Business Moves Beyond Economies of Scale

Comments Off on Business Moves Beyond Economies of Scale
Business Moves Beyond Economies of Scale

Whether you’re talking about shipping, agriculture, retailing, or process industries like oil, chemicals, semiconductors or steel, economies of scale have separated the winners from the losers for at least the last 150 years. However, new research indicates that a surge of important new technologies, accelerated by artificial intelligence, is turning economies of scale inside out. As effectively argued in Unscaled: How AI and a New Generation of Upstarts Are Creating the Economy of the Future, business in the century ahead will be driven by “economies of unscale.

Economies of unscale are enabled by two complementary market forces:

  • first, the emergence of platforms and
  • second, 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 areas such as 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, as well as built out the electric grid and the telephone system.

These new technologies ushered in an “age of scale” by enabling mass production and offering access to mass markets. Electricity drove automation, allowing companies to build huge factories to churn out a product in massive quantities. Radio and TV reached huge audiences, which companies tapped through mass marketing. The economies of scale governed business success.

Scale conferred an enormous competitive advantage. It not only lowered fixed costs, it also created a forbidding barrier to entry for competitors. Organizations of all kinds spent the 20th century seeking scale. That’s how we ended up with giant corporations, universities with 50,000 students, and multinational health care providers.

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, respectively...

To continue reading, become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund