The foundation of much of the world’s modern wealth lies in the ability to achieve economies of scale. A prime example is the original Ford Motor factory in Detroit, where the assembly time for a Model T was gradually reduced from 12 hours to just 93 minutes through continuous improvement efforts. This process involved various strategies, from streamlining production to offering limited options (such as the famous quote, “any color you want, as long as it’s black”) and even finding faster-drying black paint.
Today, we stand at the dawn of a new era of disruption, driven by public blockchains and the tokenization of industrial processes, among other digital advancements. Blockchains leverage standardization through tokenization and the flexibility afforded by smart contracts to drive efficiency, bypassing the need for traditional economies of scale. This transformation is poised to disrupt industries, reshape geographic landscapes, and redefine supply chains.
However, scale is not always advantageous. Larger companies often face diseconomies of scale, as government regulations impose stricter rules and targets, and bureaucracy creeps in. While standardized systems ensure consistency globally, they also eliminate local autonomy.
Interestingly, timeless advice on navigating large organizations can be found in a declassified CIA manual from 1944, which provided tips on sabotaging the enemy. Techniques like “going through proper channels” and “arguing over precise wording” are sadly still applicable in many large offices today.
In simple terms, bigger isn’t always better. There’s an optimal scale where companies can take advantage of economies of scale without being bogged down by excessive bureaucracy. This optimal scale, known as “minimum economic scale,” is crucial because smaller firms can thrive in markets with lower entry barriers and more competition.
Traditionally, industries have trended towards larger investments and capacity requirements to achieve scale. For example, the cost of building a new semiconductor facility can reach up to $30 billion, making it difficult for smaller players to compete.
However, there’s potential for locally enriched economies and highly competitive markets that operate efficiently. One significant challenge is the shortage of state-of-the-art semiconductor fabrication capacity, which also affects the availability of chips used to train advanced AI models. These orders often exceed $1 billion, with the cost per AI model estimated at over $50 million for the most advanced ones.
Technology changes are driving contrasting shifts in various industries. While some sectors require ever larger scale to remain competitive, others are experiencing disruptions that reduce scale significantly. For instance, 3-D printing is revolutionizing manufacturing by minimizing scale requirements. Traditional metal-stamping presses are efficient but limited in flexibility and scalability. In contrast, 3-D printers offer versatility, allowing for a broader range of parts production. Research indicates that 3-D printers can reduce scale requirements by up to 90% in certain industries.
Similarly, in the realm of IT, eCommerce and API-enabled services have democratized global trade, empowering even the smallest businesses to reach international markets. The next transformative shift is expected to come from blockchains, facilitating complex and customizable integrations through tokenization and smart contracts. Systems integration, crucial for business maturity and growth, entails coordinating a network of partners. However, this coordination is challenging, often leading to supply chain inefficiencies and product delivery discrepancies.
Blockchain technology has the potential to streamline coordination processes by representing products as digital tokens on a public blockchain like Ethereum. This approach reduces the need for integrating with multiple proprietary systems, making collaboration more accessible and cost-effective for smaller companies. As industries witness a reduction in minimum economic scale, markets can accommodate more competitors, fostering diversity and localized offerings tailored to specific needs.
The optimistic outlook suggests a return to an era where small businesses thrive, providing localized services and fostering highly competitive markets. With technologies like blockchain driving down minimum scale requirements, economies could experience the benefits of both efficiency and diversity, resulting in locally enriched economies and vibrant market landscapes.