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Diseconomies of Scale

Diseconomies of scale occur when an additional production unit of output increases marginal costs, which results in reduced profitability.

What are Diseconomies of Scale?

Diseconomies of scale occur when an additional production unit of output increases marginal costs, which results in reduced profitability. Instead of production costs declining as more units are produced (which is the case with economies of scale), the opposite happens, and expenses increase with the production of each additional unit.

Many businesses face challenges when undergoing an expansion, as there are increases in workload and clients to serve. Effective cost control under changing business circumstances is complex and may reduce profitability if production increases.

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 is vital in any organisation, especially in managing economies of scale. A communication breakdown could be the beginning of diseconomies of scale and have far-reaching adverse effects on the business. During the growth process in any entity, an efficient communication channel is vital in the proper running of the business.

Growth poses more challenges in communication as hierarchies change and increase. Increased layers of command can also distort a message as it travels upwards, downwards, or laterally. Where an organisation relies more on written forms of communication such as notice boards, newsletters, and memos, there will be a weakened communication system since such communication may not allow feedback.

  1. Reduced Motivation

As the business grows, the employee base increases, making them feel isolated and thus less motivated. A small business employs a few individuals with a personal connection to the business and a close working relationship with the owner and management. A large workforce with less interaction with the top management can quickly lose focus, leading to reduced profitability and diseconomies of scale. Diminishing employee motivation and loyalty often leads to decreased productivity levels and an influx of marginal costs.

Solutions to low motivation can be resolved by improving empowerment, teamwork, and job enrichment. Empowerment involves delegation in making decisions, making lower-ranked employees feel a sense of belonging. If an opinion of an employee counts in the daily running of a company, their motivation could increase, and engagement could significantly increase. Job enrichment involves making professions more exciting and less tedious.

Many professions involve routine work, making an employee do the same thing year in year out in an 8-5 daily routine. The routine is boring, and one becomes used to the routine and can thus lose creativity. Making a job enjoyable could involve a rotation of roles once in a while, bringing fresh enthusiasm. Job enrichment can make roles more challenging and fulfilling if people are allowed to challenge themselves in their roles and, hence, improve the efficiency of operations.

Teamwork involves grouping employees into teams to improve interaction at the workplace. Team members can bring cross-functional perspectives on performing different tasks, bringing fresh ideas to the team. Deliberation within groups on the best ways to undertake certain tasks can significantly improve operations.

A close link exists between motivation and communication; an individual’s motivation plummets when communication breaks down. Communication breakdowns can be reduced by management by implementing training and policies.

  1. Lack of Coordination and Loss of Direction

As an entity grows in size, it becomes harder to coordinate the employees who, in turn, lose direction and motivation. Many employees are used to a routine and face the risk of losing motivation and interest in improving the business’s profitability. Managers and supervisors also experience a hard time organising operations and ensuring that everyone is playing their part effectively.

Businesses will be forced to hire or promote more supervisors to oversee the increased operations and monitor the performance of employees. The move will increase costs as the company gears towards optimising its operations.

The ideal solution to the loss of direction and lack of coordination is to delegate tasks and decision-making to the junior levels in the organisational chart. Delegating tasks and responsibility saves time and equips lower-level employees with better skills, rather than waiting for the higher levels of management to give direction on every task. Furthermore, delegation motivates junior employees to be innovative and creative since they move from being just executors of functions to owners of specific tasks.

Diseconomies of Scale and Mechanization

The initial introduction of machines in a largely manual system can also increase costs. If a company plans to mechanise its operations, such exercises should be effectively managed to reduce the impacts of diseconomies of scale.

The machine operators and other employees should undergo training and take time to familiarise themselves with the new systems before the implementation date of mechanisation. While transitioning from a manual system to a mechanised one may not be easy, all stakeholders should consider this expansion and growth to identify potential loopholes. Involving the stakeholders in the mechanisation process helps reduce the effects of diseconomies of scale.

Evita Veigas
3 min read

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