Diseconomies of scale that result from running a very large business organization can be avoided by using different approaches to management.
The problems inherent in operating large-scale business operations should be recognized by all managers because these serious problems, resulting from a business being too large, can be reduced or even avoided.
The following five approaches to managing a very large business could be used to overcome the impact of potential diseconomies of scale.
1. Keep track of Average Cost (AC)
Average Cost (AC) is the cost per unit of output. It is calculated by dividing Total Costs (TC) of productions by the quantity of output (Q) produced, the number of products produced. Economies of scale reduce Average Cost (AC) of producing one product and diseconomies of scale increase Average Cost (AC). The Average Cost (AC) curve is U-shaped. As output increases, unit costs fall and continue to do so until diseconomies of scale occur, and the unit cost begins to rise. The ‘best’ scale of operation is where the unit cost is at the lowest level. By keeping track of Average Cost (AC), you will be able to determine the most optimal number of products to be produced by your business.
When the unit cost is high and you run a small business, look:
a.) Inside your business for opportunities for Internal Economies of Scale, or
b.) Outside your business for External Economies of Scale.
When the unit cost is high and you manage a large business, look:
c.) Inside your business to eliminate Internal Diseconomies of Scale, or
d.) Outside your business for External Diseconomies of Scale that may be negatively impacting your firm.
2. Use Management by Objectives (MBO)
Management by Objectives (MBO) can reduce coordination problems by giving each division, department and employee pre-agreed objectives to work towards that are components of the long-term aim of the whole business.
3. Try decentralization
This can reduce control problems and communication problems by giving each division a considerable degree of autonomy and independence. Each division will now be operated more like smaller business units with control being exercised by managers who are in the field. Only really important strategic decision might need to be communicated to the headquarters for such to be handled by the CEO and Board of Directors (BOD).
4. Reduce diversification
This can reduce coordination problems. The recent movement towards less-diversified businesses that concentrate on the core business activities may help to reduce coordination problems as all of the workers concentrate only on one or two major things that are the main sources of success and generate majority of profits for the business.
Example 1: Google has achieved focused business strategy spectacularly by very tightly integrating all their products with the core business of Google Search and Google Ads. Every one of Google’s products is aimed at getting more and more people into the Google’s ecosystem and vice versa, use the ecosystem to push other products.
5. Grow the business via franchising
This can reduce problems with demotivation and alienation of workforce. Franchising as a growth method allows an inexperienced yet highly motivated person to set up a new retail store from scratch with a franchisor’s help. A company (franchisor) well-known for its branded products allows other individual people (franchisee) the right to sell those products using its name in return for some form of payment, usually a license fee and a certain percentage of sales revenue. Both new and existing franchisees are strictly monitored to ensure that the standard is maintained.
Example 2: The three-layer system that McDonald’s created via franchising is far more efficient at each level than nearly any other food organization. It consists of corporate global management at the top with centralized functions like product design, pricing and promotion, independent networks of food sourcing and raw materials preparation on a regional level, and local franchisees on the ground with local capital, local labor and day-to-day supervision in each restaurant.
So ‘Yes!’, the diseconomies of scale are avoidable.
