Sunday, 25 May 2008

Another way to look at economies of scale

Way back in the Middle Ages, it was all about the individual artisan, the subsistence farmer, those independent workers. Some time after that, these independent workers realized that they could achieve more if they pooled their resources together with those who were doing similar things. In other words, they could achieve more working together than working independently.

It’s a pretty well known concept about economies of scale. Let’s say my neighbor and I are both small time carpenters who make tables. We each have about $500 to operate our business each month. Operating independently, we buy wood in small quantities and work by hand to produce our tables. So we each make about 20 tables a month. Pooling our resources together, we have $1000- which is enough to purchase and operate a table-making machine, saving us time and building us more tables. Not to mention that we can get bulk discounts on wood.

But looking around, you see economies of scale taken just a bit too far. Bloated corporations (I won’t name names) support layers of bureaucracy and middle management that simply don’t add much value. And yes, there is such a thing as having way too many cooks in the kitchen.

Now take a look at your typical startup or small company. Each person plays multiple roles, and everyone must pull their weight for the company to survive. It’s bare bones, it’s lean, and guess what? People are passionate about what they do. There’s no 9-5, no “I’m just doing this so I can watch TV and pay rent”. It’s about making things happen, and maybe they don’t sleep as well at night, but they’ve got a great reason to get up in the morning. And they absolutely love it.

A great example is the difference between big pharma and small biotechs. There are a million and one biotech companies, and 99.99% fail. But I can guarantee you that those folks innovate harder than many a large pharma company. Don’t get me wrong. I’m not proposing anything new here—we all know that pharma is working on reviving that roaring R&D machine so dependent on innovation. However, it seems more and more that biotechs are the ones doing the innovation because they care, because they have to, and because the promise of licensing or bringing their molecule to market could be the best thing in the world. Their livelihood depends on it.

In the past five or so centuries, we’ve gone from independent agrarian lifestyles to the extreme economy of scale. It’s time to find a solution that works. Keep that independent, entrepreneurial spirit while sharing the benefits of economies of scale. What if you had small, lean units doing the innovation, and coming together only when it came time to share resources? Small groups of people innovating, and a place they can go to make those ideas a reality. That’s the vision for the open source hardware community.

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