Diseconomies of Scale
Candlefocus EditorInternal factors related to the production process of a firm can lead to diseconomies of scale. For example, fixed costs may be constant regardless of the scale of the operation. Such costs, like the payment of rent for a plant, need to be allocated among each additional unit of production, causing average unit costs to rise with increased output. Another limitation imposed by fixed costs is that the organization's production capacity is limited by their pre-existing structural or logistical limitations, regardless of purchasing additional inputs for production.
Organizational management issues can also lead to diseconomies of scale. As a company increases its production and adds employees, it also needs to implement additional management layers or increase administrative personnel to monitor all operations efficiently. The added organization required, however, has its own associated costs, leading to increased unit costs and causing diseconomies of scale.
In addition, resource constraints can also bring on diseconomies of scale. This is the case when a company takes advantage of local sources of labor or inputs, driving up costs as the production reaches a certain level. For example, a small business that begins to produce at a larger scale may have to source its inputs from a distant supplier, increasing the cost of production.
Diseconomies of scale are outcome that no company hopes to experience, but they are a reality in many cases. Appropriate managing of production processes and resources is always crucial, as it can help minimize the risk of diseconomies of scale. With proper planning and forward-thinking, organizations can take steps to mitigate the effects of diseconomies of scale, ensuring the long-term success and profitability of their operations.