Diseconomies of Scale

What are diseconomies of scale?

Diseconomies of scale occur when a business grows so large that the costs per unit increase. As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big!

Why do diseconomies of scale occur?

Due to the difficulties of managing a larger workforce

What are the impacts of poor communication of diseconomies of scale?

As the business expands communicating between different departments and along the chain of command becomes more difficult. There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This may result in workers having less clear instructions from management about what they are supposed to do and when

What are the impacts of lack of motivation on diseconomies of scale?

Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging. This can lead to lower employee motivation with damaging consequences for output and quality. The main result of poor employee motivation is falling productivity levels and an increase in average labour costs per unit.

What can a business do about the impact of lack of motivation?

• Delegation of decision-making (empowerment)

• Making jobs more interesting (job enrichment)

• Splitting employees into teams (teamworking)

What is the impact of loss of direction and co-ordination on diseconomies of scale?

It is harder to ensure that all workers are working for the same overall goal as the business grows. It is more difficult for managers to supervise their subordinates and check that everyone is working together effectively, as the spans of control have widened. A manager may be forced to delegate more tasks, which while often motivating for his subordinates, leaves the manager less in control