How does technology influence the size and shape of business? What’s the most effective kind of organization to house low-cost CNC tools? What are the opportunities ahead?
The rapid decline in the cost of capital equipment such as CNC tools, along with the capacity to share or sell designs around the world, suggest that there are possibilities for entirely new formats for doing business. In this article, I consider some alternative forms and invite a dialogue with the makers on 100kGarages about what is possible, and what is desirable.
A brief history of the American corporation
First, some history. We tend to think of the public corporation, with shares traded on stock markets, as the standard and even inevitable way of organizing business. But in historical terms, it is clear that the “major corporation” is only one way of doing business, and it is not eternal.
The first Dow Jones index in 1885 consisted of 11 railroads, one steamship operator, one canal, and Western Union. At the time, the US had fewer than a dozen manufacturers listed on stock markets, because few of them were big enough to justify going public. Most were family businesses or private partnerships. As the US headed into the new century, railroads were creating economies of scale in distribution and new technologies were creating economies of scale in production. Bigger was now more economical, which created demands for capital on a large scale.
By 1914 the US was well on its way to being a corporate economy. Many of the largest manufacturers and retailers had gone public, often following mergers among regional companies. Economies of scale and the creation of the mass production assembly line meant that the bigger the production facility, the lower the per-unit cost. The high water mark of the mass production model was Ford’s River Rouge Plant, which employed 75,000 people when it was completed in 1927 and grew from there. The Rouge was the most vertically-integrated factory the world had ever seen, turning raw materials like iron, sand, steel, rubber, and coal into Model As.
Not every economy followed American-style mass production. In places like Italy, industrial districts persisted; in others such as Germany, industry was divided into different sectors, with family-owned businesses prevailing in much of manufacturing. But in the US, the vertically-integrated corporate model dominated.
The corporation changes shape
Efficiencies in shipping and advances in information and communication technologies (ICTs) over the past two generations have substantially re-formatted the corporation. We have moved from the vertically integrated world of the Rouge Plant to the vertically dis-integrated world of Alibaba.com.
First, low-cost containerized shipping enabled the separation of design and production into different organizations. Call it the Nike model. Nike does the design and marketing of its sneakers and sporting goods in Oregon but contracts out for production and distribution, primarily using high-volume producers in East Asia. This model has spread to nearly every consumer industry. It is often difficult to find a branded product in the US that was produced by the company whose name is on the label. In some cases nearly every brand in an industry (e.g., pet food) is actually produced by the same anonymous manufacturer, but sold under different brand names. As the factory collapse in Bangladesh revealed, sellers in industries like clothing often have little idea where their goods were produced.
Second, ICTs, and in particular the Web, have further dispersed supply chains into sectors of essentially generic manufacturing. In electronics, for instance, Apple famously relies on Foxconn in China to assemble its phones and computers, as do many other brands, while the majority of Apple’s modest US workforce is employed in its retail stores.
As a result of the growth of large-scale generic manufacturing, even small entrants can now “rent” production capability around the world and scale up rapidly without building their own facilities. Call it the Vizio model. Vizio, headquartered in Irvine, California, grew to become the largest brand of flat-screen television in the US in 2010, beating Sony and Samsung, with fewer than 200 employees. By contracting out production and relying on commodity parts, Vizio could undercut the big brands on price.
In the case of both Nike and Vizio, efficiencies in mass production, typically in East Asia, made the model work, and eventually forced many or most other participants in the industry to follow suit. There were holdouts, like Dell Computer. Dell continued to assemble PCs in the US through the 1990s and 2000s and maintained its American assembly operations even as the rest of its industry abandoned domestic production. Unfortunately for Dell, the viability of its model of “mass customization” going forward is uncertain, as inexpensive mass-produced tablet computers replace desktop PCs. Dell’s proposal to go private could be seen as a concession that being a public corporation may no longer fit the requirements of the industry.
It is not just Dell whose the corporate approach no longer fits. When Michael Dell had the dormroom insight three decades ago that he could assemble PCs for less than the name brands using off-the-shelf parts, he set about building a company with employees and factories, and pioneered new sales channels (first by phone, then over the Web). Today’s entrepreneur would instead connect to Alibaba.com and find a suitable producer, and get Shipwire.com to pick up the products at the dock and distribute them. Anyone with a credit card and a Web connection can create an enterprise today without ever leaving the dorm.
One of the results of this shift toward “pop-up business” is that the corporation itself may no longer be viable in the long term, at least in some industries. Sony has a lot more overhead than Vizio, which is one reason why its electronics business is a perennial money-loser. The number of companies listed on stock markets in the US has dropped by more than half since 1997, from 8800 to 4100. Every year but one since then, the number of companies disappearing from the market has greatly outnumbered initial public offerings (IPOs), and the companies going public rarely grow into major players. It is safe to say that Vizio or Zynga are unlikely to replace Eastman Kodak and Westinghouse as century-spanning pillars of the American economy. Moreover, even the major players are often substantially leaner: GM has the same number of employees today that it had in 1928, which is roughly one-quarter of its size 30 years ago. The age of the “major corporation” may be over.
What comes next?
The right organization for CNC
Low-cost CNC and related technologies such as 3D printing can have a transformational effect on how we organize business in the US. Chris Anderson’s intriguing book Makers explores some of these themes and proposes that we are on the verge of an organizational revolution along the lines of what happened when the Internet hit. In the foreseeable future, the per-unit cost to create bookshelves on a ShopBot will be comparable to the cost of buying them at Ikea, with the bonus of customizability. (How about bookshelves made from scavenged bowling alley wood? Or that old cherry tree that got struck by lightning?)
In fact, Ikea does not sell furniture to its customers today, but ingredients and recipes for assembling them. Ikea is in the design business, just like Nike and Apple (and Vizio). A ShopBot could in principle create much of the Ikea catalog, and it’s plausible to imagine that at some point Ikea or a competitor will simply sell the designs in a ShopBot-friendly format, along with a parts list and an assembly guide. AtFab already provides beautiful downloadable designs that are in the forefront of this alternative approach.
It is not just routers, of course: CNC tools and 3D printers get better and cheaper at a dramatic rate, just as computers and laser printers did, with highly disruptive effects on industries such as publishing, music, and broadcasting. 3D-printed sneakers may be just around the corner, followed by printed phones.
What are the organizational implications of this coming disruption? What is the right model to house this technology?
One possibility is a return to the putting-out system, which preceded the factory. Perhaps independent contractors, each owning one or two tools in garage workshop, could do components of the job, passing work in progress to the next contractor. Blade Runner, anyone?
Alternatively, Amazon.com could build “universal fab facilities” in which products that are ordered online are created and distributed from more-or-less central hubs that replace its current system of warehouses. On-demand production and delivery would lead to a world without (much) inventory, and create another value-added service for Amazon—while turning “manufacturing” into “design” even more fully than Nike has.
Or perhaps every town could have a central workshop, paid for by membership (like TechShop) or by a municipal government. Farmer co-ops in the US had a similar format. Farmers would band together to fund jointly-owned machinery, grain mills, milk processing facilities, or other high-cost inputs, and their efforts often extended to other areas (such as mutual insurance companies). These co-ops had the added benefit of allowing groups of farmers to bargain for more favorable rates from railroads and wholesale buyers. TechShop has midwifed successful several businesses that moved on to operate independently, but perhaps it could serve as a mothership for small-scale producers.
How do we get there?
In the absence of an organized movement, the most likely outcome is the Amazon outcome. (Or perhaps an Amazon/Walmart duopoly.) What are alternative possibilities?
One model already underway is a grassroots federation like 100kGarages, comprised of independent business-people. Think of this as the federation model. This allows the maximum level of individual autonomy.
Another possibility is to follow the precedent of farmers’ co-ops, collaborating at a local level to outfit a general fab shop with shared ownership. Think of this as the co-op model. This is compatible with a revival of the co-op movement happening in urban areas around the US, such as Cleveland’s Evergreen Cooperatives. The co-op model buffers some of the individual risks associated with being an independent business owner.
Either of these forms could eventually provide a platform for creating services for producers that are often beyond the means of small local businesses (e.g., establishing 401(k) plans, health insurance, a local credit union). There is a long tradition of ecosystems such as these in American history, as shown by sociologist Marc Schneiberg.
There are also models of transition for existing businesses. Ace Hardware, a quintessential American business, became a cooperative in 1973 when its founder retired and sold the company to its local retailers. In the ideal case, this allows both local autonomy and the economies of scale of large size.
History shows that the same technology is usually compatible with many alternative ways to organize business. The Internet can be used to expand democracy at the grassroots level, or to radically increase intrusive monitoring by governments and companies.
What are your thoughts? What are the opportunities created by CNC technology? What are the tradeoffs of different ways to organize?