EconomiesOfScaleVsAdvantagesOfDiversity

One can characterize the pursuit of improvement as a conflict between two principles : economies of scale and advantages of diversity. The classic example is Ford vs. General Motors.

Maybe these are fundamental categories that can be understood in informational terms.

Economies of Scale

An economy of scale occurs when one reduces the information requirement that goes into a product.

This might be by :

• division of labour, in other words splitting work between multiple specialists, and so reducing the cognitive demands or task switching within each worker.

• increasing the capacity of a factory, where the information is saved in co-ordinating the output of several factories, by buying components in bulk (and hence saving suppliers the complex information management associated with handling multiple customers and planning for fluctuating markets)

• standardization : saving other switching costs and custom information process between different players in the industry. (This includes standardization of components and processes)

Advantage of Diversity

Despite the efficiency gains of infomation saving, there is an opposing principle, the advantage of diversity. As companies attempt to track the requirements of their diverse customers, as they seek to appeal to new ecological niches in the market, they need to diversify the product range. This means building shorter, more carefully customized production runs. They must make their products information rich.

Now these two principles are in opposition. Neither a trend to simplicity nor richness will be followed to its extreme conclusion. Nor is there a way to generalize about or predict the correct balance between them for any two markets, or even two moments in history. Two different companies in the same or similar market may pursuing the opposite tendencies, and either may turn out to be the winning move in this case.

See also ProductivityOfKnowledgeWork