Diseconomies of scale occur when a business becomes too large and its average costs begin to rise instead of fall. This is the opposite of economies of scale. While growing can create many efficiencies, expanding beyond a certain point can make operations more complex, harder to manage, and less efficient. As a result, big firms may face higher costs and reduced competitiveness.
A major cause of diseconomies of scale is poor communication. As businesses grow, the number of employees, departments, and hierarchical layers increases. Messages take longer to move through the organisation, and misunderstandings become more common. Slow or unclear communication leads to mistakes, delays, and higher costs.
Another significant cause is coordination problems. Large businesses have many teams working on different tasks across different locations. Coordinating activities becomes difficult, and processes may become misaligned. For example, one department may produce too much while another falls behind, causing inefficiencies and wasted resources.
Diseconomies of scale also arise from bureaucracy. As firms expand, they often add more managers, rules, and procedures. While these controls aim to maintain order, too much bureaucracy slows decision-making and reduces flexibility. Employees may spend more time filling out forms or seeking approvals than focusing on productive activities.
Motivation issues can also increase costs. In very large firms, workers may feel disconnected from the company’s mission and less valued. Reduced motivation can lower productivity and increase mistakes, both of which raise costs. Smaller firms often avoid this problem because employees feel closely involved and recognised.
Another source of rising costs is duplication of roles. Large companies may accidentally create overlapping departments or repetitive processes, wasting labour and resources. For example, multiple teams might perform similar tasks without realising it due to poor organisational clarity.
Large firms also face higher logistics and management costs. As operations spread across multiple regions or countries, transportation, coordination, and oversight become more expensive. Managing global supply chains can introduce delays, inefficiencies, and complexity.
Finally, diseconomies of scale may occur when large firms struggle to adapt quickly. Smaller firms can react faster to market changes, while big businesses often move slowly. This may lead to missed opportunities or outdated strategies, indirectly increasing costs.
In summary, diseconomies of scale arise from communication problems, coordination difficulties, bureaucracy, low motivation, duplication, and complex logistics — all of which lead to rising average costs.
FAQ
1. Do all large businesses experience diseconomies of scale?
Not always. Well-managed firms can delay or reduce the impact, but most face these challenges as they grow.
2. Can diseconomies of scale be reversed?
Yes. Streamlining communication, reducing bureaucracy, restructuring teams, and improving processes can lower costs again.
3. Are diseconomies of scale unavoidable?
They are common but not inevitable. Strong leadership and efficient systems help businesses grow without losing control.
Call to Action
Want economies and diseconomies explained clearly and simply? Explore RevisionDojo’s full guides to deepen understanding and build exam-ready confidence.
