How Digital Technologies transformed the Economies of Scale to Economies of Unscale
A new and interesting article
written by Taneja and Maney and titled “The end of scale” was published in the Spring issue 2018 of the MIT Sloan Management Review. The two authors write about the exciting and challenging change in the new business environment – the change from the well known and popular concept of economies of scale to the new concept of economies of unscale.
They write: “For more than a century, economies of scale made the corporation an ideal engine of business. But now, a flurry of important new technologies, accelerated by artificial intelligence (AI), is turning economies of scale inside out. Business in the century ahead will be driven by economies of unscale
, in which the traditional competitive advantages of size are turned on their head.”
For decades we were taught that there are advantages of scale due to mass production, distribution, and marketing, meaning that the marginal cost of production is getting lower the more units we produce. This was the rationale behind the investments of companies in scale – larger factories, mass production, mass marketing, and more. Organizations of all kinds spent the 20th century seeking scale. That’s how we ended up with giant corporations, and universities with 50,000 students, and multinational healthcare providers. Scale was also a barrier for new entrants.
And then came the digital technologies and turned everything their head. These technologies (big data, artificial intelligence, machine learning, robotics, 3D printing, drones, and more,) the emergence of new types of business models (e.g., the platform business model, freemium, the XaaS – Everything as a Service, digitization of physical products, virtualization of markets and their transformation to e-commerce and virtual markets, etc.) reversed the relationship between fixed costs and output which is the foundation of the economies of scale. Suddenly you can sell to new customers for very low prices or free of charge (e.g., the marginal cost of Apple to sell a new song with iTunes is close to zero, the cost of selling e-books by Amazon on their Kindle platform is close to zero). Companies have developed platform business models by matching demand with supply and generate money from the fees they charge the involved parties (look at Airbnb, Uber, Lyft, Waze, Booking.com, etc.) Some services are now free of charge for the customer while the advertisers are paying the bill (Google, Facebook, and others). The marginal cost for serving an additional customer is zero or close to that.
In this new economic order, David beats Goliath and small is beautiful – small companies benefit the advantage of unscale. As a matter of fact, these companies can scale up to unheard scale (hundreds of millions of customers) without having to scale their investments accordingly in equipment, employees and marketing channels.
As this article emphasized, digital transformation is a massive change and companies must understand the new business environment with all the new opportunities and risks.
You can find more on this exciting phenomenon in our e-book https://bit.ly/2odl5th