Internal diseconomies of scale
Internal diseconomies are caused by factors the company itself controls. Here are the five types of internal diseconomies of scale:
1. Technical diseconomies of scale
Inefficiencies in the production process can cause technical diseconomies. These inefficiencies could occur anywhere in the process: at a particular point on the assembly line, in the kitchen at a restaurant or even in a single employee’s actions. Technical diseconomies often occur when companies grow faster than they’re able to adapt, meaning they may not be able to meet demand or run into scalability issues.
Related: Guide to Production Planning: Benefits and Steps
2. Organizational diseconomies of scale
Inefficiencies in workforce management cause organizational diseconomies of scale. When companies grow, they often have to hire additional personnel to manage employees, payroll and other factors. Not only does this growth add to overall production costs, but it can create issues with communication and employee productivity.
When companies expand, gaps in communication often grow wider, as there are simply more departments and people to communicate with. Employees sometimes experience a drop in motivation as companies grow larger, which can affect productivity overall.
3. Purchasing diseconomies
Purchasing diseconomies occur because of laxity in purchasing. As companies expand and increase their output, they often experience significant levels of cash flow, which can cause them to overpay for various goods and services. As companies become able to spend more on goods and services they desire, they typically become increasingly willing to overspend to acquire such assets.
When companies make more money, they typically spend more money simply because they can, which creates the potential for overspending in various situations. Purchasing diseconomies can lead to irresponsible spending, greater waste, higher costs and even lack of progress within the company because of hyper-awareness in purchasing and infrastructures created to protect such processes.
4. Competitive diseconomies
Competitive diseconomies occur in non-competitive markets. When companies face strong competition, they have a higher motivation to keep their operations efficient and costs low.
Comparatively, when companies don’t face competition, there is no tangible incentive to increase inefficiency — despite what inefficiencies occur, a competitor won’t put the company out of business. This can lead to higher costs overall and significant gaps in a company’s processes, allowing competitors to enter the market.
5. Financial diseconomies
Financial diseconomies occur because of financing increases. As companies expand, they must often make large purchases to acquire new facilities, real estate and more. To make such purchases, companies must also gain additional funding.
If the company doesn’t raise this funding through profit or other organic methods, the company might turn to external sources such as banks or private investors, which typically charge interest.
This interest can raise the ultimate cost of production even with increases in productivity. Managing such financial records can also create costs over time, as the company may require more accountants and legal personnel to do so.
