Question

Can you think of an example where a company reached diseconomies of scale and had to pull in their operations and downsize?   

Do you think that a company can adequately plan to avoid reaching the point of diseconomies of scale? Are there benchmarks that can be used in certain industries (i.e. in healthcare economies/diseconomies of scale are benchmarked)?

Answer 1

Answer:

Company reached diseconomies of scale and had to pull in their operations and downsize:

Diseconomies of scale:

It is an economic concept referring to a situation in which economies of scale no longer function far a firm.

With this principle rather than experiencing continued decreasing costs and increasing output of firm sees an increase in marginal costs when output is increased.

Company can adequately plan to avoid reaching the point of diseconomies of scale:

Diseconomies of scale happen when a company or business grows so large that the costs per unit increase with time. That is to say, rather than experiencing continued decreasing costs and increasing output, a firm sees an increase in marginal costs when output is increased.

To avoid diseconomies of scale, we need to understand why it occurs in first place.

The major reason for diseconomies of scale is overcrowding and management issues.

As a business expands, communication between different departments becomes more difficult. To avoid the expansion become a cost to the company, they must ensure that the expanssion is necessary and manageable.

Human resource management (HRM) should focus on improvements in recruitment, communication, training, promotion, retention and support of faculty and staff. Hiring more labour than truly necessary leads to overcrowding and hence diseconomies of scale. Thus, HRM has a really important role to play.

Performance related pay schemes (PRP) can provide financial incentives for the workforce leading to an improvement in industrial relations and higher productivity. To ensure that the existing pool of labour is at their productive best, proper financial incentives must also be given.

The best way to avoid diseconomies of scale is to make business organization less complex and more transparent.

The benchmark for all industries would be the minimum efficient scale. Beyond this, be it any industry, it will experience diseconomies of scale.

Looking at it more technically, if the firm continues to operate at the lowest point of it's Long Run Average Cost Curve(LRAC) then that would be its Minimum Efficient Scale. Beyond this point, the firm would experience diseconomies of scale.