Explain the term ‘diseconomies of scale’.
CAMBRIDGE
A level and AS level
Year Examined
October/November 2019
Topic
Business Growth & Strategy
👑Complete Model Essay
Diseconomies of Scale
In the realm of business and economics, understanding the concept of diseconomies of scale is crucial for comprehending the limitations of expansion and the potential pitfalls of excessive growth. Diseconomies of scale describe a situation where a company's long-run average costs increase as output increases. In simpler terms, it occurs when a firm becomes too large, leading to inefficiencies and rising costs.
Several factors can contribute to diseconomies of scale. Let's delve into some key examples:
Communication Breakdown
As organizations grow, communication channels often become more complex and convoluted. This can lead to misunderstandings, errors, and delays. Imagine a multinational corporation with thousands of employees scattered across different continents. Coordinating projects, disseminating information, and ensuring everyone is on the same page can be a logistical nightmare. In such situations, the efficiency gains from specialization and division of labor can be offset by the costs associated with communication breakdowns.
Bureaucracy and Management Challenges
Large organizations often require extensive hierarchies and layers of management to function effectively. While this can be necessary for control and coordination, it can also lead to bureaucratic inefficiencies. Decision-making processes can become slow and cumbersome, as approvals are required from multiple levels of management. Moreover, the sheer size of the organization can make it difficult for top executives to effectively monitor and control operations, leading to inefficiencies and higher costs.
Motivation and Control
In smaller firms, employees may feel a greater sense of ownership and responsibility, leading to higher levels of motivation. However, as companies grow, it can be challenging to maintain this sense of engagement and commitment among a large and diverse workforce. This can result in decreased productivity, lower quality, and increased costs associated with monitoring and motivating employees.
Examples
The presence of diseconomies of scale can manifest in various ways:
- Increased transportation costs. Imagine a company that produces goods in one central location and then ships them to customers across the country. As the company grows and its customer base expands geographically, transportation costs are likely to rise, contributing to diseconomies of scale.
- Slower decision-making. A small startup can pivot quickly in response to market changes. In contrast, a large corporation with multiple layers of management may struggle to make decisions efficiently, potentially missing out on opportunities or failing to address problems in a timely manner. This can negatively impact profitability and contribute to diseconomies of scale.
Conclusion
Understanding diseconomies of scale is essential for businesses of all sizes. While growth is often desirable, it's crucial to be aware of the potential downsides of becoming too large too quickly. By recognizing the factors that can contribute to diseconomies of scale, companies can strive to mitigate these risks and maintain efficiency as they expand. Ultimately, the optimal size for any firm is the one that allows it to operate most efficiently and profitably, taking into account both economies and diseconomies of scale.
Sources:
Sloman, J. (2007). Economics. Pearson Education.
Lipsey, R. G., & Chrystal, K. A. (2011). Economics. Oxford University Press.
Explain the term ‘diseconomies of scale’.
Note: Business Studies Pack Required
Score Big with Perfectly Structured Business Studies Essays!
Prepare effortlessly for your A/AS/O-Level exams with our comprehensive...
Business Studies Pack.
✅ Model Essays for past papers questions
✅Covers Cambridge Exam Boards
✅ Suitable for A Level
✅A Library of over 400 Essays
✅ Download all Essays in PDF format
...and much more!
Free Essay Plan 🍃
A Guide to Writing an A-Level Business Studies Essay on Diseconomies of Scale
This guide will provide you with the resources and tips you need to write a compelling A-Level Business Studies essay on diseconomies of scale. We'll break down the concept, discuss key factors to consider, and provide you with a structure for your essay.
Understanding Diseconomies of Scale
Diseconomies of scale occur when a business experiences an increase in average costs of production as its scale of operation expands. Essentially, "bigger isn't always better." This happens when the benefits of economies of scale (lower average costs with increased production) are outweighed by the drawbacks of getting too large.
Key Factors Contributing to Diseconomies of Scale
Several factors can contribute to diseconomies of scale, including:
- Management Issues: As a firm grows, it can become increasingly difficult to manage effectively. Communication breakdowns, coordination problems, and a loss of control can lead to inefficiencies and higher costs.
- Worker Motivation: Large businesses often face challenges in maintaining worker motivation. Employees may feel less valued, leading to decreased productivity and higher labor costs.
- Communication Breakdown: In large organizations, communication can become complex and inefficient, leading to delays, misunderstandings, and increased costs.
- Bureaucracy: Excessive bureaucracy in large firms can slow down decision-making, increase administration costs, and create a less agile environment.
- External Factors: Factors like increased regulation, labor shortages, and limited access to raw materials can also contribute to diseconomies of scale.
Writing Your Essay
Structure your essay with these key elements:
1. Introduction
- Define diseconomies of scale clearly and concisely.
- Explain the potential negative consequences of diseconomies of scale for businesses.
- State your thesis statement, outlining the main points you will discuss in your essay.
2. Main Body Paragraphs
- Paragraph 1: Elaborate on the factors contributing to diseconomies of scale, using examples and real-world business scenarios to support your points.
- Paragraph 2: Discuss specific examples of businesses that have experienced diseconomies of scale. Analyze the challenges they faced and the consequences of their growth.
- Paragraph 3: Explore strategies that businesses can implement to mitigate or overcome diseconomies of scale. This could include improving communication, empowering employees, streamlining processes, or focusing on specific market niches.
3. Conclusion
- Summarize your main points and reiterate your thesis statement.
- Offer a final perspective on the importance of understanding diseconomies of scale for businesses.
- Consider suggesting further research or areas for future exploration.
Tips for Success
- Research Thoroughly: Use reliable sources like academic journals, reputable business publications, and government reports to support your arguments.
- Use Specific Examples: Don't rely on generalizations. Back up your claims with specific examples of businesses that have faced diseconomies of scale. This makes your essay more persuasive and engaging.
- Critical Analysis: Go beyond simply listing factors. Analyze how these factors impact business performance and present a nuanced understanding of the complexities involved.
- Clear and Concise Language: Use clear, concise language to ensure your ideas are communicated effectively.
- Proofread Carefully: Make sure your essay is free from grammatical errors and typos. This demonstrates attention to detail and enhances your credibility.
By following these steps and focusing on critical thinking and a thorough understanding of diseconomies of scale, you can write a strong and informative A-Level Business Studies essay. Good luck!
Extracts from Mark Schemes
Explain the term ‘diseconomies of scale’.
The situation where (average) costs of production increase (1) when the scale of operation is increased (1) when the business is large (1)