Diseconomies of Scale. Meaning and Reasons
Jaap de Jonge, Management Consultant, Netherlands
Diseconomies of scale occur when economies of scale no longer function for a firm, usually due to the complexity of managing a very large workforce and company. The firm or a business has then grown so large that the costs per unit increase. In case of diseconomies of scale, rather than experiencing continued decreasing costs and increasing output (due to economies of scale), a business may experience an increase in marginal costs when its output is increased.
REASONS BEHIND DISECONOMIES OF SCALE
Diseconomies of scale can occur for several reasons:
- Overcrowding. Employees and/or machines are hindering each other, lowering operational efficiencies.
- Coordination costs. A lack of proper coordination could cause less efficiency like a higher level of operational waste. There could also be a mismatch between the optimum level of outputs between different operations.
- Communication costs
- Duplication of efforts
- Complex corporate politics
Note that there are many more things that can reduce the competitiveness of large firms, but these do not necessarily effect their cost-per-unit.