What diseconomies of scale are

1. As a business grows, its average unit cost falls at first because of purchasing and technical economies of scale.
2. Every business has a size beyond which it becomes harder to run, and past that point the extra output costs more per unit than it did before.
3. The three causes you need are poor communication, problems coordinating the business, and reduced staff motivation, and all three come from the size of the organisation rather than from the product.
4. The risk grows with expansion, so a business planning to double in size has to plan how it will be managed as well as how it will be paid for.

Average unit cost when a business grows too large

1. The formula is the same one used for economies of scale, $average\; unit\; cost=\frac{total\; cost}{output}$, so the way to spot diseconomies is to work it out at two levels of output and compare.
2. A factory producing 20,000 units has total costs of £60,000, so average unit cost=£60,00020,000=£3\text{average unit cost} = \frac{\pounds60{,}000}{20{,}000} = \pounds3average unit cost=20,000£60,000​=£3, down from £4 when it produced only 10,000 units.
3. It then doubles output again to 40,000 units, but needs three more layers of supervisors, a second site and overtime to fix mistakes, so total costs reach £160,000 and average unit cost=£160,00040,000=£4\text{average unit cost} = \frac{\pounds160{,}000}{40{,}000} = \pounds4average unit cost=40,000£160,000​=£4.
   1. The £1 rise per unit means the last stage of growth has made the business less efficient, because each unit now costs a third more to make than it did at 20,000 units.
   2. If the selling price stays the same, that £1 comes straight out of the profit on every unit, so the firm has to raise its price, accept a thinner margin, or find the savings elsewhere.

Poor communication

1. A large business has more layers of management and more sites, so an instruction from the top passes through several people before it reaches the staff who act on it.
2. Messages arrive late or altered, so two departments work to different versions of the same plan, and the wrong stock, quantity or specification is produced.
   1. Putting those mistakes right costs materials, overtime and delivery charges, and every one of those pounds is spread across the units made, so the unit cost rises.
3. Feedback also travels badly upwards, so a problem noticed on the shop floor in Cardiff can take weeks to reach the head office that could fix it.

Coordination problems

1. Coordination means getting the parts of the business to work to the same plan at the same time, and that gets harder with every extra site, product line and shift.
2. Two branches may order the same materials separately, or one factory runs short while another has too much stock sitting in a warehouse.
3. To keep control the business hires more supervisors, managers and administrators, and their salaries add to total costs without adding a single extra unit of output.
   1. Tesco needs store managers, area managers, regional managers and distribution planners to keep thousands of shops stocked to the same plan, and every one of those salaries sits in total costs, whereas the independent grocer it competes with is coordinated by one owner for nothing.
   2. Time is lost too, as decisions wait for meetings between departments that a small business would settle in a conversation.

Reduced staff motivation

1. In a large organisation an employee is one of thousands, rarely sees the owner or a senior manager, and cannot see how their own work affects the finished product.
2. Motivation falls, so output per worker drops while the wage bill stays the same, which means each unit produced carries more labour cost than before.
3. Poor motivation also shows up as more absence and higher labour turnover, and replacing and training new staff is an extra cost the business did not have when it was small.