Question

As firms grow, the tendency and common expectation is for economies of scale to take over. But, does it have to be the case? Is it possible for a firm to grow, experience economies of scale and then to hit a wall where diseconomies of scale set in?

How?

Answer 1

Scale disadvantages happen when a company grows so big that it increases expenses per unit. As production increases, unit expenses will not inevitably drop. Sometimes, for several reasons, a company can get too large Scale Diseconomies happen, but all because of the difficulty of handling a bigger workforce. As the company grows it becomes more hard to communicate between distinct departments and along the chain of control. In the hierarchy, there are more layers that can distort a manager's message and wider control spans. This may lead in employees getting less clear leadership directions on what to do when.

In a bigger company, workers can often feel more isolated and less valued, and their loyalty and motivation may decrease. Staying in daily touch with employees and building a strong team atmosphere and feeling of belonging is difficult for executives. This can result in reduced motivation of employees with harmful effects on production and quality. The primary outcome of bad motivation for employees is a fall in productivity rates and an increase in average labor costs per unit.

Ensuring that all employees work for the same general objective as the company grows is more difficult. Managers find it harder to oversee their subordinates and verify that everyone works efficiently together as the control spans have expanded. A manager may be compelled to delegate more duties, which leaves the manager less in command while often motivating his subordinates.