Diseconomies of Scale

What are Diseconomies of Scale?

Diseconomies of scale occur when expanding production actually causes the marginal cost of each additional unit of output to increase, thereby reducing overall profitability. This is the opposite of economies of scale, where costs decline as volume increases.

Businesses often face this challenge during expansion because the increased workload and client base complicate effective cost control. Managing rising expenses under changing business circumstances is complex and, if not handled correctly, can lead to reduced profits despite increases in total production.

Causes of Diseconomies of Scale

Diseconomies of scale may result from several factors, including communication breakdown, lack of motivation, lack of coordination, and loss of focus by the management and employees.

1. Communication Breakdown

Communication breakdown is a primary cause of diseconomies of scale, leading to far-reaching negative effects as a business grows. Efficient communication is vital for maintaining control during expansion, but growth inherently creates challenges:

• Increased Hierarchy: As an entity expands, hierarchies increase and change. More layers of command can easily distort or delay a message as it travels up, down, or across the organization.
• Lack of Feedback: Organizations that over-rely on formal, written communication (like notice boards, newsletters, and memos) often have a weakened communication system. This lack of opportunity for immediate feedback prevents clarification, which is critical for the proper and efficient running of the business.

2. Reduced Motivation

As a business and its employee base grows, staff can begin to feel isolated and less motivated. In a small business, employees feel a strong personal connection to the work and have close relationships with management. A larger workforce, however, often sees less interaction with top management, leading to employees quickly losing focus, which reduces profitability and causes diseconomies of scale. This drop in motivation and loyalty results in decreased productivity and an increase in marginal costs.

Empowerment involves delegating decision-making authority to lower-ranked employees, fostering a crucial sense of belonging. When employees feel their opinions count in the daily running of the company, their motivation and engagement significantly increase.

Many professions become boring due to routine work done year after year, leading to a loss of creativity. Job enrichment aims to make roles more exciting and less tedious. This can be done by implementing a rotation of roles to bring fresh enthusiasm, or by making roles more challenging and fulfilling by allowing people to innovate and push their boundaries, which ultimately improves operational efficiency.

Teamwork involves grouping employees into teams to improve interaction and collaboration. Teams facilitate cross-functional perspectives on tasks, bringing fresh ideas and improving operations through deliberation on the best ways to work. Since a close link exists between motivation and communication, teamwork also helps prevent breakdowns. Management can further reduce communication breakdowns by implementing training and policies.

3. Lack of Coordination and Loss of Direction

As an entity grows, the increased size makes it harder to coordinate employees, leading them to lose direction and motivation. Employees may become accustomed to a routine and lose interest in improving profitability. Concurrently, managers and supervisors struggle to organize operations and ensure everyone is contributing effectively. This forces businesses to hire or promote more supervisors to oversee the increased operations, which in turn increases costs and reduces overall profitability.

The ideal solution to this loss of direction and lack of coordination is to delegate tasks and decision-making to the junior levels of the organizational chart.

Delegation offers several benefits:

• It saves time by preventing lower-level employees from having to wait for constant direction from senior management.
• It equips junior employees with better skills and responsibility.
• It motivates them to be more innovative and creative, as they transition from merely executing functions to effectively becoming owners of specific tasks.

Diseconomies of Scale and Mechanization

Introducing new machinery into a system that is largely manual can initially increase costs, contributing to diseconomies of scale if not managed effectively.

To reduce these negative impacts, any plan to mechanise operations must be handled carefully:

• Training and Familiarisation: Machine operators and other employees must undergo thorough training and be given adequate time to familiarise themselves with the new systems well before the official implementation date.
• Stakeholder Involvement: The transition from a manual to a mechanised system is challenging, but it is essential that all stakeholders are involved in the process. Their participation helps the organization identify potential loopholes and proactively manage the risks of expansion and growth, thereby reducing the effects of diseconomies of scale.