Diseconomies of Scale Details

This term is used in opposition to economies of scale, but it is arguably less complicated of a concept. Whereas economies of scale occur when businesses benefit from their size, Diseconomies of Scale are situations in which a company's size is generating excess costs. The excess cost is to such a large extent that their cost to produce each good increases over time. Simply put, a company becomes too big for its own good. There are plenty of reasons why this happens. But we can attribute it mostly to a lack of control, cooperation, and coordination.

Companies tend to deal with diseconomies through preventative measures. Companies invest lots of funds in HR (human relations) to oil the communicative pathways internally and therefore nip many of the problems discussed above in the bud. If employees become frustrated, they have a way of expressing and resolving issues, like office politics and inefficient use of time. Companies might also outsource particular business areas if they anticipate that internalizing the process will be too much of a hassle.

Example of Diseconomies Of Scale

Expanding on the aforementioned "office politics," the truth is that office politics is a massive problem for all businesses, despite sounding trivial at first. Even members of senior management can cause problems and waste time and resources simply by being difficult.

Suppose the manager of one sector of a business argues incorrectly that they require more workers to reach a production target or underestimates the number they need. In that case, the company will end up spending more money either way. The business relies on the steady production of components A and B. If the former scenario is true, the business is now wasting money on an excess number of workers. If it's the latter scenario, this manager— responsible for producing component A, which they will combine with component B—has led to the manufacturing of a disproportionate amount of product A. The company must now store the excess of component B elsewhere, incurring additional costs.

Significance of Diseconomies of Scale

Diseconomies of scale arise from the difficulties associated with managing a large workforce. When a business is large enough, it can be difficult for senior management to control the managers below them. Therefore, they may become less productive, wasting the company's money. It may also be the case that people from different areas of the company need to work together, but struggle to, perhaps because of location or communication difficulties.

This might create a need for a seemingly endless series of meetings, creating "dead time"—wasted time. This works down to the level of individual workers, too. If a manager assigns a worker their tasks as part of a mundane routine, the worker might not feel like part of the bigger team or company. This is an example of poor coordination causing issues, as they might be less productive because of this alienation.