Evaluate the View That the Separation of Ownership from Control in Large Firms Inevitably Leads to Diseconomies of Scale.

Topics: Economics, Management, Costs Pages: 2 (766 words) Published: November 25, 2012
Evaluate the view that the separation of ownership from control in large firms inevitably leads to diseconomies of scale. The separation of ownership from control can be defined as the situation in which the shareholders of a firm do not manage or control it. The shareholders of large publicly owned have no controlling interest and hence the managers and directors run the organisation. Diseconomies of scale can be described as the increase in the long term average cost of production as the scale of operation increases. It can be argued that the separation of ownership from control can lead to diseconomies of scale due to the lack of communication between managers and shareholders, hence inefficiency and averages costs increase. But it could also be argued that large firms can also benefit from economies of scale whilst being operated through the separation of ownership from control the diseconomies of scale are not always ‘inevitable’ as described above. Firstly, the separation of ownership from control can lead to managerial diseconomies of scale. The power the shareholders have over the disciplining and monitoring of its executive management is reduced and as a result of this, managers may cause inefficiency by pursuing certain objectives for their own self-interest and at the expense of the shareholders. If the managers of the firm are measured and rewarded on achievement of growth targets rather than profit and return to shareholders then they may lose focus on cost control e.g. supplier costs and as a result this could drive up the average costs of production. This would have a bigger impact on large firms due to the scale of production. The costs will be felt on a much larger scale, particularly if this culture affects the way the whole of the business operates not just one business area. The extent on the managerial diseconomies of scale will depend on the objectives of the managers. If their personal targets are to ensure high business performance, then...
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