Capital intensive vs. labor intensive production techniques is the two popular techniques used in the production of goods. Firms, irrespective of their sizes, can also decide the system that is ideal for them. Nevertheless, we are going to be as plain as possible in this comparison. The aim, as always, is to provide valuable information.
Capital intensive vs. labor intensive: What differentiates both production techniques?
A business that is capital intensive implies one in which higher capital investment is required. The business owner needs to invest more in the acquisition of sophisticated and automated machines, including diverse equipment. So, there might be a need to hire only a fewer number of workers, whose primary duty would be to operate the machines. But in labor-intensive production techniques, the focus is to hire more employees (humans) to handle the production process. Furthermore, in capital intensive methods, higher investment is required to maintain the machines used for production, and output could be considerably higher in the long term. But in labor-intensive techniques, businesses can only increase production by asking workers to work extra hours or employ more temporary staff for a specified period.
Continue reading to get more information on this topic!
What Is Capital Intensive Production Process?
It is best to decide the production process a business is going to adopt before even thinking of starting operations. The reason is that if the company is capital intensive, it means that you may require a lot of money to produce similar quality and quantity as your competitors.
Furthermore, the good thing about the capital intensive production process is the output. Machines can go overboard and deliver more products or services. They can work 24 hours for weeks, while humans can’t.
However, the bottom line is, before you think of splashing the cash on a new business, think of the production process, and plan accordingly.
So, what’s capital intensive production, by the way?
When we say that a business is capital intensive, what we are referring to is that the company relies heavily on machines to produce goods and services. The company would need substantial financial resources to acquire more assets. The assets also have to be proportional to the profits or sales they can generate for the business.
Machines and robots handle the goods produced in these types of companies. So, the initial investment is always very high. Subsequently, there will be a need to make money available for repairs or probably, to replace some of the machines.
Examples Of Capital Intensive Industry
Most companies are capital intensive. In other words, they require a huge capital base to establish. For an investor venturing into a capital intensive business to be competitive, fixed capital such as property, equipment, and plant relative to the level of revenue, must be put in place.
Let’s consider an air transport business as an example. Starting such a company would require significant financial investment because of the cost of an aircraft. The price of the jetliner 747 – 700 models, starts from $82.4 million. So, you may require nothing less than $1 million to start such a business.
Other examples of capital intensive industry;
- Oil refining and production
- Transportation (airlines and railways)
- Automobile manufacturing industry
So, these are examples of businesses that come under capital-intensive. Now let’s take a look at the advantages and disadvantages of this type of production process.
Capital Intensive Production Process: What Are The Advantages?
Some things make starting these kinds of businesses attractive. But before venturing into a capital intensive business, it would make sense to weigh up the advantages and disadvantages.
So, below are the advantages of starting or owning such businesses.
1. Products are more accurate:
No offense to humans, but products made by machines or robots, is more accurate. As long as the machine in use is in good shape, it will continue to deliver the same quality and standard for years. And as a consequence, there might be little or no complaints from customers who are comfortable with the same standard.
2. Increased output:
Machines and robots can produce more goods than human laborers. They can work extra time without complaining. Products are also provided with higher speed and efficiency. So, customers will not have to wait for too long to get the products they need, unlike the labor-intensive production process. In labor-intensive production, the workers may even forget about the fact that they have a deadline and continue interacting with one another.
3. Reduced employee wages and costs:
In a capital intensive production, 10 workers can produce 10,000 products per day. But in the labor-intensive production system, the business might need to hire 100 workers or more to be able to deliver 10,000 products per day. So, you can see that in the capital intensive system, companies don’t spend much money when it comes to paying salaries because they have fewer workers. And as a result, the cost of production is also reduced a bit.
4. Machines can work round the clock:
Can humans work round the clock? The answer is no! But machines can work 24 hours throughout the week. Also, even if they work round the clock for days, the quality and standard of the product or output will not be compromised.
Capital Intensive Production Process: What Are The Disadvantages?
Everything has its good and bad sides. One just has to understand both sides to be able to make an informed decision.
Here are the disadvantages of capital intensive production;
1. The high initial setup costs:
The idea of owning a capital intensive business looks attractive. I understand perfectly well. But one thing that is preventing many people from venturing into such kind of business is the initial startup cost. Consider the airline business as an example; you will need over $1 million to start the business.
2. Difficulty customizing orders:
Products made with machines are uniform. They are always the same. You can’t tweak the machine to make one particular order to be different.
3. Lack of creativity:
Machines do not have initiatives. They are inflexible and will not know when to come up with new ideas that will make the product unique.
What Is Labor Intensive Production Process?
In economics, labor refers to human efforts deployed in the production of goods or rendering of services. The products or services produced are handled by laborers, hired, and paid specific amounts, following the agreement reached with the employers.
In labor intensive production, one drawback is that the output can be too low when compared to capital intensive production. In short, the labor-intensive production process is most common among smaller-sized companies with weak financial capacities.
Examples of Labor Intensive Industry
- Pole and line fishing
- Small scale farming
Labor Intensive Production Process: What Are The Advantages?
There are advantages a labor intensive system has over the capital intensive production process. Let’s take a look at them.
1. Employment opportunities:
Machines don’t have a family nor responsibilities, but humans do. The labor intensive industry tends to provide more employment opportunities than the capital intensive one, which is beneficial to the economy and country as a whole.
2. High flexibility:
Machines and robots can only act according to what is programmed in them. Hence, they are not flexible. But humans are adaptable and can utilize diverse ideas to create customized products.
3. Can take over when machines breakdown:
Most machines are too expensive that when they malfunction, employing human labor becomes a better option. The repairs of these machines can also be too costly.
4. Ability to provide instant feedback:
Businesses can get feedback in a labor-intensive production system, which could lead to the improvement of specific products or services. The feedback and changes effected can give the company a competitive advantage, too.
Labor Intensive Production Process: What Are The Disadvantages?
1. Labor-related problems abound:
Labor unions can go on strike at anything, thus causing production to stop. This can affect the company in diverse ways. However, machines don’t have associations, so they do not go on strike.
2. High level of inconsistency and inaccuracy:
In a labor-intensive production system, you cannot get the same quality of product all the time. Humans are also more prone to errors than machines.
3. Expensive in the long run:
If you take time to calculate the amount paid to each worker as salaries for a year or more and revenue the business generated during the same period, you will discover that a labor-intensive system is a bit more expensive in the long run.
So, that’s what you need to know about the capital intensive vs. labor intensive production systems. You can see that both have their advantages and disadvantages. So, if you are thinking of running a business, you have to consider these things before making your final decision. But above all, choose a production system that you can handle successfully. Keep in mind that the success of your business is what counts.
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