Civil Engineering Reference
In-Depth Information
A more current debate, captured in the research of Pan et al. (2008) and Chiang
et al. (2008), focuses on the new opportunities offered by
off-site production
(OSP)
where buildings, structures or parts are manufactured or pre-assembled
prior to their installation on site. This offers contractors the opportunities to take
advantage of a factory environment, with opportunities to improve on quality,
time, cost, productivity and safety. Yet surveys of the industry in the UK and Hong
Kong suggest that the difficulties in achieving economies of scale continue to be a
significant constraint, restricting construction to traditional on-site approaches
and cost schedules (Pan et al. 2008). The debate regarding whether traditional
organisational problems or modern technological barriers limit a construction firm
is examined in Reading 2 (see pages 137-9) where the option of off-site production
to reduce average costs per unit is reviewed further.
The Minimum Efficient Scale and Levels of Competition
The manufacturing sector seems to be a constant reference point in these debates
where, relatively speaking, state-of-the-art savings and economies of scale are more
easily achieved. In fact, the conceptual idea of a minimum efficient scale (MES)
first originated from a comprehensive study into the shape of long-run average cost
curves in British manufacturing industry. This was defined as 'the minimum scale
beyond which any possible subsequent doubling in scale would reduce total average
unit cost by less than five per cent' (Pratten 1971: 278).
One of the uses of the minimum efficient scale (MES) is that it gives a rough
measure of the degree of competition in an industry. If the level of output associated
with the minimum efficient scale is small relative to the total industry demand,
the degree of competition in that industry is likely to be high since there is room
for many efficient firms. Conversely, when the level of output associated with the
MES is large relative to industry demand, the degree of competition is likely to be
small. For example, the markets in oil and gas extraction, air transport, automobile
manufacturing and tobacco are dominated by a few very large businesses. These
industries have a high
concentration ratio
, and many have the characteristics
of oligopolies. In stark comparison, some industries are typified by many small
businesses, some of which are run by the self-employed. These industries are said
to have low concentration ratios. Construction is a prime example of this type of
industry and these markets are characterised as contestable. (Types of market
competition will be discussed further in
Chapter 8.
) Economists maintain that the
number of firms comprising an industry is determined by the MES, as they claim
that an industry is 'efficient' when the amount of resources used to produce the total
output is at a minimum.
The importance of economies of scale to specific industries can be determined
by the market share of an industry's largest firms, taking the gross value
added (turnover), the percentage of total output, employment or profit as the
benchmark. For example, imagine that an industry contains just ten firms that
individually account for 25, 15, 12, 10, 10, 8, 7, 6, 4 and 3 per cent of turnover,
respectively. The five-firm concentration ratio for this industry - the most widely
used concentration measure - is 72 (calculated by 25 + 15 + 12 + 10 + 10). This
