Case Honest TEa
1. Discuss the economies of scale and scope, and potential diseconomies that apply to Honest Tea prior to the Coca-Cola deal. (6 points)
The economies of scale:
"The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies."
Goldman (the founder of Honest Tea), justified the partnership with Coca Cola, stating that it will help Honest Tea spruce up distribution and reach more customers in US. He opined that greater reach would benefit organic farming and would have a positive impact on the environment. It would also incultate healthy drinking habits among the customers.
We can distinguish several advanatages of the economies of scale:
Fisrt of all, the more orders that the Honest Tea company recieves, the more savings it makes, as it will in turn get cheaper prices for the materials it needs to produce its drinks (e.g. plastic, glass, sugar) as it will be buying them in larger quantities and receiving discounts, the manufacturing company in turn would give its customers cheaper prices for the more orders for drinks they make.
Secondly, the economics of scale help Honest Tea to run they own brewery and bottle manufacturing plant. It gives the company independence and allow to run the whole manufacturing process without any intermediaries, what have immediate impact on the price reduction.
Thirdly, massive production require increased supervision and obligation to fulfill specyfic criteria. Receiving certain certificates push the Honest Tea to run full natural and healthy production. Initially, only the few products were made by using full organic indegriends. In the end, the
The economies of scale:
"The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies."
Goldman (the founder of Honest Tea), justified the partnership with Coca Cola, stating that it will help Honest Tea spruce up distribution and reach more customers in US. He opined that greater reach would benefit organic farming and would have a positive impact on the environment. It would also incultate healthy drinking habits among the customers.
We can distinguish several advanatages of the economies of scale:
Fisrt of all, the more orders that the Honest Tea company recieves, the more savings it makes, as it will in turn get cheaper prices for the materials it needs to produce its drinks (e.g. plastic, glass, sugar) as it will be buying them in larger quantities and receiving discounts, the manufacturing company in turn would give its customers cheaper prices for the more orders for drinks they make.
Secondly, the economics of scale help Honest Tea to run they own brewery and bottle manufacturing plant. It gives the company independence and allow to run the whole manufacturing process without any intermediaries, what have immediate impact on the price reduction.
Thirdly, massive production require increased supervision and obligation to fulfill specyfic criteria. Receiving certain certificates push the Honest Tea to run full natural and healthy production. Initially, only the few products were made by using full organic indegriends. In the end, the