Technology has been shaping and driving human behaviour since the advent of flint axes. But we are on the cusp of technological changes that undermine central assumptions of doing business.
Revolutions in mobile, cloud, data, virtual reality, artificial intelligence and the Internet of Things are coming to bear on many of several inter-related costs that inform business decisions – marginal, transaction, distribution and opportunity costs.
Without these costs as a guide for efficiency, or acting as barriers for new ventures, a lot of strategic thinking will need to change.
Basic economic theory states that businesses should set their prices at their marginal cost – the cost of servicing each incremental customer. But for close to a decade this equation has become increasingly tenuous. For businesses selling digital goods like music or ebooks, which are infinitely replicable, marginal cost is already essentially zero. Once the good has been created, each individual user or consumer costs companies almost nothing to service, all the while adding to revenue.
Advances in cloud computing and the Internet of Things are bringing these efficiencies to more and more industries. There are already billions of sensors embedded in everyday objects, feeding data and predictive analysis. By 2030 there could be as many as 100 trillion sensors embedded in offices, vehicles, tools and humans. This will impact fields as disparate as agriculture, education and energy, allowing more coordination and prediction that previously possible. The productivity gains from this kind of sensory rollout has been predicted to achieve similar gains for physical goods as the internet has for digital goods.
The mobile revolution, especially, has been characterised by a drop in the distribution costs for software. App stores have essentially removed the advantages of exclusive distribution deals and manufacturing lines. Small upstarts like Instagram and FiftyThree have leveraged their new distribution avenues, taking on the giants of Kodak and Adobe.
Robotics and artificial intelligence are poised to do similar things for the distribution of physical goods. 3D printing is leading to the possibility of highly customised, “local” manufacturing.
And this will be paired with huge savings in logistics. According to a recent study by Business Insider Intelligence, the cost of shipping a small package with an Amazon drone could be up to 12 times cheaper than with a parcel company. Autonomous trucks promise longer running times, reduced energy consumption, and fewer crashes.
Transaction costs, which are essentially the myriad costs of participating in a market, are coming under pressure from numerous directions.
Reviews and ratings on sites like Amazon and Ebay have eliminated the cost of acquiring information.
Technology-enabled decentralisation is a big driver behind these moves. Transferwise essentially leverages peer networks to bring down the costs of international money transfers. The likes of Uber and AirBnB are possible because of near-ubiquitous mobile phones, and their impacts on coordination and logistics.
Potentially even bigger is the looming mass implementation of the blockchain, the technology behind Bitcoin.
The blockchain, which allows for decentralised, trustless and instantaneous transactions, potentially reducing the time, risk and cost of transacting assets.