Diseconomies of Scale

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  • Created by: Natasha
  • Created on: 17-12-12 12:28


"Breakdown of effective communication due to an increase inthe size of operations."

- Communication (especially up and down the chain of command) becomes more difficult to achieve efficiently as the business grows in size. Efficiency of communication can decrease as the costs of communication increase.

- Informationdoes not flow as quickly or freely up the chain of command (vertically) and orders/instructions do not pass as effectively down the chain of command.

- An additional problem may occur if the business is miltinational. This leads to problems with language barriers, cultural differeces and time zones.

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Coordination Diseconomies

- Managers coordination becomes difficult as the number of employees, resources, departments and divisions grow. It becomes difficult to ensure that all workers are working towards the same objectives and that jobs are being carried out efficiently.

- May find it increasingly difficult to monitor progress or to motivate workers who feel insignificant at every small part of a large corporate structure.

- The diseconomy of coordination can be a major factor determining the success or failure of a merger or takeover.

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Evaluation: Potential Limits to Economies of Scale

- Limited total market demand for many products.
     1. market demand my be insufficient for business to fully exploit the scale economies
     2. 'niche' markets allow smaller-scale producers to supply at higher cost because consumers are willing to pay a higher price.
     3. falling demand in a recession - capital will be under-utilised leading to excess cpacity and rising average total costs.

- Occupational immobility of capital equipment
     1. some large units of fixed capital may not be transferable to other uses if there is a sudden switch in consumer demand. (switching machinery to other uses to meet demand may not be possible).

- Diseconomies of scale
     1. a business may expect expand beyond the optimal size in the long run and experience diseconomies of scale.

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Further Evaluation Point

  • research evidence shows that for large firms the 'average cost' curve may not be u-shaped. This is because continual advances in production technology, ICT and working practices eg. Kaizen and automation mean that average costs keep coming down despite diseconomies occurring in larger firms.


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