Definition: Diseconomy of Scale

A diseconomy of scale is a financial term that is not as commonly used as 'economies of scale' but is equally important to understand.

By definition it happens when decreases occur in efficiency or upswings in production costs run parallel to the output of an increase in operations. Factors that may lead to this could be ineffective or lack of communication between workers and management, or increased waste during production.

Diseconomies of scale are generally present in companies that have grown too large and see a breakdown in the “chain of command.”

As a solution to such difficulties in a company, considering that at that point it is no longer operating at a profit, is to break up the company into smaller divisions via default and sell off the profitable divisions if such exist.

With that said, an alternative would be for the management to look internally, diagnose the problem, and attempt to recover. This certainly could be a daunting task and would require capital support funding.

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