Magazine article European Business Forum

Diseconomies of Scale

Magazine article European Business Forum

Diseconomies of Scale

Article excerpt

It may seem an odd question to ask in the age of globalisation, but why aren't companies bigger than they are? At time of writing, there is no business organisation with more than one million employees or more than ten hierarchical levels. Why are there no corporations with ten million, a hundred million or even a billion employees? The answer, says Dr Staffan Canback of Henley Management College, is that there are significant diseconomies of scale that discourage organisations from growing beyond a certain size. His Henley working paper, Bureaucratic Limits of Firm Size, gives a summary of his research.

Canback classes diseconomies into four categories: atmospheric consequences, bureaucratic insularity, incentive limits and communication distortion. Atmospheric consequences means that as companies expand, there will be increased specialisation of function for employees, but also less commitment on the part of those employees. Employees often have a hard time understanding the purpose of corporate activities, or to value appropriately the small contribution that each of them makes to the whole. Bureaucratic insularity means that as companies increase in size, senior managers are less accountable to the lower ranks of the organisation and to shareholders. They thus become insulated and will often strive to maximise their personal benefits rather than overall corporate performance. In terms of incentive limits, large corporations tend to base incentives on tenure and position, rather than on merit. This puts them at a disadvantage when compared with smaller enterprises, in which employees are often given a direct stake in the success of the company. …

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