1. GLOBAL ECONOMIES OF SCALE Paul S. Licker GITMA 2005 Anchorage, Alaska June 2005 SCOPE STYLE

2. 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.

3. 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.”

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

5. 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.

6. Pre-Industrial Economics Buyer=Supplier= Distributor Unique Product Unique Supplies Subsistence Economy Craft Economy Focal Firm Unique Product Unique Supplies Note lack of necessary intermediaries Note possibility of intermediation But times changed and machinery got better…

7. 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)

8. Industrial Economics Focal Firm Replicable Product Replicable Supplies 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…

9. 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.

10. 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.

11. Post-Industrial Economics Focal Firm Replicable Supplies Tailorable Supplies Customer 1Customer 2Customer 3 Customer 4 Tailorable Product Keys to competitive advantage are customer feedback, agility, cost control, knowledge of supply chain. i.e., data, information and knowledge But times changed and machinery got connected…

12. 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.

13. 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).

14. Networked Economies Focal Firm Replicable Supplies Intelligent Supplies Customer 1Customer 2Customer 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”

15. 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)

16. Economies of X - Pattern Required 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

17. Economies of Scale Required 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

18. 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

19. Economies of Scope Required 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

20. 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

21. Economies of Style Required 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

22. 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.

23. 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.

24. 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.