efficiency, which is essential in attaining economies of scale. Nevertheless, specialization limits creativity within work environment, which is critical for business growth and diversification.