Advantages and Disadvantages of Economies of Scale

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The company will experience cost decreases when the company grows bigger with an increase in its level of output. Companies can do things more efficiently with increasing size. This is known as Economies of Scale.

Advantages (Pros / Positives / Benefits) of Economies of Scale

1) Reduction of the Cost

Economies of scale are where the cost declines undergone by companies when it increases the level of outcome. Reduction of the cost provides more possibilities for the companies to reduce their price structure to gain more sales. This is the main advantage of economies of scale.

2) Higher Staff Salary

Economies of scale benefit to decrease the unit cost of production. This will enable room for the senior management to increase the salary scale of their staff, also train the staff more, and recruit more talents. All of these will help the company to improve more and more.

3) Pay More Returns to the Investors

Investors aim for returns. Economies of scale reduce the total financial overhead of the company and ultimately the bottom line, which the profits will be increased. The capital savings will ultimately increase and this will provide more space for the management to pay more returns/dividends to the shareholders.

4) Scale the Business Across More Geographies

The company can attempt to enhance their business operations to more geographies since the cost is now reduced and there is more financial space to do such kind of investment. Management can plan of acquiring a company or else establish a new subsidiary company in a new geographic location.

5) Improve the Products

Management can make decisions to reinvest their profits in product development activities, which will ultimately satisfy the customers more and provide a competitive edge to the company.

6) High Ability to Attract New Investment

Shareholders will be more interested to invest in the company more since they will feel confident due to the economies of scale that achieved. It will reflect the stability of the company where the investors will notice the investment as less risky comparatively.

Disadvantages (Cons / Negatives / Drawbacks / Risks) of Economies of Scale

1) Cost Increase After Specific Point in the Output

The company processes start to become less efficient after a specific point in the output. The company will experience an increase in average per-unit cost when they start to produce an additional unit of output beyond a certain level. This is known as the diseconomies of scale. This is the major drawback of economies of scale.

2) Loss of Control

Management will feel it is difficult to control the business operation when the company grows. It will be difficult to manage thousands of employees with heavy production output. This will ultimately reduce the efficiency of company operations.

3) Ineffective Communication of Employees

When the company workforce is very large, the communication can turn to be ineffective. This is a major factor to reduce the effectiveness and efficiency of the employees.

4) Reduction of Staff Morale

Employee morale will be reduced when the total workforce is large. More layers of management are needed when the company expands. They feel like the personal attention of the management is lacking where they are unable to express their problems in open, unlike before.

5) Increase the Prices

After the company reaches a specific level of production output, the company processes start to become less efficient. This will ultimately increase the unit cost and the company will have to increase the prices to bear this cost.

6) Increase Environment Pollution

There will be an environmental impact on many large companies. When the company grows, the damage to the environment will also increase.

Learn More:

Economies of Scale: Definition, Types, Internal, and External

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