Economies of Smaller Scale

In the next 10 years, the small scale production of goods and services will become a more predominant way for market needs to be satisfied. Economies of scale will no longer be a source of lasting competitive advantage. Accordingly, large corporates will begin to lose cost advantages they have traditionally held over small, local businesses. This shift will fundamentally alter the nature of consumption and will change the relationship we have with organizations across the world.

Why is this happening?

The large scale deployment of innovative business models and technologies enables companies of smaller scale to deliver value more efficiently than ever before. On-demand business models, automated robotics and 3D printers are just a sampling of recent innovations beginning to have a dramatic impact on the global economy. As this deployment becomes a deeper fact of our everyday reality, the economics of the businesses that touch our lives will dramatically change.

Take on-demand business models as a starting point. It seems like these days we have an uber for everything. While this makes our lives easier as consumers, it has fundamentally altered the nature of employment for nearly 1 out of every 10 Americans. Pew Research estimates that nearly 8% of the American Population had participated in the “Gig Economy” in 2015, and this is only expected to increase as more of the population benefits from augmentative sources of income.1 Within less than a decade, on-demand business models have noticeably affected industries across the board. I can now order a massage from Zeel in my Uber ride home as I munch on a snack delivered to me from Postmates. Imagine what will happen in the 10 years.

Pew Research recently found that 8% of all Americans have participated in the “Gig Economy”

The rapid diffusion of automated robotics will reduce the importance of labor in the operational equation. The declining cost and increasing functionality of robotics has dramatically accelerated the utilization of the technology across a range of business tasks. The IFR estimates the worldwide supply of industrial robotics was 254,000 in 2015, a roughly 16% CAGR since 2010.2 It is undeniable where this trend will continue to go as the price of industrial-grade robotics declines and the business benefits become more clear.

IFR estimates that the worldwide supply of industrial robotics was 254,000, a 16% CAGR since 2010.

The increasing prevalence of affordable 3D printing technology will enable smaller businesses to satisfy local market demands at lower costs than ever before. According to Gartner, 496,475 3D printers are expected to ship in 2016, which is a 103% increase over the 244,533 shipped in 2015. In the same report Gartner predicts that 5,527,493 (97.5% of all 3D printers) sold in 2020 will be FDM printers, which will primarily be driven by demand from individual consumers and small businesses.3

What does all of this mean?

These technologies are dramatically reducing the cost it takes to reach profitability as a business. Declining costs associated with distance (e.g., shipping, taxes, etc.) and labor reduces the volume a business needs to achieve in order to achieve breakeven. Or in plain english, it’s easier for people to make stuff and earn money from it. Competition from corporations that achieve cost advantages due to economies of scale will become easier to overcome.

A recent analysis conducted by Bain, demonstrated that this impact has already been realized across multiple industries. In the casual dining sector, an increase in automated robotics results in a 25–35% reduction in the number of households a restaurant needs to serve in order to breakeven. It is even more dramatic in the apparel sector where that number has been reduced by 35–45%.4

A recent analysis from Bain estimates that a restaurant needs to serve 25–35% less in order to achieve break even; the estimate is even more dramatic for apparel where the reduction is approximately 35–45%

As consumers this is great news. Products and services will become cheaper. Local options will become increasingly prevalent. Niche market needs will be served by more economically sustainable businesses. However, as participants of the labor market the ultimate outcome is not so clear. The labor supply will continue to increase as more workers are displaced with fewer near-term employment opportunities becoming available for workers with comparative skill sets.

Where is this going?

The forces driving these changes will become stronger. Early stage companies are advancing these transformative technologies. For instance, Cambrian Intelligence is working to improve robotic dexterity by allowing their customers to use teleoperation as a means to train robots. Challenges surrounding dexterity currently accounts for 50–60% of the cost of robotics in today’s market.4 Using Cambrian’s technology, operators can significantly reduce the cost of programming robotics and increase the effectiveness of employing them to solve highly specified tasks.

Platforms connecting consumers and businesses to 3D printers are replacing the need for mass ownership with mass access. MyMiniFactory is democratizing access to 3D printers by building a marketplace to provide any individual with blueprints they can use to independently create useful goods. Furthermore, the company is working to deliver a $99 pocket 3D printer, which will continue to drive down the cost of access to these transformative devices.

What is going to happen?

It’s always difficult to predict where the world is going to be in the next 5–10 years. However, by extrapolating current trends we can make some educated guesses as to some outcomes we need to prepare for.

  • Displaced workers will increase the labor supply with fewer comparative employment opportunities
  • More small businesses will emerge to serve nuanced market needs in a variety of sectors in place of mass produced goods from large corporates
  • Products and services will become cheaper to produce and likely cheaper to consume
  • Corporations will invest in new sources of competitive advantage in addition to operational scale

The wide scale deployment of transformative technologies always takes time to have a noticeable impact on our day-to-day lives. However, as these technologies become cheaper in cost and simultaneously higher quality, their prevalence becomes impossible to ignore. We are nearing a large scale shift in the way products and services are delivered, and the implications are going to be immense.

References

  1. “Gig Work, Online Selling and Home Sharing,” Pew Research, Aaron Smith, 2016
  2. “World Robotics 2016 Industrial Robotics,” International Federation of Robotics, 2016
  3. “Forecast: 3D Printers, Worldwide 2015,” Gartner Research, 2015
  4. “Spatial Economics: The Declining Cost of Distance,” Bain & Company, 2016