GLOBAL ECONOMIES OF SCALE

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GLOBAL ECONOMIES OF SCALE
STYLE
SCOPE

• Paul S. Licker
• GITMA 2005
• Anchorage, Alaska June 2005

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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.

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• 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.

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Agenda

• Preindustrial Economics
• Industrial Economics and Economies of Scale
• Post-Industrial Economics and Economies of Scope
• Network Economics and Economies of Style.

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PreIndustrial Economies

• There are two versions of a pre-industrial
  economy
• In the subsistence version, people produce what
  they need. Buyersupplier 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.

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Pre-Industrial Economics
Note lack of necessary intermediaries
BuyerSupplierDistributor
Unique Product
Unique Supplies
But times changed and machinery got better
Subsistence EconomyCraft Economy
Focal Firm
Unique Product
UniqueSupplies
Note possibility of intermediation
Note possibility of intermediation
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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)

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Industrial Economics
But times changed and machinery got smarter
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
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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.

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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.

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Post-Industrial Economics
But times changed and machinery got connected
Keys to competitive advantage are customer
feedback, agility, cost control, knowledge of
supply chain.
i.e., data, information and knowledge
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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.

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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).

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Networked Economies
Focal Firm
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
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The Three Tenors

• Economy of scale Its inexpensive to make a
  large number of items
• Economy of scope Its inexpensive to make a
  large variety of items for a variety of types of
  customers
• Economy of style Its inexpensive to have a
  large number of relationships with a variety of
  types of customers and suppliers (and others)

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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

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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

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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

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Economies of ScopeRequired
Implications

• Replicability of manufacturing process
• Infinite variations of design
• Intelligence, 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

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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

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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

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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.

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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.

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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.