Production Malls!

To Alfred Chandler, the edifice of the business landscape was centred on the domination of the big. As someone described him, he was hunter of big game and collected trophies in both US and Western Europe. For Chandler, scale and scope characterized the flora and fauna of business, thus a critical role for the volume and diversification. The hunters of the small game, in the backdrop of the above, would find difficult to sustain in the long run.

Chandler’s assertions, incontestably, command certain merits. Firms whose cost structured is preponderated towards fixed costs necessitate large volumes for subsistence. Fixed costs apportioned over large volumes pull down average fixed costs creating conditions for economies of scale.  Simultaneously, as the firm gains weight, there would be increasing difficulties in organization management thus generating certain diseconomies of scale. The trade-off that firm is able to execute and balance will define its wherewithal.  Large industries like iron and steel, automobile, petroleum, banking etc function on their ability to scale up. To the Ambanis for instance, every venture from textiles to Vimal to chemicals to telecom, all have built on the basics of scale and served them well.

Likewise, for firms which are into diversification, multiple offerings using similar inputs gives them a comparable results as scale does. Newspapers, banking, retail, transportation and many related industries leverage scope engendering applicable economies. Chandler’s views were in fact influenced by the large industries that developed on the business countryside in the early 20^th century. Going forward, demand side agglomeration economies stimulated firm clusters further reducing costs.  Agglomerations like Electronics City, Knowledge Park etc were upshots of the same.

The firm despite developed configurations of assets, resources and capital continues to find life persistently on the edge. Innovation costs have increased exponentially whereas shelf life has shrunk intensely with swift advent of substitutes. New innovation models like Open Innovation etc were precisely to answer the same. To many firms, given the cost structure, the legacy investments and fast dissemination of innovation have raised numerous issues. Implied innovation spreads like wildfire in the jungles of Shenzai.

Commentary aside, the core objective of the firm remains profit maximization. Assignation in economies of scale and scope, fiats higher degree of capital expenditure. In an inexact world, where instantaneous innovation, appearance of substitutes and constant fear of obsolescence, for many large scale capital investment might remain a hazard. Therefore, firms constantly endeavour to transform capital expenditure into operational expenditure. Notwithstanding the homilies, at the staple of singularity like outsourcing, off shoring etc. lie a reflection of the firms’ pursuit to convert capital expenditure into operational expenditure. The journey, nonetheless is not discrete but a continuum.

The instant transmission of the internet, unforeseen conceivably even to its zealous votaries, enabled a fresh lease of life to players in the basic sciences otherwise economically unremunerated. For Search in Extra-terrestrial intelligence (SETI) which apart from powerful telescopes needed powerful computation tools, parallel processing or non-commercial cloud processing permitted economies of scope and made it possible to happen. Analogous illustrations can be cited with respect to mapping of genes and proteins. They might exert economic influence in the longer run, though very uncertain in the present making investors reluctant.

Interconnected computers fostering new business and production was destined to be transferred to the erstwhile brick and mortar industrial domain. Intel, a pioneer in shared foundries in chip design and manufacture was a good instance for the same enabling to save millions on innovation.

Many small firms or prospective entrepreneurs with ideas exist in niche production domains.  Their proficiencies in their forte however makes those incongruous for scale and scope. Hidden in them might be a disruptive code, a portent for an imminent landscape.  Digitally facilitated cost attractiveness of market procurement relative to internal development realigns business models accommodating plethora of heterogeneous individuals with contrasting motivations to perform tasks for them.  Palpably, decentralized production is in infant stages nonetheless pregnant with possibilities. Numerous prospective applications ranging from product design, remote maintenance, software development, business analytics, outsourcing manufacturing (different from existing contractual arrangements with vendors Chinese or otherwise), restructuring of franchising models are some manifestations.  Threadless.com allows users to design t-shirts and manufacture the most popular designs chosen through user voting. Local Motors allows users to design and assemble cars at host of microfactories. 3D Printing apparently shifts host of factory based production to home based production. Development of drones is driven through individual efforts than centralized Fordian production model.

The movement towards decentralized production notwithstanding, to many the risk of implied demand uncertainty might be deterrence for entrepreneurship.  Yet a risk taker being compensated by the prospective certainty in revenues might be an answer. In fact, the malls emerged as demand- side answer to the same. Malls perhaps originated in what is termed Reily’s law. To Reily, consumers gravitate towards larger retail centres irrespective of the distance given the attractions on offer. People are willing to travel to Dubai for its shopping festivals given the incentives on offer, a classic illustration of the incentive mechanism.

Intel’s shared foundries to Local Motors’ microfactories to the 3D printing units perhaps illustrate the first wave of Reilly’s law on the supply side, popularly called ‘Plug and Play’. Producers are willing to travel distances to produce goods if the incentives on offer are lucrative enough to alter the cost benefit dynamics in conventional terms.

Disruption is likely to manifest across industries like textiles, accessories, jewelry, food, technology, electronics hardware, consumer durables and education. There in all probability will arise entrepreneurs who will build production malls renting to producers unencumbered by scale.  To small players, perchance it is an opportunity to leverage scope and agglomeration without the sword of capital structure predominated with fixed costs hanging over it. Customization would thus be possible without a trade-off on the price.  For instance, in the automobile industry paint malls might be in handy to account for differing cooler tastes of consumers without a trade-off on price.

Apart from the technological hardware, little progress seems to have happened outside China but these themselves were unthinkable two decades ago. To the long tail of Indian industry beyond the Chandlerian giants, production malls might be imperative for opulence.