global economies of scale paul s. licker gitma 2005 anchorage, alaska june 2005 scope style

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


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


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


Supplier, buyer relationships change


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


Increased reliance on knowledge of process and customers

Supply chain vagueness


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



Blurring of organizational boundaries


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.

global economies of scale paul s. licker gitma 2005 anchorage, alaska june 2005 scope style

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