AN ABSTRACT

Economics of Scale exist when the production cost of a single product decreases

with the number of unit produced. Refer to the situation in which the cost of producing

an additional unit of output (i.e., the marginal cost) of a product decreases as the volume

of output (i.e., the scale of production) increases. It could also be defined as the situation

in which an equal percentage increase in all inputs results in a greater percentage

increase in output. Generally speaking, economies of scale is about the benefits gained

by the production of large volume of a product.

In business, economies of scale are usually considered in relation to specific areas

of the production process, which may be technical, managerial, marketing, finance, and

risk.

In achieving economies of scale, many factors must be considered. Economies of Scale

bring cost benefit to the producers and gives the following benefits:-

Because a large business can pass on lower costs to customers through lower

prices.

Increase its share of a market.

This poses a threat to smaller businesses that can be “undercut” by the

competition.

Mitchell’s is one of the largest producers in Pakistan. It is ISO-9001 certified

company. It has a number of products available in the market. It is deeply concentrating

on various areas where it can maintain its production cost to the lower level with the

more production, thus striving for obtaining the economies of scale. It is using some of

its major areas like technical farms productions, human resource training, R&D and

Quality Control, where with little effort it can bring phenomenal results.

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TABLE OF CONTENTS

CONTENTS PAGE NO.

Title 01Acknowledgement 02

An Abstract 03Introduction to the Issue

Perfect Market 05

Mixed Economy 05

Equilibrium 05

Inputs: 05

Outputs 05

Factors of Production 05 Returns to Scale 06 Internal Economies of Scale 07 External Economies of Scale 08

Introduction to the Organization:Mitchell’s Fruit Farms Ltd.

Introduction & History 09

Vision & Mission 10

Mitchell’s Products 11

Raw Material 12

Export & Import 13

Present Performance 13Topic Implementation

Mitchell’s Economies of Scale 14

Data Collection Methods 15

SWOT Analysis 16

Conclusion 18Recommendations 19References / Bibliography 20

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Perfect Market:

The following assumptions hold:

a) There is a large number of buyers and sellers or small firms in the market;

b) All firms know the exact pricing of the other firms.

c) All firms have the same access to technology and resources

d) The units of goods sold by different sellers are the same - the product is

homogeneous;

e) There is perfect information = all buyers and sellers have complete

information on the prices being asked and offered in other parts of the

market; and

f) There is perfect freedom of entry to and exit from the market.

g) seller is not able to set a price and it has no control of price

Mixed Economy:

Economic system in which both the private enterprise and a degree of state monopoly

coexist. All modern economies are mixed where means of production are shared between

the private and public sectors.

Equilibrium:

In economics, economic equilibrium is simply a state of the world where economic

forces are balanced and in the absence of external influences the (equilibrium) values of

economic variables will not change. It is the point at which quantity demanded and

quantity supplied are equal. Market equilibrium, for example, refers to a condition where

a market price is established through competition such that the amount of goods or

services sought by buyers is equal to the amount of goods or services produced by

sellers. This price is often called the equilibrium price or market clearing price and will

tend not to change unless demand or supply change.

Inputs:

Inputs are commodities or services that are used to produce goods and services. An

economy uses its existing technology to combine inputs to produce outputs.

Outputs:

Outputs are the various useful goods or services that result from the production process

and are either consumed or employed in further production.

Factors of Production

In economics, factors of production (or productive inputs) are the resources employed

to produce goods and services. They facilitate production but do not become part of the

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product (as with raw materials) or are significantly transformed by the production

process (as with fuel used to power machinery). These can be classified into three broad

categories:-

i. Land

Land, or more generally, natural resources, represents the gift of nature such as

water, air, soil, minerals, that are used in the creation of products. It consists of

the land used for farming or for underpinning houses, factories, and roads; the

energy resources that fuel our cars and heat our homes, and the non-energy

resources like copper and iron ore and sand. In today’s congested world, we must

broaden the scope of natural resources to include our environmental resources,

such as clean air and drinkable water.

ii. Labour

It consists of the human efforts used in production which also includes technical

and marketing expertise. Labour can also be classified as the physical and mental

contribution of an employee to the production of the good

iii. Capital

Human-made goods (or means of production) which are used in the production

of other goods. These include machinery, tools and buildings.

Physical capital: All the machines, buildings, equipment, roads and other objects

made by human beings to produce goods and services.

Human capital: The knowledge and skills acquired by a worker through

education and experience.

Returns to Scale

In production, returns to scale refers to changes in output subsequent to a proportional

change in all inputs (where all inputs increase by a constant factor).

i. Constant Returns to Scale

It denotes a case where a change in all inputs leads to a proportional change in

output. For example, if labour, land, capital, and other inputs are doubled, then

under constant returns to scale, output would also double.

ii. Decreasing Returns to Scale

It occurs when a balanced increase of all inputs leads to a less-than-proportional

increase in total output. In many processes, scaling up may eventually reach a

point beyond which inefficiencies set in. These might arise because the costs of

management or control become large. One case has occurred in electricity

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generation, where firms found that when plants grew too large, risks of plant

failure grew too large

iii. Increasing Return to Scale (Economies of Scale)

Increasing returns to scale arise when a balanced increase in all inputs leads to a

more than proportional increase in the level of output. This is also called

Economies of Scale. For examples, if all the inputs have been increased by 10

percent, then the increasing returns would be more than 10 percent. If costs

increase proportionately, there are no economies of scale; if costs increase by a

greater amount, there are diseconomies of scale; if costs increase by a lesser

amount, there are positive economies of scale.

Short example:

Where all inputs increase by a factor of 2, new values for output should be:

Twice the previous output given = a constant return to scale

Less than twice the previous output given = a decreased return to scale

More than twice the previous output given = an increased return to scale

Assuming that the factor costs are constant, a firm experiencing constant returns will

have constant average costs, a firm experiencing decreasing returns will have increasing

average costs and a firm experiencing increasing returns will have decreasing average

costs.

Internal Economics of Scale - the cost per unit depends on size of the

individual firm

i. Bulk-buying economies

As businesses grow they need to order larger quantities of production inputs. For

example, they will order more raw materials. As the order value increases, a

business obtains more bargaining power with suppliers. It may be able to obtain

discounts and lower prices for the raw materials.

ii. Technical economies

Businesses with large-scale production can use more advanced machinery (or use

existing machinery more efficiently). This may include using mass production

techniques, which are a more efficient form of production. A larger firm can also

afford to invest more in research and development.

iii. Financial economies

Many small businesses find it hard to obtain finance and when they do obtain it,

the cost of the finance is often quite high. This is because small businesses are

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perceived as being riskier than larger businesses that have developed a good track

record. Larger firms therefore find it easier to find potential lenders and to raise

money at lower interest rates.

iv. Marketing economies

Every part of marketing has a cost – particularly promotional methods such as

advertising and running a sales force. Many of these marketing costs are fixed

costs and so as a business gets larger, it is able to spread the cost of marketing

over a wider range of products and sales – cutting the average marketing cost per

unit.

v. Managerial economies

As a firm grows, there is greater potential for managers to specialise in particular

tasks (e.g. marketing, human resource management, finance). Specialist managers

are likely to be more efficient as they possess a high level of expertise,

experience and qualifications compared to one person in a smaller firm trying to

perform all of these roles.

External Economies of Scale - the cost per unit depends on the size of the industry,

not the size of firm.

There are three main types of external economies of scale. External economies of scale

occur when a firm benefits from lower unit costs as a result of the whole industry

growing in size. The main types are:

i. Transport and communication links improve

As an industry establishes itself and grows in a particular region, it is likely that

the government will provide better transport and communication links to improve

accessibility to the region. This will lower transport costs for firms in the area as

journey times are reduced and also attract more potential customers.

ii. Training and education becomes more focused on the industry

Through intensive training courses and growth of education to grass-root level,

more skilled worker can be developed and recruited. For example, there are many

more IT courses and vast technology changes in India which has developed its

software industry.

iii. Other industries grow to support this industry

A network of suppliers or support industries may grow in size and/or locate close

to the main industry. This means a firm has a greater chance of finding a high

quality yet affordable supplier close to their site.

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INTRODUCTION TO THE ORGANIZATION

MITCHELL’S FRUIT FARMS LIMITED

Introduction and History:

Mitchell’s is the oldest food company in Pakistan. It was established in 1933 by

Francis J. Mitchell under the name of Indian Mildura Fruit Farms Ltd. After the country

gained independence in 1947, the company's name was changed to "MITCHELL’S Fruit

Farms Ltd." with the brand name of "MITCHELL’S".

Since its inception, Mitchell’s has gone from strength to strength, not only

expanding its product line but also maintaining quality through the years to become one

of the largest food companies in the country. From the procurement of best quality raw

materials, fresh from its own farms and orchards to the adoption of latest production

techniques, Mitchell’s has been in sync with the evolving times.

The result of Mitchell’s efforts is that today it is among the market leaders in all

of its product categories. Not only that, but its products are also gaining a market abroad

with exports to several parts of the world including UK, USA, Canada, the Middle-East

and South-West Asia where already Mitchell’s is a name to reckon with.

Mitchell’s is the only major food company in Pakistan today with fully integrated

operations having its own growing and processing facilities at one location. Modern

high-volume industrial equipment, professional management and a trained workforce all

combine to ensure that Mitchell’s continues its dominance as the innovator, market

leader and trend setter. In this regard a major step was taken in 1998, when Mitchell’s

became the first food company in Pakistan to achieve ISO 9001 accreditation, thus

becoming more competitive on the international stage also.

Fully computerized and inter-linked regional sales offices ensuring a smooth

distribution system with nationwide coverage manage countrywide sales. Highly

qualified executives, using modern management tools, handle marketing, commercial,

financial and accounting functions from the Head Office in Lahore.

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VISION & MISSION STATEMENT

To be a leader in the market by serving and providing quality products to our

consumers while learning from their feedback to set even high standards.

To be a company that continuously enhanced its superior technology skills to

remain internationally competitors in this day and the age of increasing

challenges.

To be the company that attracts and retains competent people by creating a

culture that fosters innovations, promotes and rewards initiatives and

performance.

To be a company which optimally combines its people technology management

system and opportunity to achieve profitable growth while providing fair return

to its share holders.

To be a company that endeavors to set the highest standards in corporate ethics

that fulfills its social responsibility

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MITCHELL’S PRODUCTS

It is Mitchell’s aim to provide you with healthy, innovative and good quality food

that will tempt your appetite at all times. And not only that, but it also promise

convenience and variety at affordable prices. With six categories encompassing over

sixty products, company is proud to present the Mitchell's family - products to grace

your dining table on the breakfast and dinner occasions as well as products to appease

your sweet tooth.

Today the Mitchell’s family continues to grow, reaching more and more

households worldwide with an ever-increasing array of farm-fresh products ranging

from thirst-quenching Squashes & Syrups; fruity Jams, Jellies and Marmalade; rich

Tomato Ketchup & savory Sauces; tasty Pickles; refreshingly nutritious Canned Fruits &

Vegetables; and a wholesome assortment of Candies & Chocolate from its wide range of

confectionery products.

o Jams, Jellies & Marmalade

o Sauces & Ketchup

o Squashes

o Pickles

o Canned Food

o Confectionery (Candies & Chocolates)

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RAW MATERIAL

Mitchell’s has its own farms and where a number of fruits and other raw material

is being produced by the company. This is one of the major plus point of Mitchell’s of

having its own raw material. This raw material is used in the preparation of its various

products and is helping it to curtail its net cost being incurred on production. Following

is the raw material being produced and used by the Mitchell’s is:-

Tomatoes

Strawberries

Raspberries

Plums

Pineapples

Pears

Peaches

Oranges

Mangoes

Lemon

Guava

Grapefruit

Garlic

Cherries

Banana

Apricots

Apple

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EXPORTS AND IMPORTS

EXPORTS

At present, Mitchell's products are being exported to several parts of the world,

including UK, USA, and the Middle East. In future the Company is planning to make

Mitchell's a brand name familiar with households in every part of the world.

IMPORTS

There are certain Mitchell’s products that are being imported. For example,

pineapple is being imported from Singapore. Only fruit is imported, the rest of the

process is done in farms. Some of the fruit is imported in the form of pulp such as

mango. Though mangoes grow in farms but due to the increasing demand of mango

items, it has to import some of the quantity from other countries to meet the demand.

Sugar is also imported.

PRESENT PERFORMANCE

The Company passed a major milestone in the year 1998, the 65th for Mitchell’s,

brought a major distinction for the Company; the ISO 9001 accreditation, making it the

first food company in Pakistan to achieve the honor.

Today in Pakistan, Mitchell's is the only major company with fully integrated

operations having its own growing and processing facilities at one location. Modern

high-volume industrial equipment, professional management and a trained workforce

ensure that Mitchell's maintains its lead. Fully computerized and inter-linked regional

sales offices manage burgeoning countrywide sales, with those in major cities, Karachi,

Lahore, Rawalpindi and Islamabad. All the offices are on the Internet/e-mail network

ensuring uninterrupted flow of data. Highly qualified executives using modern

management tools from the Head Office in Lahore handle commercial, financial and

accounting functions.

A smooth distribution system with nationwide coverage and consistency of

quality have kept the most prestigious national institutions loyal to Mitchell's’ growing

product range. These include Pakistan International Airlines (PIA), leading five star

hotels and clubs, Utility Stores Corporation, Canteen Stores Department, chains of main

stores and established restaurants in major cities.

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MITCHELL’S ECONOMIES OF SCALE

Currently, all the markets in the world are a mixture of command economy and market

economy, thus called as mixed economy. Pakistan is also experiencing mixed economy

in its market. Mitchell’s Fruit Famrs Limited is also trying hard to maintain its market

equilibrium and economies of scale through many initiatives. It is making the following

efforts to gain and also maintain economies of scale.

i. Land

Mitchell’s has its own fruit farms where they have their own processing and growing

facilities. These farms are producing raw material for the company. These farms are

helpful in curtailing the total per unit cost of production.

ii. Large Scale Production (Bulk-buying economies)

Mitchell’s is one of the largest producers in Pakistan. They are producing a number of

products which are countrywide available. Due to owing number of products, it is

making production at large scale, which is helping it to reduce its net cost-per-unit of

production.

iii. Human Resource (Managerial economies)

As the Company considers its employees its most important asset. Its human

resource has the pivotal importance for the company. Management and employee skills

are constantly being updated through training courses and study tours both at home and

abroad. Currently Mitchell’s is operating with 32 executive staff members along with a

big sales and labor force

iv. Research and Development & Quality Control (Technical economies)

The success of Mitchell's products, and the taste that has been winning

consumers' hearts for generations, is the result of the Company's ongoing investment in

and emphasis on quality control, reinforced by research and development (R & D). R&D

section prepares the samples of newly formed products, which are sent to quality control

section, which ensures that all our products live up to the consumers' high expectations.

From selection of the finest fruits, to processing and packaging, quality control plays a

key role in keeping a vigilant and unrelenting eye on every step of the process. The

Quality Control staff, with a main up-to-date laboratory, two line-control labs for the

Groceries and Sugar Confectionery divisions, and an incubation lab, ensures that there is

no deficiency in quality standards during production.

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DATA COLLECTION METHODS

i. University’s recommended Book

ii. Internet search engines

iii. Websites

iv. Library material were also consulted.

v. Company’s website

vi. Information collected from company’s regional office.

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SWOT ANALYSIS FOR MITCHELL’S

Strengths

1. Clear intention towards maintaining its economies of scale

2. Having sufficient resources to maintain its economies.

3. As compared to their competitors. Consumers taste.

4. Farm fresh fruits with having their own growing and processing facilities

5. Mitchell’s was the pioneer in the field of squashes, they gained massive

market share and achieved the positive word of mouth regarding there

products as they are made of fresh farm fruits.

6. They have export quality products in Pakistan.

7. As they have their own fruit farms, hence availability of raw materials is no

matter.

8. Provide vast product lines.

9. A smooth distribution system with nationwide coverage

10. Having ability and resources to hire skilled engineers.

11. Mitchell’s can compete in the field of food industry with other international

companies because of ISO Standard quality products.

Weaknesses

1. A big deficiency is the high cost of the products.

2. Lack in promotional and advertising policies.

3. They have limited number of distribution channels in Pakistan.

4. Customer service staff needs training

5. More budget needed for Human Resource Development

Opportunities

1. Introducing new verities of food products.

2. Mitchell’s can continue its dominance as the innovator.

3. Can maintain its position as market leader.

4. Can also continue to be a trend setter.

5. International and domestic market expansion due to availability of resources.

6. Local competitors generally does not have their own farms.

7. Local competitors have less resources to produce quality goods.

8. Can grow towards technological advancement in the field of food processing

industry.

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9. New distribution channels.

10. Cost of raw material is very low because Mitchell’s have partial self

sufficiency due to which they are cost effective at some extents.

Threats

1. Political instability.

2. International Financial crises / Global recession.

3. Challenge of work force diversity.

4. Increasing security threats in the country.

5. Increasing competition in the market.

6. Retention of key staff critical.

7. Possible negative publicity.

8. Market demand very seasonal.

9. The food industry is highly competitive and every company is providing new

packages (flavor & prices) in short span of time.

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CONCLUSION

The company which I have selected for this my assignment, is Mitchell’s. I find

that the Mitchell’s is the largest and 1st ISO 9001 Certified food producing company in

Pakistan. It was analyzed that the company having the well repute in the market, what

they offer and what they produce the consumer accepted it with warm welcome.

Mitchell’s is very much conscious and careful about its sales and about the customer

level satisfaction and determined to keep its economies of scale maintained. Since 1933,

they have been trying to maintain a same graph of satisfaction level and give customer a

quality, fresh farm products direct from their own farms. Mitchell’s is very much

concerned about its SWOT analysis and keeping a closer eye on every action it can take

for the better of its products.

Mitchell’s management deals with developing a marketing mix to serve a

designated market. Their main focus is on the three forces; Customer, Competition,

Corporation. And in addition to this, internal and external factors also play an important

role to develop strategy. Mitchell’s is concerned about the external information pertains

to social, economic, political and technological trends and product/market environment.

The information is analyzed to identify its strengths and weaknesses. Mitchell’s possess

a nationwide smooth distribution policy. They are investing money on quality assurance

of the products and R&D department is working a lot to keep their quality going.

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RECOMMENDATIONS & SUGGESTIONS

Mitchell’s needs to take full advantage of having its own fruit farms. It should get

its employees more trained. As it produces its own raw materials, therefore, products

prices should be reduced more to a common man level. Its products should easily be

available at all stores. It should improve its advertising campaign. It should further look

into more areas which can benefit it with economies of scale such as marketing,

distribution of products through suppliers, transportation of goods etc.

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