Increasing the size of a business or production does not always result in lower costs per unit. Sometimes a business can get increase in cost of production or loss to the organisation, it is called as diseconomies of scale
Diseconomies of scale occur when a business grows so large that the costs per unit increase.
Diseconomies of scale occur because of several reasons; this situation is the result of the difficulties of managing a larger Workforce.
Internal diseconomies occur as the output of the firm is rising.
Interdependence:
Large firms with many and different departments have the problem with interdependency with each other. A machine failure in the packaging department may result in stopping the whole production line.
Coordination and communication:
As the business expands communicating between different departments and along the chain of command becomes more difficult. There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This may result in workers having less clear instructions from management about what they are supposed to do when.
Mismanagement:
One of the main causes of diseconomies of scale or internal diseconomies is the difficulties of large-scale management. As a firm expands, difficulties of management go on multiplying. In a big firm, it becomes pretty difficult to co-ordinate the work of different sections. It becomes a tough problem to supervise the work spread all over. It adversely affects operational efficiency of the firm. In the words of Mc Connell, "The main factors causing diseconomies of scale have to do with certain management problems which physically arise as a firm becomes a large-scale producer."
Industrial relations:
Because of the lack of contact between senior management and the work force, the workers may not feel commitment to work. Industrial disputes may arise and production may suffer.
Lack of motivation:
Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may decrease. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging. The main result of poor employee motivation is fall in productivity levels and an increase in average labour costs per unit.
Lack of control: when there is a large number of workers it is easier to escape with not working very hard because it is more difficult for managers to notice shirking.
External factors beyond the control of a company increases its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production.
For example, as a business increases its output, more pressure might be put on its labor supplies, which would then raise the price of additional output. The availability of raw materials also might cause the cost of production to rise. A mining firm, for example, might first extract minerals that are easy to access. After it is necessary to mine deeper seams to produce more ore, the cost of additional output will rise.
As output increases in an industry, each of the factors of production, land, labour, capital and enterprise, become scarcer. As they become scarce (unavailability), their prices increase.