It means earlier on they made less effort. And now it has become worse. Dilute means to weaken something by adding water to it. So if you add water to beer, you're diluting it. The author is trying to be creative or add some spice to his writing by using the word dilute.

The earlier dilution of effort = the lack of effort

Peggy, earlier dilution of effort = the earlier separation of the total effort into many smaller efforts The German airforce had separated into smaller groups flying in different directions. The German airforce would have been stronger if the planes had stayed together. It was easier for the British to defeat the smaller disorganized groups.