Diseconomies of scale factors
Diseconomies of scale occur because of a variety of influences that cause organizational and production inefficiencies. Even though there are different diseconomies of scale types, here are some factors that can affect how successfully a company can increase their output without triggering diseconomies of scale:
Communication
When companies grow, they often hire more personnel to handle higher demand and activity. This type of hiring influx can create larger departments within companies. Naturally, when there are more people to interface with and larger departments, the opportunities for miscommunications increase.
For example, if Ben’s computer company expands quickly and hires 100 new employees, it might become confusing for staff to figure out who handles what responsibilities, especially at first. Therefore, without updated communication systems, processes may become slower and lead to higher inefficiency.
Management and motivation
When companies experience fast growth, they may internally promote current employees to become managers because the employees are more competent and familiar with procedures. Despite this, the current employee might not have the skills to excel as a manager, which can lead to ineffective management.
For instance, if Ben promotes his senior developer, Stacy, to the position of development manager based on her current performance, he might expect her to train and motivate a team of 25 new employees.
Unfortunately, while Stacy may have been an incredibly talented developer, she feels overwhelmed with her management responsibilities. Therefore, her team experiences an overall drop in productivity because of her management style.
Higher costs of natural resources
Natural resources can be challenging to acquire, which can lead to an inevitable spike in cost for any company that relies on natural resources.
For example, if a company needs to build their facility on a large plot of land, they may have to pay higher premiums for the land they want to buy if other companies have developed facilities nearby. When resources become more scarce, the cost of obtaining them rises, creating financial and purchasing inefficiencies.
Greater levels of financial activity
As companies grow, they may take on greater levels of financial activity, which often results in taking on larger debts. Paying these debts, making more purchases and the potential for unprofitable investments can cause financial inefficacy within a company.
For example, if Ben’s computer company invests $100,000 in creating a new hardware product that doesn’t create sufficient productivity gains, his company may experience a financial loss that a smaller company wouldn’t have risked.
