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The Diseconomies of Scale Twitter Facebook Print E-mail
Written by Tom Welch   
Wednesday, 03 October 2007

Many of you remember the "miracle of the gulls," in which seagulls saved the early pioneers' first harvest of 1848 by gorging themselves on a swarming infestation of crickets. My own experience with these "Mormon crickets" dates back to 2004 on a family vacation to central Utah.

Each year my family heads down to the small town of Hinckley, Utah, where my in-laws have a small ancestral family home. We meet there around the 24th of July and celebrate Pioneer Day with cousins, uncles, aunts, and grandparents. The home is not big enough for the whole family, so people bring down tents and camping equipment to camp in the large, shady lot. We have a lot of fun swimming in the local irrigation ditches, hunting for fossils in the nearby trilobite quarry, and panning for gold in the mountains. However, one of our favorite activities is riding ATVs and motorcycles in the hills. Several times each trip we will load up all of the vehicles and drive to a nearby trail, where we spend the day picnicking and exploring the countryside.

While on our trip in 2004 we loaded up the vehicles and headed north from Hinckley to a spot we had not visited for a few years—a place where we might find an enjoyable place to ride. As we got within a few miles of our destination, we started noticing a lot of insects along the sides of the road. These insects had large bodies, were dark brown or black, and were everywhere. Some areas were so thick with insects that they covered the road. The road became very slippery from the dead bodies of those that had been squashed by previous vehicles. These insects were, of course, Mormon crickets. The crickets seemed to cover every inch of ground. The sagebrush and cedar trees were so full of crickets that they seemed to drip from the sky. It was quite an unsettling sight.

The insects were "swarming," a behavior that is not well understood by scientists. While some theories suggest that this swarming is triggered by weather, other theories suggest that it happens when the crickets come into close contact with each other over a short period of time. Think of it as claustrophobia for crickets. The swarming instinct can be triggered when a cricket is "touched" by another cricket several times per minute over a period of several hours. Mormon crickets cannot fly, so when swarming happens, they walk like a huge army as fast as two kilometers per day. When this happens, millions of crickets on the move make it look as if the earth is literally shifting beneath your feet.

As mysteriously as this massive horde of insects appears, it also disappears. We are not quite sure why, but studies suggest that the insects eventually become hemmed in or trapped by some geographical or man-made barrier and eventually exhaust all of the food supply. Because the crickets' eggs can survive for up to two years beneath the surface of the ground, future generations of crickets are able to hatch and survive once the food source has recovered.

I recently read several research reports and studies on the diseconomies of scale. Specifically, as a company or firm grows, it will reach a point where it can no longer find economies in processes to reduce costs. In fact, the reverse begins to happen and it costs the company more money and time to produce the same products and services. The following graph will illustrate the phenomenon.

 


 

As is depicted by the above simplified graph, costs drop initially as an organization finds more efficient ways of producing output. However, at a certain point (M) the cost begins to rise again and can eventually far surpass the original cost of the product. Diseconomies happen in all businesses, regardless of their industry. It can happen in the technology industry. There are three categories that explain this occurrence.

  1. Bureaucracy. As a firm adds more managers and levels, it adds more policies and formalization of processes. Problems are solved by adding structure, and the organization reaches a point at which the added structure costs more than the problem solved.

  2. Information Loss and Rigidity. With more layers of bureaucracy comes a loss of information. Ideas do not flow as easily through the levels of the organization. The company becomes less flexible and more rigid in response to increased demands upon resources. New ideas find it difficult to fight the inertia of the organization's existing processes.

  3. Agency. Employees feel less empowered to make changes. They feel like their contribution will not make a difference. Because they are restricted by existing policies and procedures that are intended to help make the organization more efficient, they become disengaged and much less productive. They lack motivation and incentives to produce. Studies have shown that employees of large corporations earn as much as 15-20% more in compensation than those of smaller companies. However, these same individuals are less satisfied with their jobs, while those who work for smaller companies achieve a higher level of job satisfaction.

When organizations open up their businesses to community involvement, they can offset many of the factors that cause the diseconomies of scale. Corporations that embrace the community will listen to what the community has to say (improving communication). They will implement some of the ideas that the community suggests (limiting bureaucracy) and will involve the community in the development of products and services (giving greater agency to employees). While community involvement can be a challenge for any organization, figuring out how to effectively involve the community is critical in today's Web 2.0 world. The Church is committed to figuring out this process. In order to accomplish the amount of work that has to be done, we need the involvement of many professionals and enthusiasts around the world. We need new ideas and insight. We need willing individuals to spend the time necessary to help us achieve our objectives.

We don't want to be like the Mormon crickets that grow until they can't sustain their growth and then begin to die out. We need to figure out how we can continue our growth in producing new products and services. We need to figure out how we can efficiently work with and engage the community. Let me know your thoughts.  Post your comments here or participate in a discussion in the forums.

 

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