Diseconomies of scale
A smaller firm would have had neither the money to allow such expensive parallel developments, nor the lack of communication and cooperation which precipitated this event.
As an organisation increases in size, it becomes costly to keep control of a sprawling corporate empire, and this often results in bureaucracy as executives implement more and more levels of management.
If a single person makes and sells donuts and decides to try jalapeño flavoring, they would likely know on the same day whether their decision was good or not, based on the reaction of customers.
A decision-maker at a huge company that makes donuts may not know for many months if such a decision is embraced by consumers or if it is rejected, especially if their research or marketing team fails to respond in a timely manner.
In a reverse example, the smaller firm will know immediately if people begin to request other products, and be able to respond the next day.
A large company would need to do research, create an assembly line, determine which distribution chains to use, plan an advertising campaign, etc., before any changes could be made.
An example is Polaroid Corporation's delay in moving into digital imaging, which adversely affected the company, ultimately leading to bankruptcy.
A company which is heavily dependent on a resource supply of a fixed or relatively-fixed size will have trouble increasing production.
Similarly, service companies are limited by available labor (and thus tend to concentrate in large, densely-populated metropolitan areas); STEM (science, technology, engineering, and mathematics) professions are often-cited examples.
Larger firms have a reputation to uphold and as a result may place more restrictions on employees, limiting their efficiency.
Old firms tend to have a large retiree base, with high associated pension and health costs, and may be unionized, with associated higher salaries and labor rights.
While diseconomies of scale are typically associated with large mature firms, similar problems have been observed in the growth phase of small and medium-sized manufacturing companies.
[4] Solutions to the diseconomies of scale for large firms may involve splitting the company into smaller organisations.
A systematic analysis and redesign of business processes, in order to reduce complexity, can counter diseconomies of scale.
(Of course, this phase of analysis and revamping in itself can be, and usually is, a diseconomy leading to hiring of new personnel and investment in new, competing systems.)
Returning to the example of the large donut firm, each retail location could be allowed to operate relatively autonomously from the company headquarters.
For instance, the local management may decide on the following factors instead of relying on the central management: While a single, large, centrally-controlled firm may have higher ability to innovate and develop or market new products more effectively than when its resources are divided, it may lack the flexibility to offer individual customizations.
The empirical validity of diseconomies of scale as a rule of thumb has been criticised in recent years, following the increasing concentration of transnational corporations on the global level.
