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GLOBAL ECONOMIES OF SCALE
Paul S. Licker
GITMA 2005
Anchorage, Alaska June 2005
SCOPESTYLE
Purpose of this Paper
This paper proposes that the network economy which is coming into being features a particular advantage termed “economy of style” in which the kth relationship among producer, supplier and buyer is essentially cost free. There are implications, too, for particular kinds of infrastructure and roles for information.
Porter [1996]: strategic advantage is now vested in unique processes.
Then “intelligent processes”, the hallmark of the new economy will drastically change the landscape of competition domestically and, more pervasively, globally.
This paper examines a new influence on the value chain, what is termed an “economy of style.”
Agenda
• Preindustrial Economics
• Industrial Economics and Economies of Scale
• Post-Industrial Economics and Economies of Scope
• Network Economics and Economies of Style.
PreIndustrial Economies
• There are two versions of a pre-industrial economy:
• In the subsistence version, people produce what they need. Buyer=supplier and there are no intermediaries, supply chains, fulfillment, etc.
• In the craft version, people buy from skilled suppliers who fabricate unique items for each customer. There might be intermediaries in the value chain, but the product itself is unique in form, substance and performance.
Pre-Industrial Economics
Buyer=Supplier=Distributor
Unique ProductUnique Supplies
Subsistence EconomyCraft Economy
Focal Firm Unique ProductUnique
Supplies
Note lack of necessary
intermediaries
Note possibility of intermediationNote possibility of
intermediation
But times changed and
machinery got better…
Economies of SCALE
• The industrial age brought about the ability to mass produce items creating economies of scale.
• These items were no longer unique in form, substance and performance.
• To keep costs low, quality control and replicability were the major criteria.
• Large quantities required changes to the supply chain, ultimately requiring intermediaries at both ends.
• Economies of scale require mass markets• Products have weight and volume: costs move from
production to distribution (including marketing)
Industrial Economics
Focal Firm Replicable Product
ReplicableSupplies
ReplicableSupplies
Note almost certain
requirement of intermediaries for distribution and marketing
Note focus on reliable and manageable
supply chains
Competitive advantage arises from nature of product but also from maintaining external supply chains and relationships with
customers
But times changed and
machinery got smarter…
Economies of SCOPE
• As mass markets specialize and differentiate (or as individual customers become more savvy, literate, demanding), there grows a necessity to cater to individual tastes or niches.
• Meeting these needs requires controllable variation in the mass produced product, a change in the SCOPE or design of the product.
Economies of SCOPE
• New products, though, require new plants, given the need for economies of scale.
• In order to have economy of scope, this “barrier to entry” has to be overcome
• In general, industrial economies cannot exhibit economies of scope and hence competition has moved to differentiation and market segmentation.
• However, entry costs for IT-enabled businesses are generally low, allowing new products and services to be launched almost at will.
Post-Industrial Economics
Focal FirmReplicableSupplies
TailorableSupplies
Customer 1
Customer 2
Customer 3
Customer 4
Tailorable Product
Keys to competitive advantage are
customer feedback, agility, cost control, knowledge of supply
chain.
i.e., data, informationand knowledge
But times changed and
machinery got
connected…
Economies of STYLE
• The network economy has introduced a third kind of economy: style
• An economy of style occurs when the whole business proposition can be reengineered at will
• This allows the producer, customer and supplier to have almost any relationship desired.
Comparing Industrial and Networked Economies
• IT and the Internet can create “weightless” production in which N can be very small, thus obviating the need for a mass market.
• In addition, both transaction and coordination costs for sales and production can be dramatically decreased (sometimes close to zero).
Networked Economies
Focal FirmReplicableSuppliesIntelligentSupplies
Customer 1
Customer 2
Customer 3
Customer 4
Intelligent Product
Each of these implied relationships is now customizable rather than fixed. Now the focal firm has implicit control over all aspects of the model, including all aspects of the supply chain. In the extreme, the focal firm can “disappear”
The Three Tenors
• Economy of scale: It’s inexpensive to make a large number of items
• Economy of scope: It’s inexpensive to make a large variety of items for a variety of types of customers
• Economy of style: It’s inexpensive to have a large number of relationships with a variety of types of customers and suppliers (and others)
Economies of X - PatternRequired Implications
Replicability of input factors
Some output factors are relatively weightless
Intelligence, knowledge
Flexibility, agility
Expenditure on process
Lots of output variation
Increased complexity
Potential role conflict and vagueness
Increased reliance on knowledge
Blurring of organizational boundaries
Ratcheting up of competition
Economies of ScaleRequired Implications
Replicability of supplies
Development of mass markets for products
Knowledge of marketplace and production process is more critical
Ability to tune production
Expenses on machinery and employee training
Ability to produce multiple products
Increased complexity
Supply chain integration
Increased reliance on knowledge
Supplier, buyer relationships change
Ratcheting up of competition
IT and Economies of Scale
• IT has an ACCOUNTING function to keep track of materials
• IT has a REPORTING function to keep track of performance of production
Economies of ScopeRequired Implications
Replicability of manufacturing process
Infinite variations of designIntelligence, knowledge of
process design and design process
Flexibility, agility in production
Expenditure on design, training
Odd dependence on suppliers
Lots of unique products
Increased complexity of product line and customers
Potential role conflict and vagueness
Increased reliance on knowledge of process and customers
Supply chain vagueness
Ratcheting up of competition
IT and Economies of Scope
• IT has functions of industrial economy providing economy of scale PLUS
• Intelligence gathering and maintenance functions to keep track of customer requirements
• Monitoring and control functions to keep track of process variation
• Accounting functions to determine profitability
Economies of StyleRequired Implications
Replicability of input factors
Business model is relatively weightless in terms of product, process
Intense Intelligence, knowledge of suppliers, buyers, employees
Flexibility, agility in design, relationships
Expenditure on intelligence, marketing
Lots of variation in relationships
Increased complexity of supply chain
Potential role conflict and vagueness
Increased reliance on knowledge
Blurring of organizational boundaries
Ratcheting up of competition
IT and Economies of Style
• All functions required for economy of scope PLUS
• Network required to integrate along supply chain
• Intelligence gathering critical to develop and monitor new relationships
• Accounting is much more complex as new businesses develop.
Where Will We Go from Here?
• There are few examples of a lot of economies of style.
• Dell has effectively removed itself from the supply chain
• Amazon.com turns customers into salespeople (cf. Tupperware)
• The value chain is turning into a value network.• Moving around the value network depends on
weightless products, processes, and people.
Research
• Measuring and classifying economies of style
• Value ($) of economies of style
• Technological determinants and requirements for various economies of style
• Business success and economies of style in the network economy.