MIT Sloan Management Review has a very fascinating piece which looks at the (approaching) end of the economies of scale and how technology is reducing its impact on market competitiveness. Many decades ago, companies needed massive scale to drive cost efficiencies. Sure, scale still matters but now we are looking at the scale that comes through Inversibility Construct – a construct that looks at using digital platforms and network effects to inverse physical-level customer experiences.
With mobile, cloud computing and AI, we are seeing how small and agile companies are challenging incumbents, using knowledge as a key factor of production. Interestingly, being big with traditional assets could weaken a firm’s capacities to thrive in this era. The unconstrained and unbounded internet has made it possible to reduce marginal cost without massive capital investments on distribution and transaction systems.
Economies of unscale are enabled by two complementary market forces: the emergence of platforms and technologies that can be rented as needed. These developments have eroded the powerful inverse relationship between fixed costs and output that defined economies of scale. Now, small, unscaled companies can pursue niche markets and successfully challenge large companies that are weighed down by decades of investment in scale — in mass production, distribution, and marketing.
Investments in scale used to make a lot of sense. Around the beginning of the 20th century, the world was treated to a technological surge unlike any in history. That was when inventors and entrepreneurs developed cars, airplanes, radio, and television, and built out the electric grid and telephone system.
Today, we’re experiencing a new tech surge. This one started around 2007, when mobile, social, and cloud computing took off with the introduction of the iPhone, Facebook, and Amazon Web Services (AWS), respectively. Now, we’re adding AI to the mix. AI is this century’s electricity — the technology that will power everything.
AI has a particular property that supplants mass production and mass marketing as a basis of competitive advantage. It can learn about individuals and automatically tailor products for them at scale.
Indeed, Netflix without prior distribution infrastructures is positioned to challenge Disney because the distribution internet network is unbounded. Amazon has since become the most pre-eminent retailer without following the outdated paths of opening physical stores.
Economies of scale is not going anywhere as a business concept. But the absolute impact based on the traditional factors of production will erode. The scale that matters is Capability of the Future which is largely knowledge. This knowledge will anchor new business models which will emerge as new technologies like blockchain reshape the structure of global economies.
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